Question

Shawn Van Dyke, a construction industry consultant, wrote on a home building site: Brains do some pretty funny things when making a buying decision. If you understand your customers' brain activities, then you can use this knowledge to help increase your sales and deliver on value. \(\ldots\) There's an old question in advertising. "How do you sell a \(\$ 2,000\) watch? Put it next to a \(\$ 10,000\) watch." This is an example of price anchoring. a. What is price anchoring? b. Explain why Van Dyke cited the "old advertising question" as an example of price anchoring.

Short answer

Price anchoring is a tactic where the first price a consumer sees influences their perception of subsequent prices. Van Dyke's example talks about how, by placing a \$2,000 watch next to a \$10,000 one, the first serves as an 'anchor' that makes the second one seem cheaper and thus more attractive to prospective buyers.

Step-by-step solution

Definition of Price Anchoring

Price anchoring is a psychological phenomenon in sales where the first price a consumer sees sets an expectation of price in their mind, also known as the 'anchor'. This anchor price then influences their perception of subsequent prices. When a consumer sees a high-priced item first, and then encounters a similar but cheaper item, the second item appears more attractive due to the initial anchor price.

Explanation of the Example

Van Dyke used the question 'How do you sell a \$2,000 watch? Put it next to a \$10,000 watch.' as an example of price anchoring because the high price of the \$10,000 watch serves as an anchor that makes the \$2,000 watch seem much more affordable in comparison. A customer who might balk at spending \$2,000 on a watch might reconsider when they see the price in relation to the \$10,000 watch. So, even though \$2,000 is itself a high price for a watch, appearing less expensive relative to a far more expensive option makes the buyer perceive it as better value.

Key concepts

Consumer Psychology

Consumer psychology explores how thoughts, beliefs, feelings, and perceptions shape how people buy and relate to goods and services. It's all about understanding the "why" behind buying choices. When we talk about **price anchoring** in consumer psychology, it refers to the initial price point a consumer sees and how it can significantly sway their purchasing decisions.

Imagine you walk into a store and the first thing you see is a super expensive watch priced at $10,000. In your mind, this sets a baseline for what watches might cost in this particular store. Now, when you see another watch that's tagged at $2,000, it may suddenly seem like a bargain, because your mind has been "anchored" on the $10,000 price. This psychological anchoring is powerful because it impacts your value perception.

• Initial prices act like mental benchmarks.
• They influence how consumers perceive subsequent pricing.
• Anchors can make expensive items seem like a good deal when placed next to even pricier items.

Understanding and leveraging consumer psychology techniques like price anchoring can enhance effective pricing strategies.

Behavioral Economics

Behavioral economics combines insights from psychology with economic principles to better understand how real people behave in economic decision-making. Traditional economics assumes individuals are rational actors, but behavioral economics recognizes that human decisions are often irrational and influenced by biases.

One key concept is how **price anchoring** works as a cognitive bias within behavioral economics. When exposed to a high anchor, like the $10,000 watch, consumers may subconsciously adjust their perceptions and expectations. Their willingness to pay for the $2,000 watch may increase, even though theoretically, they should evaluate its price based on its own merits rather than comparison.

• Human behavior is often predictably irrational.
• People rely on anchors even if they are arbitrary.
• This cognitive bias can be harnessed to influence purchasing decisions.

Behavioral economics teaches businesses how to strategically use anchoring to influence consumer behavior and optimize pricing strategies.

Pricing Strategy

Pricing strategy is a fundamental aspect of business operations and refers to the approach companies use to set prices for their products and services. One effective pricing tactic within this realm is price anchoring. By strategically placing high-priced items near their more moderately priced counterparts, businesses can shift consumers' perceptions, making the less expensive items seem like a better deal.

Consider Van Dyke's example: Placing a $2,000 watch next to a $10,000 one isn't just a random choice. It's a well-thought-out pricing strategy intended to leverage the psychological impact of the high anchor price. This tactic makes consumers more likely to view the $2,000 watch as affordable and reasonable, facilitating higher sales.

• Price anchoring is a deliberate tactic in pricing strategy.
• It's used to alter the perceived value of products.
• Strategically high anchors can enhance the perceived attractiveness of lower-priced items.

By understanding and applying such strategies, businesses gain a competitive edge by capitalizing on consumer psychology principles to increase sales and customer satisfaction.