How do you get price stability?
The Price anchoring effect
You’ve probably experienced the anchoring effect many times unconsciously. It is an effective way to make people pay exactly what you want for your product or service, without them having the feeling that they are paying too much. It’s also a way to persuade people to buy a product for a certain price. Besides, it can ensure price stability. What is it exactly, and how can you use it in your daily marketing activities?
The price anchoring effect explained
The human brain is limited when it comes to making choices. We often want as many options to choose from, but unconsciously we are not happy at all with having choices. In fact, you will always try to reduce your choices as much as possible to keep perspective. Your brain is looking for reference material and will then narrow the choices down to two or three. This is of course one of the reasons why price comparison sites are so successful. You need a product and would actually prefer a clear preselection. From this you can then easily and quickly make a choice.
The anchoring effect is actually pretty simple. The client is looking for a reference point from which to determine if they will be paying a fair price for your product or service. This is regardless of the type of product, so Low involvement or High involvement; the brain wants to know what the anchor is. Think of a market vendor who sells beautiful rugs. There is no pricetag attached to the rugs, and you ask the price because you have no idea what it costs. The merchant places an anchor of 100 euros, and from there the negotiating starts. Eventually you end up with 75 euros and you buy the rug. But what if the man had started at 75 euros. Would you still want to pay 75 euros? Would you still have found it a good price? Or did you have afterwards cognitive dissonance?
The anchoring effect is in fact an error in perception due to the absence of information. It allows the vendor to program certain parameters of value in your head.
This effect is of course used daily in retail stores. Products are labeled with a higher price and get a “sale” tag with an X amount discount. Furthermore, you have the famous “two for the price of one” promotions. If they simply marked the products down to a 50 percent discount, would you still feel that you have got something for free?
Research from 2007 showed that the effect is stronger for people with an openness-to-experience personality. In psychology, this is one of the five “general” personalities. People who are open to new experiences are usually more sensitive to design, appreciate art, are more emotional, adventurous, curious, and love varied experiences. Other research showed that the anchor effect is so strong, that it is almost impossible to avoid this. Even if one knows that it is being used!
A lesson of price anchoring by Steve Jobs:
Apply the effect within your business
As we all know, price is an important part of the marketing mix. But what if you can’t keep your prices under control? Applying price anchors can save yourself a lot of misery.
There are global companies who have seen their average sales price (and therefore their margin) subside with the advent of internet stores. These companies do everything they can to keep their prices stable by increasing the purchase price and not delivering them anymore to certain resellers. The strange thing is that many of these companies are investing millions in keeping their prices stable, but often forget to put the anchors in place.
They forget to communicate the shop selling price actively to end users, and allow resellers to determine the selling price. Everybody knows how the internet shops work. They focus on traffic, and the more the better. And what do we use the internet for? Not to determine where you will have the best service. We use it to compare prices. In other words, online providers are doing everything to attract people with a competitive price to their site. Subsequently, there will be some ridiculous shipping cost added, or the colour they are looking for is just 15 euros more expensive than the simple white T-Shirt. But still, the price anchor is put in place!
If you want to avoid this then you naturally try and think of lots of other forms of distribution. However, something that will help price stability is the communication of the sales price. If you are a supplier and displays your products on your website without having to sell them directly to the end user, then the chances are that 90 percent of your visitors will be looking for information on the price. You are their reference. If they then find the product 25 euros cheaper in a shop, this will instantly give them the feeling that this is the right price. More importantly, this is especially true for ads, campaigns, brochures, flyers, TV and radio commercials; make sure you put in place your anchor price, because it is likely that the potential customer will see your product through your marketing efforts first!
Another way to let people buy into a particular product or a particular service is to give them a (limited) selection capability. Some time ago I saw on TV the example of a test in a cinema. They sold popcorn buckets. Customers could choose between a large and a small. The small was $4, the large $9. Most people went for the small one, as $9 compared to $4 was a little high. Who pays more than twice the price of a small for a large? What exactly is the deal here? During the second round, one could choose from three buckets; small, medium and large. The prices of the first two remained stable and the medium was placed at $ 7:50. This time, most people chose the large one, because it was only $1.50 more. And if people didn’t chose it, then they almost always took the middle option. The seller highlighted that they only had to pay $1.50 more for a large bowl of popcorn, and without any thought most people went for it. A very simple way of upselling.
So if you are selling physical products, it may be advisable to add an additional choice in order to sell that product better. In terms of services, you can put together packages that customers tend to take, so they buy excactly the package you want to sell to them. Good luck!
