It’s not the price of your product that determines how many people buy it…
…but more the prices of the products adjacent, both in-store and online.
It all has to do with a psychological principle called anchoring. Essentially, the first number you see colours any numbers that come after it.
For example, if you see a bulk stack display of champagne in the supermarket, with each bottle priced at £10.99, then an alternative on offer for £25.49 is perceived as very expensive. But if you put the £25.49 bottles next to some £50 bottles, then they look much better value.
Welcome to the retail opportunity that is anchoring. During normal decision making, individuals anchor, or overly rely, on a reference price or specific information and then compare other items against that reference.
Anchoring plays an important role in how we understand and assess the prices of products in stores and online. Psychological anchoring is particularly prevalent in relation to goods with which we are either unfamiliar or that we don’t consider the price as part of the purchase decision hierarchy.
Imagine that you decide to buy a new car for £30,000. Then paying a further £230 for a spring loaded cup holder – seems reasonable. But what of you went to Costa and paid £2.60 for a skinny latte and they wanted to charge you a further £230 for a bit of plastic to enable you to balance the beverage in your car?
Looking beyond pricing, anchoring can also influence our perceptions of whether a product is good or bad quality, healthy or unhealthy, etc. And there are occasions influenced by anchoring that dictate whether we consider it fair and acceptable to pay a certain amount for a product: A can of Coke from the supermarket, 50p, but buy the same product while at a rock concert, for £1.50: When offered next to £2.50 bottles of lager, seems a snip. This latter example shows just how powerful a simple anchor can be in influencing our perception of value, and certainly undermines the notion that decision makers are perfectly rational beings.
With respect to buying things like grocery items, research suggests that, we draw from a reference category of similar goods, which serve as our anchors. For example, when evaluating a jar of coffee, we tend to look at the prices of other jars in the same area. From that we decide whether the price represents good or bad value.
Anchoring influences our price perceptions by altering the value we attach to different objects. So, when a new and original product enters the market, shoppers have difficulty valuing it as they have no reference point. Therefore, brands and retailers are able to influence shoppers by dictating a reference price for their NPD items. This is usually done by setting a high anchor price, so that subsequent discounts and special offers make the item appear more of a bargain.
J. C. Penney thought it was a smart move to eliminate special offers and instead create everyday low pricing (EDLP). Had they been aware of the power of anchoring? Perhaps they wouldn’t have been so keen. And subsequently, when sales ‘dropped off a cliff’, they got the message. They’ve now reversed their policy and customers are returning, albeit perilously slowly.
The point of this article is to try to illustrate the importance of psychology and behavioural economics within retail. Ask yourself, at the next range review, are you considering engaging a psychologist or a behavioural economist? If not, then why not? Because I pretty much guarantee that their input will prove to be more valuable than their cost.
In summary, when determining how much to charge for our products, we should let psychology and behavioural economics help us. Shoppers don’t see items on a spreadsheet, they see them in-store and online next to other similar products and brands. And it is there and then that they anchor themselves to a perceived value and reference price. With that in mind, how appealing do your products really look?
Hmm, Something to think about
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