Three benefits of using anchor pricing
Anchor pricing is a highly effective strategy that works for industries ranging from retail to manufacturing. With 81% of customers already doing their own research before even setting foot in a store, price anchoring helps a company control how its products are positioned in the market.
Here are three key benefits of using an anchor price structure:
Influences price perception
Products are not definitively “cheap” or “expensive.” It depends on who you ask and the prices of available alternatives.
For example, say a distributor sells a two-seater sofa for $1,000 and a three-seater version for $1,399. While the three-seater sofa can be considered expensive, a buyer might find that $399 for additional seating space to be a deal.
As customers are exposed to different products and prices, they build their own reference or perception of how much something should cost.
An individual’s perception of price can change, especially when specialty brands or new products are introduced. However, a customer’s first price perception still carries a lot of weight. This is referred to as the anchoring effect or anchoring bias.
By applying anchor pricing, companies potentially offer the first piece of information customers come across and can better control the price perception of their product.
Facilitates the decision-making process
With so many options at their fingertips, customers often have difficulty deciding what product is best for them. This delays the purchasing process, and can even lead to potential buyers simply walking away due to analysis paralysis.
To ease the burden of decision-making, it’s common for customers to look to customer reviews and “bestseller” or “most popular” labels. This bandwagon effect indicates that individuals are more likely to buy what they see others have already bought.
Anchor pricing helps further speed up the buyer’s journey. By showing how much they’re saving compared to the anchor price, customers are assured they’re making the right choice.
Lessens the risk of purchase
While taking risks can be appealing in some instances, customers usually prefer to play it safe with their purchases. Given several versions of the same product, there’s an innate cognitive bias for the middle option.
Consumers don't want the cheapest version in most instances as it might fail to meet their expectations. But they also aren’t willing to spend on the most expensive product. Instead, they gravitate toward the middle, where they find the most moderate and sensible version.
Similarly, anchor pricing surrounds a product with higher and lower price points. These anchor prices give context to the customer and help them see greater value in the current offer.
Challenges of using anchor pricing
The main challenge of using anchor pricing is determining the best anchor price that will convince customers your product provides the most value.
Depending on how a company chooses to apply anchor pricing (more about this in the section below), there are a few factors to keep in mind:
Balancing price with value
In an anchor pricing strategy, a company must balance low prices with high value.
A simple form of this is with a discount, where the initial price remains next to the new discounted price to underscore the product’s actual worth.
A more complex form is tiered pricing, where there are different versions and prices of a core product. Versioning has built-in anchor prices, allowing companies to highlight the features and value of the specific product version it wants to sell.
Regardless of what strategy is used, the ideal anchor price effectively frames the product as delivering the most value at the best purchase price.
Staying up-to-date on industry prices
When using a competitor’s product as an anchor price, additional research is needed. To start, a company should know its primary competitors. Competitive pricing works best when the potential buyer is already familiar with the other brand and may even be in the final stages of deciding between the two companies.
Select a competitor you’re confident to win against in a direct comparison. Not only does your price have to be lower, but you should also emphasize the added value and benefits a customer will get if they buy your product.
Once you use a competitor in your anchor pricing, it’s important to keep tabs on their prices. They’re likely to come across your product page and decide to adjust their pricing to remain competitive.
Testing with your target market
Price anchoring doesn’t always work, especially in markets where the average customer already has an idea of industry prices or enough information to know the product’s value. In these cases, anchor pricing might not be enough to convince informed customers.
A company can still employ an anchor pricing strategy. However, it’s even more crucial that anchor prices are not overstating the market rates and the company’s products actually deliver their promised value.
How to use price anchoring in your business
There are several ways a company can use a price anchoring strategy to increase sales. Here are some popular methods to implement anchor pricing on your product pages:
Strike-through prices
The most straightforward implementation of anchor pricing is with a strike-through price, where the original price is displayed next to the current sale price. This type of anchor price creates an understanding of the product’s actual worth and encourages customers to purchase because of the savings.
For example, say a distributor offers a 10% discount on its refrigerators. The original price of $2,500 serves as an anchor price and therefore remains next to the discounted price of $2,250 as a way to highlight the product’s real value.
Even if there’s no actual discount, a company can still utilize an anchor pricing strategy by including a higher strike-through price next to the product’s current list price.
Companies can automatically include an original price column with QuickBooks Enterprise to show customers the savings on any discounted products clearly.
Tiered pricing
Tiered pricing is a common strategy used by companies that cater to various market segments or offer a few versions of a core product. Product tiers naturally create anchor prices by listing a range of different prices.
Tiers can be segmented by product quantity or features.
For example, a soap manufacturer can apply tiered pricing by product quantity by offering the following:
- 1–10 cases of soap for $60 a case
- 11–20 cases of soap for $50 a case
- 21 and above cases of soap for $40 a case
If the same soap manufacturer applies tiered pricing by features, it can alternatively offer:
- 1 case of plain soap for $40
- 1 case of scented soap for $45
- 1 case of cold process natural soap for $50
The lowest and highest tiers serve as anchor prices in these two examples. Depending on how each tier is segmented, this strategy can guide potential buyers to the company’s preferred product.
Competitor price comparisons
In highly competitive markets with little product differentiation, a company can benefit greatly from competitor price comparisons.
A competitor price comparison positions the company’s product as the better option, offering the same or greater value at a lower cost.
For example, a health supplement retailer can list its bottle of multivitamins for a $30 retail price, with a note that it’s 20% cheaper than a competitor’s product with a high price and same formulation.
Using a competitor’s price as an anchor is something most customers do anyway, and including it on a pricing page can help drive the purchase forward.
Final thoughts
At its core, anchor pricing successfully combines customer psychology with a company’s need to remain competitive and deliver value. With a good product and a reasonable price, the addition of an anchor price gives potential buyers a reference point that encourages them to the final sale.
QuickBooks Enterprise helps simplify a company’s anchor pricing strategy, with the ability to automatically create various price levels, publish a product’s original price to highlight discounts, and implement pricing rules that help maximize your profits.
