What is the anchoring effect?

According to Wikipedia, the anchoring effect or anchoring heuristic is a cognitive bias occurring when a particular reference point or “anchor” influences people’s decisions.

The anchoring effect occurs when people frequently rely too much on the first bit of information they hear. As a result, when making plans or calculating expectations, we take newer information from our anchor’s perspective rather than viewing it coldly. 

With this cognitive bias, we can become too focused on our own emotions and not focus as much on the person or situation. This may lead to an incomplete picture of reality that influences how we modify our plans and expectations.

anchor blue

This phenomenon is another one observed and described by Daniel Kahnemann and Amos Tversky. In their paper, they explain, “People make estimates by starting from an initial value that is adjusted to yield the final answer.”

Continuing, “The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient.”

“That is, different starting points yield different estimates, which are biased toward the initial values.”

To corroborate their account of the anchoring effect, Tversky and Kahneman conducted research in which high school students attempted to solve mathematical equations in a very brief amount of time.

 In five seconds, the students were asked to estimate the outcome:

8 x 7 x 6 x 5 x 4 x 3 x 2 x 1

Another group was given the same equation, but reversed:

1 x 2 x 3 x 4 x 5 x 6 x 7 x 8

The average estimate for the first equation was 2,250, while the average estimate for the second one was 512. (The correct answer is 40,320.) The researchers argued that the gap was caused by students doing partial computations in their heads before attempting to adjust these values to arrive at a solution. 

The group given the descending sequence initially worked with larger figures. Hence, their partial computations brought them to a bigger starting point, which they became anchored to. The same thing happened in the other group.

Here is a video presenting the anchoring effect:

Why is it important for marketing?

The anchoring effect in pricing products or services

The anchoring effect in marketing applies mainly to numbers and prices. For example, suppose you tell someone a product usually costs $9.99. In that case, they may immediately assume they’ve encountered a great deal when they see it priced at $7.99 somewhere else.

On the other hand, if they discover the same item on sale for $12.50 somewhere else, they will assume it is overpriced. The anchoring bias suggests that we favor the information we learned first.

The most popular anchor is the “99” ending on the price. You may not be willing to pay $100 for a product, but $99.99 seems a lot better, as it’s not even a three-digit number.

Marketers can create an anchor concerning the relation of price to the amount of product we get.

window shop sale

For example, the sign says you can get a 20 oz Coke for $1.69 or a 32oz Coke for $1.99. So, for 30 cents, you’ll have almost twice as much Coke. So, anchoring that a 20 oz Coke is worth $1.69, 32 oz for $1.99 suddenly seems like a great deal even when both are overpriced.

Another example can be pricing pages. The customer chooses a package that can differ from others depending on the time of billing period and features provided.

For example, you can showcase subscriptions for your product in the pro package on the same page as your starter package. Then start with the pro package price, which is significantly more expensive than the next available option.

Even if you’d never need the pro package, by seeing this price first, all other packages are suddenly perceived in relation to the higher price, rather than to other more comparable packages. So ultimately, $15 seems like a bargain, even if you need the $8 package. 

Here are a few options if you want to apply the anchoring effect to how you price your products or services.

  • The first option the client sees is going to be the price that anchors in their mind. If you want to sell your mid-price choice, anchor the top-priced product by placing it first or in the center in a larger font to draw attention. This will make the mid-price option look like a bargain in comparison.
  • When selling the most expensive option, make sure you set the lower price in a similar range. This way, you can present how much more value comes with the slightly higher price.
  • Another example can be the suggested “retail” original price crossed out, and you’re given a lower price. The final price can still be high, but the initial price was anchored, and how customers perceive the final price is not as high as it seemed before.
  • The anchor doesn’t have to be a price. Showing any higher number next to your price can help you increase sales. You can show the number of items sold or how many people have purchased.

It also appeals to social proof, which is an effect we also described in a dedicated article.

The anchoring effect in branding and design

When it comes to your brand identity, the crucial part is first impressions. A Google study says that people can make first impressions just in 17 milliseconds. That’s why it’s vital to stand out from your competitors.

A prospective customer has to remember your company’s name or see your logo. It’s hard to create an anchor if your prospective customer can’t even spell or remember the name of your business.

brand design

Here, we have listed the essential elements of your brand design:

  • The crucial part of brand design is a web page. When designing a webpage, you need to convince people in a few seconds that you have the solution to their problem; otherwise, they’ll leave your site. Make it simple and choose a visual anchor to highlight on your homepage. An excellent visual anchor will make an impression and will make people interested in your product.
  • Also, a unique company brand name can be an anchor itself. Using effective connotations to your product while creating a catchy name can effectively increase your sales. Stray away from online generators or generic lists of name ideas.
  • If you can, don’t settle for a generated logo from a template or one created by an app. It won’t stand out and get lost in the crowd, and neither will your business. Instead, understand how font size, shape, and colors in a logo design can impact purchasing decisions.

We recommend reading about the visual framing effect in our separate article.

Conclusion

The anchoring effect in marketing is when the first price you see in a set of prices is so much higher than the other prices that it becomes 10x more expensive. What this does is affect how the potential customer sees the following prices. 

This is extremely important in marketing since it will be anchoring the customer’s idea of how much the product typically costs. You can apply the anchoring heuristic by making the first price or number displayed high so that other prices seem like a discount. 

If you want to sell your product, you should learn how psychology marketing can help you upgrade your business strategy.

We hope this article helped you understand the anchoring effect and how it can affect consumers’ perceptions.

Author

Experienced psychologist and T-shaped marketer with a deep love for content marketing and conversion copywriting. Privately a big fan of travel, coffee, and jazz!

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