What is the Anchoring Effect?

Woman with anchor on her shirt

"We have a very narrow view of what is going on." — Daniel Kahneman via @choicehacking

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Have you ever bought something just because it was on sale?

Your rational mind knows that the sale price is never the real price. But you were persuaded by the deal. “It’s 50% off,” you say to yourself, “I’ve saved so much money!”. Seeing the regular price and then the sale price influenced you. It made you feel like you were getting an unmissable deal.

But in reality, the business will still make money off the reduced price. And having a “sale” triggered a purchase that they wouldn’t have gotten otherwise.

So why are sales such a powerful persuasion tool?

It’s all down to a behavioral science principle known as the Anchoring Effect.

What is the Anchoring Effect?

Discovered by researchers Tversky and Kahneman, the Anchoring Effect states that decisions are influenced by the first information we see. We anchor to this information without being consciously aware of its effects.

This principle has been rigorously researched, in situations as varied as house prices, legal judgments, and purchasing decisions.

The Anchoring Effect in action

In 2006, researcher Dan Ariely led an experiment at MIT. He held an auction with a twist. He showed students in his class random objects, like a bottle of wine or a textbook.

Ariely then asked students to write down a fake price for the item using the last two digits of their Social Security number as if it was the price (so if my Social was 123–45–6789, the price of a bottle of wine would be $89, for example).

After students wrote down the fake price of each item, they bid on it in an auction.

The results? Students who had high Social Security numbers paid up to 346% more than those with low numbers, for the same items.

Why? Because the first number students saw — even though it was completely unrelated — unconsciously influenced how much they decided to bid.

The higher the Social Security number, the higher the bid.

As Dan Ariely put it in his book “Predictably Irrational”:

“Social security numbers were the anchor in this experiment only because we requested them.
We could have just as well asked for the current temperature or the manufacturer’s suggested retail price.
Any question, in fact, would have created the anchor. Does that seem rational? Of course not.”

Examples of Anchoring in marketing, advertising, and customer experience

1. Amazon

High Starting Price: As seen in the example below, Amazon shows a high starting price, also called the “List Price” to anchor customers.

Source: Amazon via New York Times article, Some Online Bargains May Only Look Like One

The New York Times article “Some Online Bargains May Only Look Like One”, describes the strategy this way:

“List price is a largely fictitious concept, promoted by the brand or manufacturer and adopted by the retailer to compel the customer into pushing the buy button.”

Check out this example from Amazon above. A cat litter box, which was “listed” at over $2,000, is now being sold at the bargain price of $27.67.

Customers anchor to the list price, and in comparison, it looks like they’re getting a fantastic deal.

And as we know from Ariely’s Social Security example, an unrelated number will still influence later decisions. It doesn’t matter that the list price is outrageously high. It just matters that customers see it.

2. Walgreens

Multiple-unit Pricing: In this example, from Walgreens’ weekly ad, we can see them employing this strategy. Multiple-unit pricing means offering a “Get 2 for $5”, or similar offer.

Walgreens ad with anchoring effect

Source: Walgreens Weekly Ad, Jan 2020

In their paper, “Multiple unit price promotions and their effects on quantity purchase intentions,” researchers Manning and Sprott explain that people are more likely to buy if the quantity of purchase is higher. In other words, a 10 for $10 deal is more convincing than a 5 for $5.

Why?

Because customers anchor on the first number they see, they begin to rationalize why they need ten bottles of dish soap instead of one. They might only buy five, but that’s four more than they intended to buy when they came into the store.

More ways to apply the Anchoring Effect to your experience

The Anchoring Effect can be applied in several different ways, but it’s commonly used when pricing products. To apply the Anchoring Effect, try to:

1. Add premium-priced anchor products

Add a premium product with a much higher price point than the rest of your catalog. This product’s job isn’t to sell, but to make everything else seem like a good deal.

J.Crew uses this strategy on their website. Below you’ll find a few examples of high-priced “anchor products” that are much higher than the average customer would expect to see in a J.Crew store.

Even on sale, a $700 cashmere blazer is much more than J.Crew’s core customers are willing to pay.

Example of premium anchor products on jcrew.com

Source: J.Crew

The image below includes products indicative of an “average” priced J.Crew item. These coats now look like great deals in comparison to the $1500 anchor coat above.

Jcrew anchor effect

Source: J.Crew

2. Add high initial “anchor prices”

By showing customers the “normal” price and the sale price, you give them something to anchor against when deciding if they’re getting a deal.

This strategy does carry some risk, however. As in the earlier Amazon example, if you set the “anchor price” too high, you risk treading in an ethical grey area. You’ll also run the risk of training customers to only buy on steep discounts, which can damage your brand in the long-term.

Woman shopping

Photo by Tristan Colangelo on Unsplash

The bottom line

The Anchoring Effect means we need to be mindful of what we show customers, especially in the early stages of digital experiences.

Make sure to weigh the pros and cons of tinkering with the Anchoring Effect. It can be a tricky, but very effective, behavioral science effect to experiment with.

Ask yourself, is the upside of applying the Anchoring Effect worth the potential risk for our brand?


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