Why should you anchor your prices?
Our brains are wired to save energy. This means that the thousands of decisions we have to make every day — from the color of our clothes to what to have for lunch — are in a way, painful for us. So one of the strategies our brains use to avoid this waste of energy is trying to focus on things using less information as possible. And this means we decide what to focus on in microseconds.
You may have thought about several ways this makes sense. And it does. But the world has gotten more and more complex, and this strategy has not been updated by our brains. So there is a large cognitive bias here, and pricing is one of the fields that take a huge advantage of this blind spot.
Price anchoring is fixing a price point that customers can refer to when making decisions. It’s a strategy you can use to give your consumers a frame of reference for the value of your product. It can be used on any product, but it’s especially applicable to new products — or whole new markets.
If your market doesn’t exist yet, your customers are gonna need a little help to determine a price point.
This happens all the time. When you see a discounted price you should assume the highest is there to anchor the lowest price. That visual effect of showing how much would actually cost — that is, how much YOU are saving when purchasing — is very powerful. And it works.
So let’s take a look at some practical tips you can use to apply price anchoring:
1# Improving price perception
Price is always relative, so nothing is really cheap or expensive. People need to compare products and services to understand their value perception, and anchor prices help them to do that. Prices have everything to do with value — as a matter of fact, we can say prices are the exchange rate for the products’ value.
If you want your customers to understand your price and the value your product delivers, you can anchor prices to improve this process. It is an excellent chance to position your product alongside with products or services you DO want as competitors. Especially if they help you differentiate yourself. Remember: if you do pay attention to price reference, your customers will have to go the trouble of doing themselves. And they might just place you next to an unfavorable product — meaning you might be seen as cheap or expensive unnecessarily.
2# Using Premium pricing
Having a premium option on your pricing strategy has a lot of advantages. A premium product — a.k.a., a more expensive one — plays the role of an anchor by reframing your regular product as a good bargain. For this to happen the premium product pricing must be presented first.
3# Simplifying the decision-making
Price anchoring can help you simplify the whole decision-making process. Instead of having several pricing options, having two or three — with one of them as an anchor — will make your customers’ life way easier. Humans get conflicted when that are too many options, mainly due to the energy waste involved in the process. So the fewer options, the less stressful it is.
That’s why initiatives like “most popular option” or the “flavor of the day” work so well.
When it comes to decision-making we have to accept our blind spots. Decision-making is not a rational process. So it’s unsafe to outsource the price point process to the consumers. Think about a pricing strategy before you launch and apply it to your business. Pricing is a science, and the more aware of the pricing decision-making process, the biggest are our chances of succeeding in our pricing strategy.
#priceloop#pricingstrategy #pricing #pricingmatters
Larissa Sielichoff is a mentor and consultant in Pricing Strategy, holds an M.SC degree in Business and Innovation, and developed a pricing methodology focused on digital solutions based on her dissertation — Why Pricing Matters.