BiasesDecision makingFocus

The Anchoring Effect

By June 26, 2021 No Comments

What Is The Anchoring Effect?

The “anchoring effect” refers to the fact that human beings rely heavily on the first piece of information offered when it comes time to making decisions. This first piece of information is called “the anchor,” and it causes a cognitive bias. The anchor then affects the way that human beings make decisions, whether we know it or not.

To put it simply, the anchor effect refers to the fact that humans use an initial piece of information to make decisions. The “anchor” can lead to judgments and expectations, as well. The anchoring effect is commonly used in sales and marketing, but it also applies to many other aspects of life: startups, relationships, and financial investing. Amos Tversky and Daniel Kahneman first described the anchoring effect in 1974.

The Anchoring Effect In Business

The anchoring effect often comes up when discussing negotiation, as well. The “anchor” may be the first price offered for a car or business, and that initial anchor will influence subsequent negotiations. Let’s say that you are in a job interview and the interviewer asks you what salary you expect from the job.

You have been hoping for $75,000 – and the interviewer agrees. While you may be pleased with the negotiations, you may never realize that he or she was willing to offer you up to $100,000. You essentially set your own “anchor”, in this case, and were influenced by it – and ended up leaving money on the table. The anchoring effect is the reason for the common phrase in business: “Never make the first offer.”

Here’s another example: let’s say that you are interested in purchasing some items at the store. You are interested in buying a blender but haven’t decided on a particular brand or type of blender. You’ve decided that you are ready to pay about $100 and haven’t found anything that stands out.

You notice that there is a blender that is on sale for $100. The original price was $200, but that price (the anchor) is now crossed out – and the new sale price ($100) is suddenly much more appealing. There’s a good chance that you may be more interested in purchasing this blender than the others. This is because of the anchoring effect, and it happens because the $200 price has acted as “the anchor.” The anchoring effect is why so many retail chains use this marketing tactic to sell their products.

How The Anchoring Effect Can Harm Founders

There is also another point that needs to be made: the anchoring effect can also harm your business. We have discussed how the anchoring effect can affect sales and negotiation, but what about the actual pricing of your product or service?

Let’s say that you are selling an incredible marketing service, and your company runs on a subscription business model. Your company offers marketing reports and analytics, and it’s been quite successful. Your company offers a basic plan for clients that only costs $10 a month, but are working diligently on a new premium plan that will offer some incredible features. You’re excited to launch this new “premium plan” for $100 a month, and are confident that it will propel your company to a new level of success.

Once you launch the new plan, you notice much less interest in the premium plan than you had anticipated. While there might be a range of factors to explain why this idea didn’t succeed, the truth is that your basic plan might be anchoring your clients. They might already be getting some useful features for only $10 a month, and the idea that they should suddenly pay ten times that amount simply doesn’t make sense.

In other words, you have priced your services too low, and your clients are now uneasy about paying much more money for more features. Entrepreneurs often run into this issue and realize that the actual solution is to raise the price of the basic plan. Now, the “anchor price” is higher, and the more expensive premium plan seems much more reasonable. In this scenario, the price anchor has negatively impacted your company because the anchor price was too low.

Using The Anchoring Effect To Your Advantage

Entrepreneurs and marketers might already be aware of the anchoring effect, but how exactly can you use it to your advantage? There are simple examples of the anchoring effect everyday in your everyday retail store – the use of a price ending in “.99”, or a new price under an crossed-out old price – but what about figuring out a way to use the anchoring effect to your advantage for your startup or organization?

One of the most obvious ways to use the anchoring effect to your advantage is very simple: list your most expensive product or service first! Earlier, we discussed a marketing company that was selling subscription plans. One smart and easy way to take advantage of the anchoring effect here would be to list the premium plan (the most expensive) first, so that the basic plan – or any additional mid-price plans – are a more attractive option. You can highlight the premium plan by using a larger font, for example.

Also, no matter what products or services you sell: display the discounted price next to the original price. The original price helps consumers and clients understand that this was once the price, but they now have the option to “take advantage” of the discount. This will change the way that the consumers value your product or service, and it can increase conversion.

Business owners can absolutely use the anchoring effect to their advantage, and it can do wonders in terms of marketing and conversion. However, it should also be noted that it has its limits – it’s not like a clothing company can claim that their sweaters are ACTUALLY worth $10,000, but they are selling it for the discounted price of $150. Obviously, this seems a bit “gimmicky.”  While the anchoring effect might not be a miracle that can single-handedly save your company, it is certainly a tool that your business should consider.

Kim Hvidkjaer

Kim Hvidkjaer

I’m a father, author, speaker as well as multi-disciplinary serial entrepreneur and investor. I started my first company at age 19, and have built and invested in companies in innumerable industries.

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