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Price Anchoring How It Takes the Pain Out of High Prices

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You find yourself in the market for a new car. You go to a nearby car lot and find a vehicle you would love to own, but the price is firmly outside of your range. Up walks an observant salesman, and after a bit of back and forth, he tells you he can beat 25% off that sticker price. It’s still more than you wanted to spend, but at 30% off, this deal is too good to pass up, right?

The salesman has just utilized a tactic known as “price anchoring.”

In this episode, we’ll be talking about:

  1. What is anchoring

  2. How does anchoring applies to pricing

  3. How does anchoring applies to dates

A product is truly never “cheap” or “expensive”; it’s all relative. People love to compare when valuing products and having an anchor price allows them to do that. Price anchoring refers to the practice of establishing a price point which customers can refer to when making decisions.

Basically, in price anchoring, you make your customer think of a certain number, then you price your product or service below that number, thus creating the perception that he or she has saved money and got a decent bargain.

By implementing anchors in your pricing, you’ll be able to guide your customers to the product you want them to buy. It’s another powerful perception tool in your arsenal and a great way to generate revenue and improve your pricing strategy.

Mentioned in this episode:

Wikipedia article about Anchoring
Ep012: How to Do a Sales Presentation, and How to Present It

For more information on remote selling and a complete list of links mentioned in this podcast, visit this remote selling article on our website.


Price Anchoring How It Takes the Pain Out of High Prices:

Full Transcript

Want to buy a sandwich? If I sold you a $12 gourmet sandwich, made exactly how you like with all the right toppings, all of the right dressing, the perfect amount of cheese or no cheese, if you don’t like cheese. This sandwich is perfect. And if I sold you a $12 gourmet sandwich, made exactly the way you like and then rang you up at the register and charged you $10, how would you feel? Well, you’d feel pretty damn good about it, right? You might even ask if I made a mistake, because you are already prepared to pay $12. But, if I sold you that same sandwich for $8 made exactly how you like, then rang you up at the register and charged you the same $10, I said eight but I charged you $10, how would you feel?

Probably wouldn’t feel as good. You probably would say something like, “Wait a minute. I thought the sandwich was $8. You must have made a mistake.” But then behind the counter, I say back to you, “So, sorry about that. We just upgraded our payment system and someone put in the wrong numbers. The correct price is $10.” Now in both of those scenarios, you paid $10 for the same exact sandwich. In one of the scenarios, you gained something, a free $2 in the case of over quoting the price at $12. And in the other case you lost something, a measly $2 in the case of underquoting the price at $8. Which scenario do you feel more strongly about, though? Almost certainly the scenario where you lost $2.

Now, let’s consider a different example. Teslas. When Tesla kick-started the hype machine for the release of their Model 3, it was fueled by a simple and attractive promise. They’d finally mass produce a car that would be $30,000, Elon Musk’s original promise when he launched Tesla. And, imagine all of that drool worthy Tesla tech, over the air software updates, insane mode and the social status to boot for the low price of $30,000. Now that would actually be quite impressive, especially in comparison to the starting prices of the Tesla Roadster, which retailed for about $110,000 and both the Model S and Model X for $80,000. Throw in the extended battery, Performance Mode, and Ludicrous Mode for each of these cars and the price goes up another 40,000, bringing them in between 120 and $150,000. There is a problem with the Model 3 though, that $30,000 car. The price point was never met. The starting price is not 30,000, it’s $39,500, and the model everyone wants and expects is another 20,000 on top of that. Quite disappointing from a $30,000 promise to a $60,000 delivery.

This news should have been heavier than a boat anchor and yet sales are still strong. That $30,000 promise should have made the $60,000 Model 3 sound really expensive. What’s going on? Well, Elon Musk promised a $30,000 car and delivered a $60,000 car, meaning he created a downward anchor, but they somehow survive the debacle, and it appears there are two main reasons for this. Number one, the buyers of Tesla Model 3 cars were more anchored by the prices of previous models between 80,000 and 150,000 than they were by the promise price of the Model 3. That is, the Model 3 was still much more affordable in comparison, especially if you want the fully loaded model. In this way, there was an upward anchor set on the price.

In addition to that, let’s be honest. Elon Musk has made a lot of bad promises. Maybe a lot of people out there just didn’t believe that a $30,000 Tesla would ever be made. I don’t know. The second major point is about who buys the car. There are three main groups of Model 3 buyers. So-called environmentalists switching from a Toyota Prius, traditional audio enthusiasts who like high performance cars, Insane Mode and such, and tech enthusiasts and those just wanting a “cool car.” All three buyers are less price sensitive and also heavily driven by social status, which makes the decision inherently emotional for them all. So, in a sense, price anchoring was still a factor in the sale of the Model 3. It just didn’t hurt Tesla despite all of Elon Musk’s promises and antics.

Now, price anchoring is talked about quite a bit in sales, but it can be a little bit of a mysterious subject because it works both ways, for you and against you. We don’t get to choose the anchors that our clients take, but yet they are still influenced by those anchors. In today’s episode, I’ll be talking all about price anchoring and how you can use it in your own sales.

Welcome to Modern Sales, a podcast for entrepreneurs, business owners, and salespeople looking to have more and better conversations with your perfect clients. You’ll get a healthy scoop of psychology, behavioral economics and sales studies to help you create win-win relationships. I’m your host, Liston Witherill, and I’m pleased to welcome to Modern Sales.

We’re going to start the episode with, of course, a definition. What in the heck is anchoring? Well, according to Wikipedia, anchoring is when an individual relies too heavily on an initial piece of information offered, considered to be the “anchor” when making decisions. In the case of the sandwich at the top of the show, that initial piece of information was the wrong price you were given. In the case of Tesla, that anchor was the more expensive cars that people viewed as being the upward anchor to the Model 3 that they ultimately bought.

Here’s another example to illustrate the point. In a study run over and over again by Daniel Kahneman and Amos Tversky, they asked participants to compute within five seconds the product of the numbers one through eight, as in one times two, times three, times four, times five, times six, times seven, times eight, and they asked a separate group of people to compute the same thing. They just gave them in a reverse order. Eight times seven, times six, times five, times four, times three, times two, times one.

Now obviously, five seconds is not enough to even enter those numbers into a calculator, let alone do them in your head unless you’re some sort of savant. And so what they wanted to figure out was, how much would starting with a relatively higher or lower number influence the person doing the calculation? And here’s what they found. When participants were given the numbers in ascending order, starting with number one, finishing with number eight, the median estimate was 512. When the sequence was started with the larger numbers, starting with eight going down to one, the median estimate was 2,250. The correct answer is 40,320. We can take away two things from this. One, people are bad at head math, no surprise there, and two, we know that starting with the larger number definitely impacted people’s estimate of the product of those numbers.

Now you may be hearing this and thinking, “Well, that’s great and all, but my clients are really smart,” or you may even be thinking and shame on you if you are, “Hey, I’m not susceptible to this anchoring thing. That’s for everyone else.” And the truth is we’re all susceptible to anchoring. Some of us will be more susceptible to it and others will be less so. For example, people with more experience and expertise are a bit more resistant to anchoring when done within their field of expertise. So, as that applies to your price, if you’re in a field where people hire companies and vendors in this area, over and over, and over, and over again, any anchoring you do will probably not have nearly as much an effect on how they perceive your price. They will be comparing it to their experience set.

Similarly, personality traits can make us more or less susceptible to anchoring. Certain personality traits like agreeableness and conscientiousness make us a bit more susceptible. So bad news to all those agreeable people and conscientious people out there, whereas extroversion seems to make us a little bit less susceptible. These are three of the big five personality traits. So, really this establishes two things, right? Number one is, anchoring is real and we can prove it empirically. And number two, we all experience the effects of anchoring to some degree. Some of us more, some of us less, but we all experience it.

Now, how this applies to your selling. There are two major ways this applies and of course the number one thing we need to start with, because this is what’s on your mind when you hear anchoring, is pricing. How do you make your price or your investment, if you want to call it that, how do you make it sound like a bargain? Well, first of all, you can demonstrate that it is. So anchoring aside, you can show past results that you’ve had with clients. You can show projections based on data, depending on the field that you’re in. There’s all kinds of things that you can show to help demonstrate your value. But of course your client may be thinking, “I don’t know if any of that stuff is true.”

So, what I recommend you do is when you have a value discussion with your client, in other words, “What would it be worth to you if we did this project? If you got rid of all of your terrible pain and made it to your goals, what would that be worth to you?” Helping them set and articulate that value will help you set your anchor as high as you can, and this is important, such that it reflects your client’s perceived value. And what that means is, what your client believes matters a lot more than what you believe, number one, when it comes to setting value. And number two, it can’t be total bullshit, because as you set the value now, it will influence your client, but later they will still have that value in mind.

So, if they think a project is worth $5 million and you don’t do anything to temper or adjust that expectation, and you know that the project is probably more like a $2 million project, you may be setting them up for disappointment. So keep that in mind, but it basically works like this. If in the value discussion we can set a project value of five million and then we go in with a price of 500,000, a 10X potential value realization, most clients will look at that as an attractive offer. Now you may be wondering, “Well, what if I can’t show that there’s a lot of value? What if I can’t show five million versus 500,000? What if I can only show 700,000 versus 500,000?” Well, that’s obvious, right? What I would say in that case is, you don’t have a very good value proposition. So, maybe you need to rethink working with this client or maybe selling on quantitative value isn’t quite there yet. You need to do a better job of understanding where the value lies for your client.

So that’s number one, establishing value in a structured value discussion, where your client can articulate what a project is worth to them and then you can anchor your price against that value. The second way you can use anchoring when it comes to pricing is to anchor against your own price. Now, if you are interested in learning more about anchoring against your own price within proposals, I do have a whole episode on how to do a sales proposal presentation and why you shouldn’t email it. That’s episode 12 and it’s linked in the show notes, but here’s the CliffsNotes version.

The way it works is you show a few prices that allows you to anchor your own price against yourself, which means we’re always going to start high. We start with the highest number. “In order to work with me with all the deluxe bells and whistles and every single thing that you want is,” drum roll. You name your highest price, whatever it is, $85,000. Then you move onto the second price. But if you want the middle version, that price is, drum roll once again, $45,000. And, if you want the least expensive version, we could get started for the low, low price of $25,000. Now, presenting those prices in sequence, and doing it live so that the client isn’t looking at all of the prices all at the same time, you’re revealing them one at a time, allows for this anchoring effect to take hold. It also allows you to demonstrate to them what they get at each stage and why the pricing is so different.

In all of this is to say, the $45,000 price seems much lower in comparison to the first price, then it would in a vacuum. And the reason for that is because that first price was the initial piece of information and we went down from there. Another Cliff Note for you on that episode, and this is an important part of showing multiple prices, it allows your client to compare your price against the other prices, which I’ll say it another way. If you show three prices, they may be asking the question, “Which one should I buy?” But if you show them just one price, they might be asking themselves the question, “Should I buy?” So in one scenario, they have three options to work with you as well as of course the option to not work with you or go somewhere else. In the second scenario, they have an option to work with you or go somewhere else. Which decision set would you rather your client have? Okay, so that’s number two, anchoring against your own price.

Number three, market price as an anchor. Now, this is partially dependent on your differentiation strategy, and I’ll get into that in a second. But basically some clients, if they are buying services or products that either they know well and understand what the market pricing is, or if they’re buying things where it’s very easy to determine what the market price is, they’re very likely going to be using that market price as an anchor. Which means, you will need to do a better job early in the process of differentiating yourself, so that you fall into a separate category. Here’s the thing with categories. Every human being uses categories in order to organize and make sense of the world.

So, the reason that base CRM, a relatively unknown CRM, can charge 199 a month for their elite product when they’re basically unknown, is why? Well, because of Salesforce. Salesforce Lightning Enterprise is 150 per user, per month, billed annually, while their Lightening product, which is probably the equivalent of Bases, now, Zendesk Sells elite product. Salesforce is $300. Zendesk Sell, AKA Base is 199 a month for the complete full access. So market pricing really matters, right? When Salesforce sells their top product for $300 and they’re the market leader, everyone else in the market has some room to move.

Now, if you are premium pricing your services and your products, which I do recommend you do, you’re probably in the neighborhood of 10 to 20% and even sometimes as high as 50 to a hundred percent more than the going rate in your category, which means it is imperative that you differentiate your category so the anchor no longer applies. Let me say that a different way. If your client sees you as equivalent to other options in the market, they will use market price as an anchor and you won’t win their business if you’re seen that way, if you’re higher. If on the other hand, your client can clearly articulate why you are different than others in a similar category that you are almost but not quite part of, they will not use the market price as a hard and fast anchor. There will be a compensation that they make in their calculation.

So, market price is an anchor just as, number four, budget is an anchor. So the initial budget that your client has in mind actually does act as an anchor. Now, when I’m asked, which I get asked all the time, “How do I find out what the budget is for my client?” Or, “How do I get more budget,” which is a separate question, almost everybody is referencing those instances when they ask for budget and it’s way below where it should be. No one is thinking about budget as an issue when it’s far above their pricing, when they’re dealing with an uneducated buyer, or at least a relatively uneducated buyer. And again, this is just to say, budget as an anchor works both upwards and downwards. If your client thinks your thing is going to be really, really expensive because pricing is opaque, or they haven’t done much homework or they’re sure you’re the one, then you’re happy with it. But if their budget is too low, you’re always going to be wondering, “How can I get more of it?”

So, that’s number four. Their budget will act as an anchor, and one of the ways to get them to change their budgeting expectations is to pre-qualify them coming in. So there’s lots of ways to do this and it really depends on your unique situation. But if you’re generating new leads, one of the best ways to do that is to give them a range on your website. Now if you are a value pricing convert, then you’re not going to do this, right? Because, there’s no way you can value price if you’ve already set the expectation coming in. But on the other hand, you can anchor them properly on your website if you have relatively set pricing or pricing that falls within a range. So I do recommend that, because you can set their budget expectations coming in either through the website, or through email or some other form of marketing that they’re exposed to prior to the sales conversation.

And this relates to number five, anchoring applies to pricing in a negotiation. So there’s this age old question about who should throw out the first number in a negotiation. And the conventional wisdom so far as I can tell, is never throw out the first number, because I don’t know, you look weak or you show your hand, but again, if they throw out a number that’s way higher than you expected, you’re happy with that, right? But if they throw out a number that’s way too low, you may not have any room to negotiate so it can really work against you. Now, here’s what multiple studies have shown. In negotiation studies, it’s been shown multiple times that initial offers have a stronger influence on the outcome of negotiations than any subsequent counter offers. Meaning, that first number is pretty damn critical, because that acts as the anchor, not just for whoever says it, but for both parties. That’s now our starting place.

So, it could be really to your benefit to be the first person to throw the number out in a negotiation because that acts as the anchor, or you could do what I recommend, which is let’s not discuss price until very last. There’s all kinds of other things that we can negotiate on, like terms, and start dates, and payment options and service levels, and on, and on, and on, and on before we get to pricing. So I do recommend that if you’re not sure what to do in a negotiation, is to look at what are all of the options and things that your client might want, and focus on price last because usually price is just a proxy for a win. And I’d much rather give someone a win on something else other than price.

Now, that’s pricing anchors. So we’ve talked about five different things. The value discussion, so setting the client value as an anchor to your price, anchoring against your own price by presenting multiple offers, market pricing as an anchor for or against your price, your client’s budget as an anchor that they’ll have in their mind, and the first number thrown out in negotiation. Now the other area where anchoring really applies is in dates. And what I mean by that is, if you’re delivering your project over a relatively long time, this probably won’t work if your projects are one week. But if your projects take a few months or even six months or more than that, the start date is really, really important.

Sometimes your clients want to move faster. Sometimes they want to move a little bit slower or push out the start date. That is another place where anchoring happens because any promise you make will disproportionately affect any other piece of information they get along the way. So, keep in mind that if you’ve ever promised a start date that you couldn’t meet and then you later changed it and your client was pissed off, this is why, because they were looking at anchoring as that initial piece of information.

That should be everything you need to know for anchoring, at least in one episode of this here Modern Sales podcast. Thank you so much for listening and if you got anything out of today’s podcast and you know someone else who this might help, I would love it if you just recommended this episode to them. Email it to them, text them the episode, however you communicate with your friends. Do share it. Leave us a review if you’re so inclined. It helps us get the word out and expose this podcast to even more people.

And finally, if you want to bring sales training to your company, I’d love to have a conversation with you. All you have to do is go to my website, Liston.io/consult, C-O-N-S-U-L-T, fill out the form and we will be on the phone to chat about how I can help you and your team. Thanks so much for listening and I will be right here next week. Have a great day. Bye.

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Up next…

Check out the four sales fundamentals every top performer masters, how to use value-based selling to increase your leverage, and how to improve your remote selling skills as the world becomes more virtual.

And check out the SDS method if you want to improve your sales process.

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