Pricing is a critical aspect of any business, and understanding the psychology of pricing can help companies to set prices that will maximise revenue while still being perceived as fair by customers.
One little-known technique that can influence customer perceptions of price is called “anchoring.”
Anchoring refers to the tendency for people to rely heavily on the first piece of information they receive when making subsequent judgments. For example, if a customer sees a sweater priced at £100, they may perceive a sweater priced at £50 as a good deal, even though it is still relatively expensive.
You may have been exposed to this technique if you have bought a new car.
Car salespeople often start by showing customers a high-end car with a hefty price tag. This “anchor” price sets the customer’s initial perception of what a car should cost, making them more likely to consider purchasing a less expensive vehicle from the same dealership.
One real-world example of the anchoring technique in action can be seen in the luxury hotel industry. The Ritz Carlton is a luxury hotel chain known for its high prices, with room rates often exceeding $500 per night. However, the Ritz Carlton also offers a program called “Suite Moments,” which allows customers to book a suite at a discounted rate for a limited period.
By using the high prices of the Ritz Carlton as an anchor, the discounted rates of the Suite Moments program are a much better deal to customers, even though they may still pay several hundred dollars per night for a room.
Leveraging its high-end brand, Ritz Carlton can make the discounted rates appear more attractive. By offering a limited-time deal, the hotel chain also exploits the psychology of scarcity, making the deal more desirable and valuable to the customer.
Another example of anchoring can be seen in the retail industry…
Retailers sometimes run “sales promotions” where they mark up the prices of items before offering an apparent discount. This creates the perception that the customer is getting a great deal, even if the final price is still higher than what they would have paid without the sale. This technique is illegal in many marketplaces. However, unscrupulous retailers still employ it!
Anchoring can also be used in reverse by starting with a low anchor price and escalating the price. This technique is often used in the service industry, where companies may start at a low initial cost and then add on additional charges as the service progresses.
Anchoring is a powerful tool for influencing customer perceptions of price and can be used in various settings.
However, using this technique ethically and transparently is essential because customers will feel cheated if they believe they are getting a good deal, only to find out later that they paid more than they should have.