There is an abundance of psychological pricing tactics that have been created with the goal of attracting more customers. We could talk about rounding prices, bundling products, dynamic product pricing, and others. We could, but we won’t.
This time, we will take a closer look at one of the most tried and tested psychological pricing tactics on the market — price anchoring.
Price anchoring, in its simplest form, means having a higher price point, as a price anchor, next to the lower price, which is the actual price at which the product is being sold.
The price anchor (the higher, initial, price) serves as a reference point. The actual price then turns the price anchor into an offer almost too good to be true. This triggers numerous psychological mechanisms in people’s brains, but one’s perhaps the most important — FOMO (fear of missing out).
This does two things:
- It urges the customer to act quickly before the deal is gone.
- Increases the customer’s desire to grab the extraordinarily good deal and get more value than what they are paying for.
This tactic can be executed in numerous ways.
Examples of price anchoring
Probably the three most popular variations of the price anchoring pricing tactic are discounted pricing, tiered pricing, and price skimming.
Each of these tactics helps achieve different goals. Let’s go over each one, see why online retailers are implementing them, and what you should have in mind if you want to try it yourself.
Discounted pricing
Probably the most familiar example of price anchoring are discounted prices. In this case, there’s usually a drastic price hike prior to the discounts. Once the time for discounts comes, the seller will usually prominently highlight the anchor price, and in many cases also highlight the percentage amount of the discount.
At the other end of the spectrum is a discount so small that it’s barely noticeable. Some sellers may discount their products for the minimal possible amount (e.g. a $99.99 product is discounted to $98.99).
What does this do?
It is not exactly an example of price anchoring, but it’s related as both approaches are rooted in consumer psychology. A significant percentage of consumers have already been conditioned to be automatically attracted to discounted prices, without considering the discounted amount. Even if it’s a $1.00 discount, customers will be attracted. A part of them may purchase the product without further consideration.
Another subset of those customers may actually now consider it, even though they haven’t come to your store to buy that particular product. And another subset may be repelled by the amount of the discount. However, this third group is usually the smallest one, percentage-wise.
Tiered pricing
Another example of price anchoring is encountered with tiered pricing. This is a situation where there are multiple tiers of a product, each with a higher price than the previous one, and with more features and capabilities.
However, what’s important here is that the rise of the prices and the rise of the perceived value of the features are not equal. Prices seem to rise slightly, while the apparent value of the features seems to drastically increase with each next pricing tier.
This nudges customers towards buying the more expensive option, in order to get the most “bang for their buck”.
Price skimming
Now, let’s take a look at mobile phones. What does their pricing model look like (especially for the flagship models)?
Think about when a new iPhone drops. Its starting price is usually pretty steep. Over the course of a few months, that price steadily decreases. The goal? To capture as much profit as possible from early adopters who are willing to pay a premium to be the first with the latest tech.
This strategy works because there’s always a group of people who love being first or just can’t wait to get their hands on the newest gadget.
Be careful when implementing price anchoring
Before trying out any of these pricing tactics, read about the two most important scenarios you should be aware of and try to avoid.
Consumer backlash
It is true that price anchoring can drive more sales. However, it’s important to be aware of how customers perceive it. If consumers feel manipulated — such as when a steeply discounted product is paired with a higher-priced item that appears to offer less value — they may become distrustful.
This can lead to negative word-of-mouth and erode customer loyalty.
Generally speaking, people value transparency and fairness, so be sure that your prices don’t make customers feel exploited. Instead, you want to instill a sense of fairness and authenticity.
It’s a fine (and difficult to keep) balance between enticing your audience and maintaining their trust. If you cross that line, the short-term sales boost may not be worth the long-term damage to your brand’s reputation.
Hurting your margins
The most common goal when implementing price anchoring is to entice higher-than-usual spending. Going overboard with it can be dangerous, though. Damaging your profit margins by, let’s say, discounting too much is a scenario you want to avoid.
For example, if you employ discount pricing or tiered pricing, you might unintentionally lower your product’s perceived value. This could lead customers to expect discounts regularly, making it harder to sell at full price.
Also, if your anchor price is set too high, you may find yourself unable to sell the premium item at a desired margin. In these cases, the initial sales increase may be offset by the reduction in profit per item sold. Always ensure the strategy aligns with your overall pricing structure to avoid margin erosion.
Conclusion
Price anchoring and tactics like discounted pricing, tiered pricing, and price skimming can be powerful tools to boost sales when used thoughtfully.
While it may be tempting to play with pricing to drive sales, you should always keep the bigger picture in mind. To put it simply: keep things balanced. Aggressive discounts may bring a short-term sales increase, but in the long run, it is almost guaranteed to hurt your margins.
Similarly, skimming too much from early adopters could alienate price-sensitive customers down the road.
Ensure your pricing strategy (and the tactics derived from it) helps you achieve your business goals and nurture customer relationships, instead of focusing solely on quick wins.
