Anchoring.
It’s a funny word ‘anchoring’. Perhaps a better phrase would be ‘comparison point’, but ‘anchoring’ was the word Daniel Kahneman used. Who am I to argue with a holder of the Nobel prize in economics?!
Essentially, anchoring is all about how consumers compare prices. As we have discussed in a previous blog post, people assess prices in relative terms. Every price needs a reference point. For example, £5 would seem a high price for a cup of coffee but not for a pint of beer. This is because we have a rough idea of what each product usually costs. A related concept to this is ‘mental accounting’ whereby people actually allocate funds to each product, or group of products.
Anchoring though is how we describe the link between one price and another reference point. Like a ship is connected to part of the seabed by an anchor, people connect one price to another – and can even be guided by a marketer to focus on a specific connection point. If an item is reduced in a sale for example, the previous (original) price would be the anchor point i.e. ‘was £10, now £5’. On other occasions though, the anchor point might be the price that another seller is offering the same product at.
There is evidence that anchor points are not always logical or relevant comparison points. For example, one study for BBC Horizon asked participants to select numbered balls from a hat, before then asking them to judge the price they would pay for a bottle of champagne. The trick of the experiment was that the test was rigged: all participants choose balls with the same low number. The test was then repeated on a new sample of participants, this time giving them high-numbered balls. Can you guess the impact of the balls on valuation of the champagne? Yep, the numbers ‘anchored’ the prices given – resulting in high or low valuations.
There are of course laws regarding reference to other prices. For example, retailers can’t pretend an item has been reduced if the price has always been low. However, used ethically, anchoring can be an effective way of framing numbers.
Photo by Matthew Wheeler on Unsplash
