What the heck is Anchoring, and why is it so important?

Simply put, anchoring is how people live their lives… Woaah! *We gotta bad ass over here*

Anchoring is all about comparing a certain prospect to another. The base-line product, base line sale, menu option, service, vacation, relationship, , etc. etc. etc. – we all live by comparing our current life system to potential options that we see.

Bar Rafaeli will never date you, cuz Leonardo DiCaprio is a thing. She’s gonna anchor her decisions based on who she’s with right now.

[Slow clap for the ones that couldn’t make it to the rich guy boat party]

So, you know how it’s so hard for businesses to tap into clients in the B2B space? That’s cuz clients are anchoring their existing providers with you. If you can anchor yourselves with the existing provider and compete on only one or two key differentiators – then it makes the decision easier for the client.

Examples of Anchoring?

1. A $55 Filet Mignon coupled with a $60 Lobster will make the decision easier if anchored against a $25 Roast. Its a no-brainer – I’m not spending twice as much on something that fancy – although, if I order the Roast, and I like it – I’m gonna think about how incrementally more delicious the $60 Lobster is gonna be.

2. Expensive audio equipment.

 

beats by dre pricing
Beats by Dre Pricing comparison – Click to enlarge

 

So a consumer walking into the digital store will have a set budget in mind, and looking at the expensive price point of $449.95 – the decision is clear. He’s gonna go for the cheaper headphones. Anchoring works in this way. You gotta check out their product pages – their UI is quite above average – check it out

3. Digital newspaper subscriptions – I love this experiment by the economist  Dan-the man-Ariely’s. *Props*. I pulled these images from Peep’s blog at ConversionXL (another interesting resource)

Here’s the setup – a group of MIT students (the top 1% of the worlds smartest) were asked to choose a subscription model for the Economist magazine. They were free to walk away from the deal as well. [Not sure about how the questions were phrased]

One of the groups saw the following options  –

1. Web Edition- $59.00

2. Print Edition – $125.00

3. Print and Web – $125.00

economistpricing-1

84% went for the last option, and 16% for the first.

Option 2 was a decoy. An anchor stimulant – if you will. Consumers base their anchor point at the web edition, and imagine their lives with Options 2 and Options 3. Option 2 seems like a waste of money, and option 3 appears to be a gosh-darn bargain. I’ll pick option 3.

Now here’s where the experiment gets realllly interesting –

When they removed the second option for group II, only 32% went for the last option. A huge drop! When group II anchored themselves at $59, they were too focused on the incremental cost of a print edition – and then they considered themselves environmentalists *guppies* and went for the web edition instead. Too much of a processing load to handle.

A huge drop in revenue.

Here’s another gem from Peep at Conversion XL

“When people were offered to choose a trip to Paris (option A) vs a trip to Rome (option B), they had a hard time choosing. Both places were great, it was hard to compare them.

Now they were offered 3 choices instead of 2: trip to Paris with free breakfast (option A), trip to Paris without breakfast (option A-), trip to Rome with free breakfast (option B). Now overwhelming majority chose option A, trip to Paris with free breakfast. The rationale is that it is easier to compare the two options for Paris than it is to compare Paris and Rome.”

I think this sums it up.

Types of anchors

 

Pricing anchors –

i. First digit anchor

The magic of “9”…*spoooooky*

Why is everything on this god-damn planet priced at $49 or $499.95, or Rs. 19,900, or something of the sort?

That’s cuz we anchor the price of the product to the first digit we see.

In the case of $49 – We instantly associate the price of the product as being $40 + $9, instead of being $50. This is huge. Because now you’re looking at these numbers separately and they’ve become an acceptable amount for placing an order.  $40 bucks works for me, and what-the-heck – $9 isn’t that expensive either.

This also works incredibly well for the $1 a day campaigns. A few insurance companies and cell phone providers say that their service only costs $1 a day instead of saying $30 a month. Why? Because you can ANCHOR $1 and compare it with your daily bus fare, coffee, bag of chips, energy bar, etc etc etc. Instead of comparing $30 to a pair of shoes, or a bag, or something of higher value. Consumers will automatically anchor onto the $1 and won’t budge.

i-cannot-brain-today-i-has-the-dumb-cat

We can’t help it – that’s just how people are. If we like something we see, we wanna convince ourselves to buy it. And if there’s an external influencer like a pricing anchor – then damnit we’re sold!

*To Note* This doesn’t kick in during discounts. Selling a $50 product and discounting it by $5 is too much of a load on the consumer’s mind. Now she’s gotta factor in the after-sales tax, and she thinks “When you add it all up, it comes up to the same price”

[#NEVER DISCOUNT]

ii. Comparison anchor –

Having a dummy price-point  built in to your pricing, works great.

price intelligently mac book

When I look at the MacBook Air’s 64 GB hard drive – I’m like NO WAY is anyone gonna pay that much for that little. And now – I’m sucked in. The ad has got my attention, and got me thinking about the other three brands. The Macbook’s also intentionally placed on the extreme left – like its almost automatically distanced from the true mid-range selections. (:0 Genius)

Credit goes to Price Intelligently for spotting that.

iii. After Sales – Upselling ancillary items after someone has made a huge purchase has a lot to do with anchoring as well. The cost of the accessory is now compared to the price of the overall product. The product now being the anchor.

E.g. A car with a music system. A flat screen with a set of speakers. A PS3 console compared to a game that costs almost 25% of the price of the PS3. Compared to the investment that the consumer has just made, the price of a smaller commitment/product/upgrade on a flight/extra leg-room/ super-sizing / etc. etc. etc. seems inconsequential. “Go ahead n do it, but make it fast.”

Service Anchor –

a. Customer Experience -When a customer walks into a store, and they’re treated with respect & made to feel affluent, it creates an anchor. An anchor where the consumer starts believing the script, and ends up spending more during the stroll-around or atleast leaves the store with a smile. Bob would recall his experience and tell Cindy,” I didn’t buy anything from that store, but man were the staff helpful. Great bunch of people. They’ve even got a decent winter-coat.”

[Slight Caveat] Sometimes the staff is just a bit rude to their customers – especially in high end outlets. Bunch o’ bitch*s. I haven’t imagined an interaction where that would pay off – unless you want to influence an existing customer who’s browsing. The fact that the sales person didn’t bother me, made me feel like I belonged to that store, that brand, that ideology, that socio-economic class.

I remember listening to an episode of Freakonomics or maybe it was NPR, where a guest talked about a guy (a stranger) in the subway telling others (strangers) whether they’re ok to enter the subway or not. The man would simply say, “You can enter. You can’t. You sir, can enter.” Kinda made him feel like he was in a nightclub. He later gushed and said,”It felt nice.”

b. Ownership anchor –  A Starbucks coffee will have your name written right on it. Starbucks is the largest chain of coffee shops in the world. Correlation? Maybe.  Just the fact that someone publicly acknowledged your presence and wrote your name on your order – does have a significant impact. I think it was either Dan Pink or Ariely that mentioned this in a TED talk a few years ago, but the principle still holds true. When you have ownership of a certain product or a service – you value it much more. Starbucks made you the owner of that cup-o(insert_fake_italian)-cinno, when they wrote your name on it and called it out to ask you to claim your property. The anchor now being the fact that you now have ownership of the brand’s product, which inclines you to value it more, enjoy it more, and return for more of the same in the future.

Matter-o-fact, here’s an oldie from Dan Ariely –

Credit – Youarenotsosmart/anchoring

Drazen Prelec and Dan Ariely conducted an experiment at MIT in 2006 where they had students bid on items in a bizarre auction. Ariely explains in his book, Predictably Irrational, that the researchers would hold up a bottle of wine, or a textbook, or a cordless trackball and then describe in detail how awesome it was. Then, each student had to write down the last two digits of their social security number as if it was the price of the item. If the last two digits were 11, then the bottle of wine was priced at $11.

If the two numbers were 88, the cordless trackball was $88. After they wrote down the pretend price, they bid. Sure enough, the anchoring effect scrambled their ability to judge the value of the items. People with high social security numbers paid up to 346 percent more than those with low numbers. People with numbers from 80 to 99 paid on average $26 for the trackball, while those with 00 to 19 paid around $9.”

c. Brand Anchor – Brands perceived to be a certain way, will find it incredible difficult to convince consumers otherwise. Walmart will have a hard time selling $1000 Louis Vuitton hand-bags, customers will never forgive Enron, and Barack will always be seen as a caring father to Malia & Sasha, regardless of how many drones or the extent of the NSA program. Celebrities make constant appearances in advertisements, or the paparazzi – they want to anchor themselves in your minds as having a certain trait or certain personalities. Miley has anchored herself as a crazy wild performer, and hence can’t be pictured in a Disney production – unlike singer and actress Selena Gomez.

Communication that anchor is crucial.

 

05

Take Virgin. They’re into everything. Even space exploration.

What do you think Virgin has anchored itself onto? Being the best in the music business?  The greatest network provider?

No, its the experience. Virgin anchors itself on experience.

I love love love flying virgin. I’ll pay a little extra and change flights to fly virgin -because the experience is far superior to any other airline and its not that expensive. This superior experience can be literally translated to any and all businesses, and consumers know that deep down. Want proof? Branson’s signed up 700 folks to fly in space, asking them to pay $200K upfront per seat. Why? Because he’s gonna take good care of em, and because they know they’ll enjoy the experience.

Well then, what should a brand do?

Experiment – and track the experiment closely. It’s a lil bit of work but it’ll pay off, and you’ll make millions – I promise.

I) Choosing an anchor – Pick a dummy comparison price point, pick the $9 pricing trick, select the $1 a day effect – choose whatever you want, but keep in mind about the communication strategy around it. If your competition is spewing the same numbers as you are – then its no fun to be in that game. Pick any anchor based on your current objectives, market trends, competition review, and brand profile.

II) Setting up the anchor – Next, you want your major communications channels to reflect the anchor effectively. Ads, radio jingles, 20 second spots, social media, etc. etc. – make sure you rock each one.

III) Executing the anchor – You want to make sure that the anchor is presented effectively at the point of sale. Website, shelf space, Amazon, sales staff, in-store, on mobile,  in-air, in person, whatever and wherever. You need to have it reflected across platforms to maintain a consistent consumer journey. Plus it’ll be a huge headache to track multiple anchors across the country if you get feedback data with inconsistent metrics.

This is the end of the article. You did it! You’ve absorbed most of this information subconsciously, so ease up and chill if you didn’t quite remember everything that was covered. Take care!

 

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