Decoding psychological pricing: Anchoring principle

Imagine walking into a store and seeing a product priced at €1.99 instead of €2.00. Does that one-cent difference really sway your decision? The answer lies in psychological pricing, where subtle tactics often shape consumer behaviours - without consumers being aware of it.

In the world of marketing and pricing strategy, understanding the principles of psychological pricing can give you a significant edge. It's not just about numbers on a price tag—it's about tapping into the complex psychology of consumers to make your offerings simply irresistible.  
According to Daniel Kahneman, a renowned psychologist in the field of behavioural economics who was influential in topics such as judgement and decision-making, we have two modes of thought: "System 1" is fast, instinctive and emotional; "System 2" is slower, more deliberative, and more logical. When it comes to purchasing, despite consumers' claims of rational decision-making (system 2), intuition or emotions (system 1) often drive their purchasing actions. In its complexity, the brain is sometimes not as astute as it perceives itself to be. This gives marketers an opportunity to employ a range of techniques to make their price appear as the most appealing choice for their customers.

To help you better understand psychological pricing, we’re launching a series on five scientifically supported principles. We will cover anchoring, cognitive association/substitution, intuitive brain stimulation, loss aversion/prospect theory, and cognitive biases/decoy techniques.  

The first technique in this fascinating and eye-opening series on psychological pricing is the anchoring principle, a concept deeply rooted in cognitive psychology.  
Our minds often rely on mental reference points when making decisions, which we call anchors or imprints. An anchor can be any aspect of the environment that has no direct relevance to a decision but still affects people's judgments. Anchoring refers to our tendency to rely heavily on the first piece of information we receive (the "anchor") when making decisions. In the context of pricing, this means that the initial price (or plain number) we see sets the tone for all subsequent evaluations.

Setting the stage for comparison

Money has different values for different people. The amount of money that may be significant to one person may not mean much to another person, depending on their financial status. This shows how value is subjective and relative. The anchoring effect influences the way people perceive price differences.  
This principle is frequently leveraged in sales scenarios, where 'before' and 'after' prices are displayed. Here, the higher 'before' price is the anchor, making the 'after' price seem more attractive.  

Let’s look at a few commonly used examples of the anchoring principle:

1. Influence the perception of pricing by reducing your price by 1

One common application of the anchoring principle in pricing strategy is seen in the perception of prices. For instance, €1,99 is often perceived as significantly lower than €2,00. This cognitive bias is rooted in scientific research and is a widely adopted technique in the retail industry. When consumers encounter a price, their brains subconsciously anchor on the first digit they see (typically before the comma), influencing their perception of the entire price. This initial digit acts as a reference point, leading to what is known as mental rounding to a more appealing and memorable, i.e. lower, number. Consequently, when comparing prices between products, this anchored price serves as a reference point that instantly influences consumer purchase decisions.

2. Suggest recurring pricing

Offering multiple payment options can further leverage the anchoring effect in pricing.  
By emphasising the recurring price, a lower figure can serve as an anchor against which consumers subconsciously compare the total amount offered by competitors. Even if consumers are aware that the sum of recurring payments does not equal the competitor's total amount, the anchoring effect remains a powerful driver of purchasing decisions.  

When offering promotions though, it's better to mention a one-time high monetary discount instead of a recurring monetary discount each month. This is because people tend to anchor on the higher number when it comes to saving money, rather than paying more.

3. Leverage comparative pricing

Research indicates that displaying higher-priced products alongside the main product can positively impact consumers' willingness to pay a higher price. By strategically using higher-priced products as anchors, consumers are nudged towards perceiving the main product as a more desirable or reasonable purchase. Test this yourself: do you often see more expensive products advertised alongside cheaper ones when shopping online?

4. Show prices next to large quantities

When presenting products, starting with the quantity before revealing the price can induce a positive anchoring effect. To enhance this effect, ensure that the quantity of products appears more significant, i.e. much higher, than the price, making it slightly challenging for consumers to calculate the price per unit. This strategy elicits a "good deal" feeling, enhancing the perceived value of the product.

5. Show consumer other (irrelevant) high numbers next to your price

The anchoring effect is further exemplified when a high number is displayed to consumers before revealing the product price. This initial number significantly shapes consumers' price perception, ultimately influencing their willingness to pay a higher price for the product. On social media, a popular advertising technique is to mention how many consumers have already purchased a product before you.

6. Separate shipping costs from total price on web shops and e-commerce

In web shops, setting lower product prices without including shipping costs consistently yields higher earnings. This strategy, particularly effective for lower-priced items due to the comparatively higher perceived shipping costs, is also commonly employed by second-hand online stores selling inexpensive products. By anchoring the selling price (or the initial bid) at a lower price point, sellers can capitalise on the psychological effect of associating low prices with positive feelings, encouraging increased bidding activity.

Understanding the psychology of pricing

The anchoring principle is a powerful technique in psychological pricing. When used correctly, it can influence consumer perception and drive purchasing decisions favourably for your product.  
However, the use of the anchoring principle should not be arbitrary. It requires careful consideration and knowledge of market dynamics, competitor pricing, your brand and product value, and consumer perception. Misuse could lead to credibility issues if consumers perceive the anchor price as unrealistic. Hence, consider psychological pricing as the ‘final adjustments’ after setting your base price according to value-based pricing principles.

As you begin your journey through psychological pricing, consider how anchoring influences your own purchase decisions. How can you leverage this principle to make your pricing strategies more compelling and irresistible to your target audience?

If you're looking to take your business to the next level, you need to nail your pricing strategy. At boobook, we understand this and are committed to helping you navigate the complexities of pricing. Our approach combines robust consumer-based data analysis topped with insights from behavioural economics to create pricing strategies that align with your customers' decision-making processes. This drives profitability and business growth. In our upcoming articles, we will explore other psychological pricing techniques that can transform your approach to pricing strategy, so stay tuned!

‍