When Steve Jobs introduced the iPad, he said,Apple should price the iPad at $999 – and a giant $999 appeared on the screen behind him. Later, the $999 was crushed by the actual price that is $499. They had pulled off one of the oldest pricing strategies – price anchoring.
How Does Price Anchoring Work?
How do you sell a $2000 watch? Put it next to a $10000 watch. The essential idea behind this is that customers perceive pricing relatively. An item is perceived as cheap or expensive in comparison to the initial price point or to another item whose price they knew about first.
Price perception – A product is truly never “cheap” or “expensive”; it’s all relative. In the case of the iPad, the initial price flashed was $999. Then,when the price was revealed to be $499, customers felt like they had saved $500. What if the initial price flashed was $399?
For companies that have multiple product offerings, price anchoring can work in two ways.
- High price anchor – One could price a 50″ TV at $1000 & a 48″ TV at $600. Customers will buy more 48-inch TVs since they can save $400 by buying a TV that’s only 2″ smaller. The idea is to price a slightly more premium product higher than the product you want to sell.
- Low price anchor – A data subscription service could price 500MB/day package at $14.99 a month & unlimited data package at $29.99 a month.500MB per day is nothing today. The idea is to price your product slightly above a basic product so they feel like they are gaining more.
Decision making – Humans are naturally indecisive creatures. The decision can become so debilitating that some folks might even walk away because of the anxiety. Yet, a great way to prevent this is to label choices as the “most popular” option or the “recommended.”
- A kitchen retailer sells a basic mixer for $200, a mid-range one for $500 and a high-end one for $600. Some people buy the basic mixer because it is much lower than the other two, particularly the $500 anchor.
- Many others, however, who usually buy the mid-range, see the high-end mixer as ‘only’ $100 more, which is a much smaller gap than the $300 down to the $200 one, and so buy the high-end machine, seeing it as a relative bargain compared to the $500 anchor.
- The normal price of the mid-range mixer is $400 but has a low-profit margin. This strategy sells lots more basic mixers, attracting buys from people who were not thinking of buying, as well as upselling to the high-end mixer.
- A car salesman shows a customer an expensive car, anchoring the perception of the price at the high end. Then they show them mid-range cars which seem so much cheaper than the expensive car that customers often decide to buy these.
- A magazine offers a print subscription for $190 & print & online editions for a $200.They sell lots of the dual subscription. When online studies show many customers making good use of online edition, they offer this as a single item at $150, which takes up.
- A camera manufacturer offers the basic camera at a bargain $200. Lenses are extra and cost a lot more.
- For any digital product, While using high price anchoring, order plans by most expensive. Add level to “most popular” option or the “recommended plan”. Make the most popular plan stand out.
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