Anchoring is one of the most powerful techniques of effective pricing. You are subjected to it all the time and if you’re not using it in your own pricing, you’re almost certainly selling fewer higher-priced solutions, leaving serious money on the table.
If you’re unfamiliar with the technique, the few minutes you spend reading this might be some of the most profitable of your career.
Anchors in Action
During a ski trip to Whistler a few years ago I found myself meandering through the village, killing time, when I encountered my first Prada store. I ambled in to see what all the fuss was about.
The first item I encountered was a prominently displayed, simple black t-shirt. “That would look like nice on my wife,” I thought. I flipped over the price tag and something happened in my brain. I couldn’t compute what the tag said. It must be $50.00. My furrowed brow said that was wrong. Eventually I realized I was looking at a $500 t-shirt.
I’m not in Prada’s target market. If I gave my wife a Prada t-shirt (and didn’t disclose the price, which would kill her) she would wear it while gardening. I walked out, stunned at the experience.
What I didn’t realize at the time was it’s not the job of the $500 t-shirt to sell. It’s the job of the $500 t-shirt to sell $275 t-shirts by making them look like good value in comparison. Every luxury retailer in the world knows this and places anchors in prominent positions in their stores.
Restaurants do this, too. Menu design consultants know that most diners' first glance is to the top right-hand corner of the menu. Here they strategically place a price anchor, even subtlely drawing attention to it with a border, illustration or other flourish. Right next to or below the anchor they place their most profitable items, which are made to look less expensive by the anchor.
Software as a Service (SaaS) companies do this too. Look at the following Salesforce pricing page. I’ve referenced this page in a few of my pricing webcasts where I explain more of the pricing techniques being used but let’s just focus on the use of the anchor, the Unlimited edition.
Like the Prada t-shirt, the Unlimited edition column’s job is not to sell the Unlimited edition. It’s job is to help sell the Enterprise edition by making it look less expensive. The more you study this page the clearer it becomes that Salesforce wants you to buy Enterprise.
They're using bundling, options, fences, charm pricing (or what I call reverse charm pricing, which I’ll explain) and other cognitive biases and heuristics (mental shortcuts) that all point you toward buying Enterprise. Even the edition’s name “Unlimited” is a trick to keep you from buying it, as it’s been proven that “unlimited” is less appealing than other plan descriptions because it’s difficult to quantify and compare.
How many Salesforce customers do you think buy the Unlimited edition? Answer: almost none. (I have only anecdotal data from a few sources close to Salesforce on this.) What’s the most popular edition? Well, Salesforce tells you that already, don’t they? Enter social proof as yet another nudge.
Charm prices are prices that make it look like something is on sale, triggering another cognitive bias to price reduction or savings. Prices ending in 9 are powerful, and 5 is slightly less powerful. The most effective charm price is something ending in 99. Salesforce outs its anchor by putting a charm price on everything but Unlimited – a reverse charm. They want Unlimited to look expensive.
What is your firm’s Unlimited edition?
The Science of Anchoring
Daniel Kahneman and Amos Tversky are the behavioural economists who pioneered studies in anchoring in the early 1970s with their now famous United Nations experiment. They asked two groups of people the same question: How many African countries do you think there are in the United Nations?
Before the question was posed, however, each participant was asked to spin a wheel with the numbers 1 to 100 marked on it. The wheel was rigged, with half the participants having the wheel stop at 10 and the other half having it stop at 60.
The average answer to the United Nations question among the group that was subjected to the low anchor (10) was 25. The group exposed to the high anchor (60) answered 45.
I repeated this experiment in a seminar last year where I asked all the participants, via advance survey, to guess at what the average blended hourly rate of the firms represented in the room would be. Half the participants were first subjected to an anchor question: Do you think the average blended hourly rate will be higher or lower than $500?
Everybody knows this is a high rate and chooses the obvious answer: lower. But by being asked the question the participants in this group start thinking about the more expensive firms they know, and their estimates increase. The anchored group's answer to the question was 38% higher than the control group's.
You Can’t Fight It
Anchoring is so powerful that it works even when you know it’s being done to you. There’s a saying in price negotiating that I’ve been guilty of repeating hundreds of times: he who speaks first loses. The thinking is that you’re better off letting your client put a price on the table that you can respond to, rather than vice versa. Kahneman & Tversky’s work proves this is wrong.
You’re better off setting a high anchor that skews the entire negotiation your way than letting the client set a low anchor. The anchor serves as the mental reference point throughout the negotiation.
In fact it’s been shown that if I anchor high in a negotiation with you, the only way you can negate the effect of my anchor is to get me to throw it out and start over with a new number, rather than negotiating with the anchor as the starting point. It doesn’t matter how low your discounted counter-offer is, the anchor still works unless you can get me to start over.
Other studies have shown that the higher the anchor, the higher the final price. Litigators, masters at anchoring, having learned that the more they ask for in their civil suits, the more they are likely to get. The correlation isn’t direct (x% in ask = y% in gain) but it is predictable. Studies of mock juries have proven this and shown that there doesn’t seem to be any backlash or penalty for asking for astronomical sums or “too much.” Anchor high.
You’re Already Anchoring
Most creative people are already innately familiar with the concept of anchoring even if they’re not using it in their pricing. Have you ever presented two or three creative concepts to a client and deliberately thrown in one that was far more radical than you thought the client would accept? The radical idea is your anchor, whose job it is to make the other idea seem less radical.
Now let’s do the same with your pricing.
Anchoring in Conversations
You can start anchoring well before you get to discussing price with your clients by referencing what others have paid you. We teach firms that use process-framed case studies to lead with the most expensive case study they can and look for ways to put forward as large a price tag on the case study as possible.
As an example, to a client that has a budget of $200k, you might say, “The work that I’m going to show you represents an investment on the part of the client of $2.5 million.” The case study you share might have cost the client $500k per year over the five years of work you're showing, but you can explain that later. Just start big and let the anchor do it’s work.
Anchoring in Proposals
In my article The Justice of Price Premiums I talked about the importance of putting forward options as a means of controlling the comparisons your clients need to make. The highest priced of those options should almost always be an anchor – something you’re not expecting the client to buy and will celebrate if they do.
To get to your anchor offering simply ask the question, what would we do on this assignment if the client had unlimited resources? Think about the greatest value you might add and think about a fair price for a client that had unlimited resources and wasn’t shy about spending money to make money. What would you charge? Don’t worry about the limited resources you imagine this client having – think beyond them, think big. That solution and price is your anchor. Now include it in your proposal.
ABA – Always Be Anchoring.