What is the ‘anchoring effect’? Understanding how it works may help you modify your pricing strategy to take advantage of the brain’s irrationality.
On a boat when you send your anchor overboard you stay put rather than floating off to the nearest rocky cliff. If the sea floor is sandy, your anchor may drag along the bottom, and you may move a bit, but your boat stays vaguely where you left it.
Your brain is like that: in its day-to-day life it needs help not getting overwhelmed by the millions of bits of data that floats past it. Enter anchoring, a mental shortcut the brain uses to reduce processing power: “I have seen this situation before: this must be the same or similar to that.”
A mental shortcut (or heuristic) is like an anchor. Your brain sees a situation, which then triggers the throwing out the anchor response. For example when approaching a road your brain knows you need to stop and look for cars or bad things can happen to your body. It has been to the side of roads before, so knows what to expect.
Most mental shortcuts work well, until the brain gets over-enthusiastic with its shortcuts. It loves them so much that as it grows, it uses them for everything, and grabs the smallest hint of a similar situation and then leaps into anchor response mode.
This is why adults generally hate performance reviews, or asking for feedback or testimonials – your brain associates it with waiting for school reports.
In most cases, you can see the logic behind the trigger and the response, except your brain has a nasty habit of taking it to the extreme.
The irrational anchoring effect
A study by Dan Ariely asked people to write down the last two numbers of their social security number. He then asked people to bid on items such as chocolate or wine. The people with higher social security numbers bid on average between 60-120% more than people with lower social security numbers.
Why? If people are not sure how much an item is worth, then a mental anchor helps the brain create a base to start from. Setting a high mental anchor (the higher social security number), meant people bid more. A lower mental anchor (the lower social security number) meant that people bid less, even though there is absolutely zero correlation between the number and the value of the item.
The anchoring effect kicks in no matter how smart you are and even if you know that you are being “anchored.” It just happens, and there is nothing you can do to stop it.
High to low anchoring in business marketing
Marketers use anchoring all the time in business settings:
- This fabulous rug used to cost $1597, but today it is just $997.
- How much would you expect to pay for this anchor? Marketers charge $5800 for similar anchors in the shops. If you paid a marketer for an hour of their time, it would cost $3200, but if you act today, this golden widget is yours for just $900.
- The manufacturer’s recommended retail price is $20.97, but we are almost giving it away at $11.97.
The first rate mentioned is your mental anchor point, and you mentally see the second amount as a “bargain”, which is why you tend to buy.
Anchoring also works in reverse. You can anchor someone to a commonly known low-cost item, and suggest that the daily or weekly cost of your product is just the same as that common item.
- For just the price of a cup of coffee a day, this golden widget could be yours.
- Build your own DeLorean model car. This model comes in weekly parts and comes with a colour magazine for just $18.99 per issue.
Never mind that the actual cost of the widget or item runs into the thousands: Your mind thinks of it as coffee or single magazines.
But wait! Still more anchoring examples
Anchoring is also why it is so hard to downsize a house or car or accept a lower paying job. Your brain has been primed for a certain lifestyle, and just like a boat anchor drags in a sandy bottom, your brain drags against the change.
Once you know about anchoring, you will see it used everywhere.
- Menus often start with lobster or pricy dishes first. It makes the rest of the menu seem a bargain.
- Limit of 12 per customer. It anchors people to buying more than one.
- 4 packs of noodles for just $2. Multipack buys generally outsell marketing single packets of noodles for 50c each.
- You don’t buy a mug of coffee, you buy a Grande Caffe Breve.
No matter who you are, or what background you come from, your brain creates and responds to anchors. Your challenge as a business owner is to use this knowledge for good not evil.
Have you used anchoring techniques? Have they worked?