Have you ever been to a store, seen a high-priced item, and suddenly found another item—cheaper but still over your typical budget—that seems more affordable? If yes, you've been influenced by a psychological phenomenon known as the anchoring effect. It's a powerful tool, one that marketers can harness to nudge customer perception and decision-making.
In our previous post, we covered the Scarcity Principle and today we're looking at another powerful behavior bias known as the anchor principle.
In this article you'll:
- Learn the power of Anchor bias in marketing: A psychological principle influencing consumer perception.
- Get Real-world examples: Demonstrates anchor bias in marketing strategies.
- Real-wold Application: Insights on integrating this bias into pricing and promotion.
Anchoring Bias: A Brief Overview
The anchor bias, a concept rooted in behavioral economics and cognitive psychology, refers to our tendency to rely heavily on the first piece of information—or 'anchor'—we encounter when making decisions. Once an anchor is set, we adjust our subsequent judgments based on it. Even when we encounter other information, we tend to interpret it around the anchor.
The customer experience perception is heavily influenced by external anchors (external reference value directly provided by others and is divided into high anchor and low anchor).
What is the anchor bias principle in marketing and how is it applied?
The anchor bias principle in marketing refers to setting an initial price or value as a reference point, influencing consumers' perception and decision-making. The rest of this article illustrates its application through real-world examples, showing how companies like Apple and KFC use anchoring in their pricing and promotional strategies.
How does the anchoring bias work?
Imagine you're shopping for a new TV. The first one you see is at the original price of $2,000. You move on and find another one for $1,200. Suddenly, the second TV seems like a steal, even though it's still pricey. That's the anchor bias effect in action, subtly shaping your perception of value.
This type of irrational decision-making is why Rolls Royce stopped exhibiting at car shows.
Instead, they started exhibiting at aircraft shows.
Rolls Royce stopped exhibiting at car shows Instead, they started exhibiting at aircraft shows.
"If you've been looking at jets all afternoon, a £300,000 car is an impulse buy. It's like putting the sweets next to the counter."
Examples of the Anchor Bias in Marketing
Williams-Sonoma Bread Maker
This is a classic example of the anchor bias effect in action. When Williams-Sonoma initially introduced a bread maker priced at $275, sales were sluggish. However, once they introduced a second, more advanced bread maker at $429, the original bread maker's sales increased significantly. The high price of the new model served as an anchor, making the original model seem like a great deal in comparison.
Apple's Product Lineup
In 2010, when Steve Jobs introduced the first iPad, rumors were swirling about its potential price. Many media outlets speculated that it would cost $999, some even predicted it could go up to $1,000 or more.
However, when Jobs finally unveiled the price on stage, he revealed it to be just $499. Compared to the anticipated price of $999 or more, $499 seemed incredibly reasonable, even though $499 initial price was quite high for a tablet at that time.
This is a perfect example of the anchoring effect in action. By allowing the speculation of a much higher price to set an anchor in consumers' minds, Apple made the actual price of the iPad feel like a great deal. It's a strategy that has become synonymous with Apple's product launches and has contributed to their reputation for delivering high-quality products at a perceived value.
Apple also strategically applies the anchor bias principle with their iPhone launches.
Apple typically offers three storage options for their iPhones. For example, with the iPhone 12, they offered a 64GB version for $699, a 128GB version for $749, and a 256GB version for $849. Many consumers might think, "I don't need 256GB, but for just $50 more, I can double my storage from 64GB to 128GB." The highest price (the 256GB model) serves as an anchor that makes the middle option seem like a good deal.
The Economist Anchoring Bias Experiment
This example arguably falls under another behavior bias called the Decoy Effect. However, I think it works powerfully as an anchor too.
In his book "Predictably Irrational," behavioral economist Dan Ariely described an advertisement from The Economist offering three subscription options:
- Online subscription: $59
- Print subscription: $125 (price anchor)
- Print & Online subscription: $125
At first glance, the second option (print only) seems irrelevant, given that for the same price, one could get the print and online subscription. However, Ariely conducted an experiment with his students and found that the seemingly useless option had a significant impact.
When all three options were available, the majority of students chose the third option (print and online), seeing it as the best deal. Very few chose the online-only option, and nobody chose the print-only option.
However, when Ariely removed the second option (print only) and asked another group of students to choose, most students chose the cheapest (online only) option, and fewer chose the combination option.
The second option (print only) served as an anchor, making the third option (print & online) seem like a fantastic deal in comparison. By removing the anchor, the perceived value of the third option decreased.
The print & Online subscriptions became the anchor price which enhanced the perceived value of the option when compared to the print subscription only for the same price.
- Web Only | 16% purchased
- Print Only | 0-%
- Print and Web | 84% purchased
This example not only demonstrates the power of the anchoring effect but also illustrates how companies can strategically set prices to steer customers towards a specific option.
The Campbell Soup Limit Quantity Example
So, picture this: three supermarkets in Sioux City, Iowa decided to run a sale on Campbell's Soup, offering it at a sweet price of 79 cents per can. They set up signs behind each display that rotated between two options: “Offer limited to 12 cans per person” and “No limit per person.”
And guess what? The sign with the limit of 12 cans increased sales per buyer by a whopping 112% compared to the no-limit sign! Buyers went from purchasing an average of 3.3 cans to 7.0 cans each. Holy moly!
Why did this happen, you may ask? The study suggests two possible factors: artificial scarcity and anchoring bias. Artificial scarcity is the idea that limited availability creates a higher demand, even if there is plenty of supply. Anchor bias refers to the tendency people have to base their judgments on the first piece of information presented to them.
So, the next time you're thinking of running a sale or promotion, consider setting a limit per customer. It might just boost your sales and make you a happy camper.
The Power of 9 in Pricing
The psychological pricing strategy of using ".99" or "39" instead of rounding up to a whole number is a ubiquitous phenomenon in the retail world, and it's all about the power of perception. This strategy, often called "charm pricing," taps into our cognitive biases and heuristics, particularly a concept known as "anchoring."
Researchers Eric Anderson and Duncan Simester conducted an experiment, published in several papers, about the effects of price endings on retail sales, with a particular focus on the "9" price ending. This phenomenon is where prices that end in ".99" (e.g., $4.99, $19.99) seem to be more attractive to customers than rounded prices (e.g., $5.00, $20.00), even though the difference is only a cent.
In the studies, the researchers manipulated the prices of various catalog items. Some were priced at round numbers, while others ended in 99 cents. The researchers found that the sales of the items priced with the 99 cents ending were significantly higher than those of the items with rounded prices, even when the difference was just a penny.
This research shows the impact of price perceptions on consumer behavior. The "9" price ending gives consumers the impression of a deal, even if the discount is minimal. This illustrates the idea of "left-digit effect" where the leftmost digit is changed from, say, 5 to 4, when the price goes from $5.00 to $4.99, which has a significant effect on consumer perception.
Here's how it works:
- Left Digit Effect: We read from left to right, and thus, we process the left-most digit first. So, when a price is $4.99, we focus more on the 4, rather than the 99. It's not that we consciously think it's $4 – we know it's closer to $5 – but the anchoring effect leads us to perceive the price as more closely related to $4. This is why a one-cent price decrease from $5.00 to $4.99 can result in a surprising increase in sales.
- Perceived Bargain: Prices ending in ".99" are often associated with discounts or deals and enhance the perception of consumers. This convention sends a psychological signal that an item is cheaper or on sale, leading to increased perceived value.
- Breaking the Dollar Threshold: For prices just under a round number (like $0.99, $9.99, $99.99, etc.), consumers often perceive a significant price difference because the price is in a lower "range" or "category." For example, we categorize $99.99 as 'under a hundred,' which feels psychologically less than a price in the 'hundred' category, like $100.
- Increased Complexity: A price of $4.99 is psychologically more complex than a rounded number like $5.00. This complexity diverts our mental resources, reducing our ability to fully process the price, and hence making us more likely to underestimate it.
So why does it work? It boils down to our inherent cognitive biases and heuristics. Our brains are designed to use mental shortcuts to make sense of the world quickly. This efficiency often results in systematic errors in our judgment and decision-making. These cognitive biases, including anchoring, are hardwired into our brains from evolutionary times, designed to help us survive and thrive. They can be very difficult to overcome, even when we are aware of them.
Remember, however, that while the ".99" trick is a powerful tool in behavioral pricing strategies, it's not always appropriate. For luxury goods or professional services, rounded prices can signal quality and simplicity. Understanding the context and your target market is key when applying these strategies.
KFC “A deal so good you can only buy four.”
Back in 2014, Oglivy Asia had a challenging brief ahead of them.
- Increase the sales of KFC French Fries
- You can’t change the product, offer, or the price, just the communication
At the heart of this campaign is the idea of "Just 4 packs per customer!", which is an excellent example of an anchor in advertising that helped limit the purchase of a the fries — a product their customers already loved — but made it scarce.
Sales of “1-dollar chips” increased by 56%.
The anchor bias, as previously described, causes people to rely heavily on the first piece of information they encounter (the "anchor") when making decisions. In the context of this campaign, "4 packs" was the anchor, setting the reference point for customers' purchasing decisions.
Here's a breakdown of how it could have influenced customer behavior:
- Perception of Scarcity: By saying "Just 4 packs per customer", KFC created an artificial limit, suggesting that the product is in high demand and maybe even scarce. This perceived scarcity can increase the perceived value of the product, making it more desirable to customers. Scarcity is a well-documented psychological principle that triggers fear of missing out (FOMO) and can lead to increased sales.
- Normalized Quantity: The initial anchor of "4 packs" also subtly suggested a norm or an acceptable quantity to purchase. Customers might have previously bought one or two packs, but the anchor of "4 packs" resets expectations. The idea is not that every customer will buy four packs, but it nudges them to consider buying more than they would have initially.
- Value Perception: The external anchor of "4 packs per customer" might lead some customers to think that they are getting a bargain. In their minds, if KFC has to limit purchases, the deal must be good.
- Influencing Behavior: Even for customers who did not intend to buy four packs, the anchor could influence their behavior. When they are deciding how many packs to buy, "4 packs" is the number that is already in their minds, thanks to the anchoring effect. So, they might end up buying more than they originally planned.
Overall, by placing an anchor in their campaign headline, KFC was able to influence the purchasing decisions of their customers on a national scale. Anchoring can be a powerful tool in advertising and marketing when used strategically and ethically. By understanding the power of cognitive biases like anchoring, businesses can craft more effective campaigns and drive sales.
The use of the anchoring effect in this context demonstrates the real-world applicability of cognitive biases and behavioral science principles in marketing and advertising, underlining the intricate relationship between psychology and consumer behavior.
SaaS Price Anchoring
Many SaaS (Software as a Service) companies use the anchoring effect on their pricing pages. They often display their most expensive plan first, followed by cheaper options. The high price of the first plan serves as an anchor, making the subsequent options seem more affordable. For example, Mailchimp does this across all their services.
Restaurants and Wine Lists
It's common practice for restaurants to include a few high-priced meals in their menu. These expensive options make the other meals seem reasonably priced, even if they're above average in cost.
How does Behavior Science + StoryBrand Work Together?
At Creativeo, we combine the StoryBrand framework with in-depth customer and market research, and apply the most effective neuromarketing principles to drive engagement. You can see this across our StoryBrand Website Examples.