Content navigation:
- What is price anchoring?
- How to implement a price anchor
- Does price anchoring work?
- The pitfalls of price anchoring
- When to use a price anchoring strategy
- Conclusion
What is price anchoring?
Price anchoring represents a practice of setting a price point which would then be referenced by customers while decision-making.
Anchoring is a psychological pricing strategy where a seller sets a high initial price (the anchor) for a product or service before offering it at a discounted price. Price anchoring implies an idea of impacting customers' perception of value by making the discounted price following an initial one seem more attractive to buyers.
The anchor price serves as a reference point for consumers, shaping their understanding of what is a reasonable price to pay. By starting with a higher price, you can create a perception of a good deal when the price is lowered. And at the same time, the discounted price is still profitable for you.
Price anchoring definition does not cover the diverse applications and variations of price anchoring in business. "Original" prices displayed alongside sale prices, tiered pricing structures, and pricing bundles are just a few price anchoring examples. It is a common tactic used by retailers, marketers, and negotiators to influence consumer behavior and increase sales.
It's not enough to know what is price anchoring to implement the strategy effectively. You need to know how it works in detail and be aware of the common pitfalls associated with price anchoring. Let's see how anchoring price strategy works.
How to implement a price anchor
You need to go through several key steps while implementing a price anchor. Firstly, you need to determine the initial anchor price. Remember the price anchoring definition? Right, the anchor price should be higher than the price you ultimately intend to sell the product for. However, always keep in mind that the anchor price should still be justifiable and believable to customers. Consider highlighting the premium features or benefits of a particular product to justify the initial high price.
Next, prominently display the anchor price alongside the discounted price to emphasize the value proposition. Use visual cues, such as strikethroughs or bold text, to draw attention to the price difference. Once again, you might need to provide valuable meaning for the anchor price, such as comparisons to similar products, to reinforce its perceived value. Remember that anchoring price strategy has always to deal with customer psychology.
Last but not least, create a sense of urgency or scarcity to prompt customers to act and buy the product quickly. This can be done through limited-time offers or limited availability, further enhancing the perceived value of the discounted price. By implementing these tactics, you can effectively use price anchoring to capitalize on customer perceptions and increase sales.
Does price anchoring work?
Anchoring price strategy is something many retailers tried, yet barely a lot of them succeeded. And that's where the question comes in: does price anchoring really work?
According to the price anchoring definition, the strategy leverages psychological principles to influence consumer behavior. Speaking of its effectiveness, research suggests that price anchoring can be effective in certain contexts. In particular, a recent study published in the Social Science Research Network proves that anchoring can lead consumers to perceive a discounted price as a better deal, even when the anchor price is arbitrary.
Price anchoring works only if several important factors are in place. These include the credibility of the anchor price, the perceived value of the product, and the decision-making process of the consumer. In contrast, if consumers are, for example, skeptical of anchor prices because they seem unrealistic it may lead them to question the validity of the discount and, eventually, undermine the price perception of the entire store.
The point here is that price anchoring can be a powerful tool in pricing strategy, but its success relies on careful implementation and consideration of various factors that influence consumer perception and behavior.
The pitfalls of price anchoring
It's time now to consider more carefully the risks and pitfalls associated with anchoring in sales. As mentioned above, the major risk is that consumers may perceive the anchor price as arbitrary or unfair, leading them to question the validity of the discount. This can undermine consumer trust and negatively impact the price perception of your store, which can, eventually, harm customer retention in the long run.
Another pitfall is the potential for anchoring to backfire if the anchor price is too high. What it means is that instead of perceiving the discounted price as a good bargain, shoppers may simply view the product as overpriced and not wait for a discount but switch to alternatives in other stores.
Finally, you should avoid overusing price anchoring because it can simply desensitize consumers, making them less responsive to future anchor prices and discounts. This can substantially reduce the effectiveness of the strategy over time.
When to use a price anchoring strategy
At this point, you're probably asking: how can I know that now is the right moment to apply the strategy? Let's look at certain situations in which using price anchoring can be particularly beneficial:
- Introducing a new product. When adding a new SKU to your portfolio, setting a high anchor price can establish a perception of value and quality, especially if the product has innovative features or unique benefits compared to old similar products.
- Repositioning an SKU. If you're repositioning a product to target a higher-end market segment, price anchoring can help justify the higher price point by referencing the lower price. That's especially relevant for luxury segment products.
- Clearing stock. When you need to clear old inventory, setting a high anchor price can create a sense of urgency and encourage customers to purchase a product during the following markdown waves.
- Premium branding. Once again: luxury segment pricing is one of the best price anchoring examples. If you want consumers to perceive your business as an expensive high-end store, relying on price anchoring is almost inevitable.
Conclusion
As you can see, the important meaning of price anchoring strategy in retail is not without reason. The right use of anchoring in sales can create a powerful marketing buzz around a particular product and drive metrics. At the same time, while price anchoring works perfectly in particular cases, it may sometimes undermine the brand positioning and negatively impact the customer retention rate in the long term.
That's why the strategy should be used carefully and rely on data-driven insights generated by smart pricing solutions. Such solutions, like Competera, can help you understand how a particular anchor price can impact the key business metrics both immediately and in the future.
