Is $200,000 a lot for a house?
The answer depends a lot on where you were living when you first looked into buying a house. Your opinion of what a house should cost will be shaped differently depending on the first prices you saw. So if you lived in San Diego, California you would have a much different perspective than if you were in Lincoln, Nebraska.
Not only would this affect your conscious price comparisons, but it would even effect your subconscious approach to pricing houses. That initial shopping foray created an anchor in your mind. And it’s been shown that those initial anchors have a way of hanging on as we make future purchasing decisions.
This is important to understand when talking with a potential customer. Because how you present the price of your products or services will have as much of an impact as what that price actually is.
The Anchoring Bias in Pricing
Anchoring is a cognitive bias that has been studied by behavioral psychologists for the past 50 years. Basically, it’s a mental shortcut that our brains use to make decisions quickly when we don’t have a lot of information.
In one of their early papers on the topic, researchers Amos Tversky and Daniel Kahneman stated that “People make estimates by starting from an initial value that is adjusted to yield the final answer.”
In other words, the final decision someone makes is influenced by our first impressions of the subject. It’s a habit that our brains have of making faster decision so it can free up thinking space for other decision. When we first get information about a new subject, we anchor around the initial information we receive and adjust from there.
In other words, we don’t start fresh.From how long we think an appointment should take to how people perceive our professional brand, the first impression has a long-lasting impact.
So our initial information – for example, the price we think a software package should cost – influences our final decision – what we are willing to pay for that software package.
Why Sales Sherpas Need to Understand Price Anchors
This is an important mental shortcut for Sales Sherpas™ to understand. As a trusted resource for prospects and customers, Sherpas play an important role in the buying journey. They help their prospects make better decisions by helping them translate the copious amounts of information they have available.
A key piece of information that prospects need to wrap their head around is pricing. This is especially true when they buying something that they haven’t purchased in the past.
It’s important that a potential customer can create an accurate framework in their mind about the price and value of what they are going to buy. So it’s vital that you present the pricing options in a way that helps prospects create the right context.
First Impressions Stick
Until you give them proper context, price is just a number (albeit with a dollar sign in front of it). By harnessing the power of anchors, you can frame that number correctly in their minds.
If potential customers don’t have a lot of experience in buying, they are going to anchor their beliefs on pricing to the first numbers that they get. It doesn’t even matter how close they are in their assumptions, it’s hard for them to get off these initial impressions.
Author Dan Ariely calls this arbitrary coherence. The initial information we get about pricing can be arbitrary, but our future opinions about what the price should be will be coherent with that first exposure. (If you want more on this topic, by the way, check out Dan’s Predictably Irrational.)
3 Ways to Use Anchoring with Your Prospects
Here are easy ways that you can harness anchoring in your pricing conversations with your customers:
1. Uncover Their Previous Anchors
Has the prospect already created an anchor in their mind? That will influence how they respond to your prices. And while you can’t directly ask, because it’s unconscious and they aren’t aware of their anchors, you can ask some questions that will illustrate their thinking:
- “Have you shopped around with the other companies out there?”
- “Have you priced out other solutions ?”
- “What was your impression on that price they quoted you?”
- “What have you paid in the past?”
- “Did that seem like a fair price?”
- “Much much do you think ____ costs?”
2. Position Yourself Carefully with Competitors
Yours is probably not the only solution. When you are presenting price, it’s common to compare yourself with what else is on the market. How you make these initial comparisons highlights the power of anchoring. If you start with a cheaper competitor, that lower price will become the anchor. It doesn’t matter if their quality isn’t as good, the customer will compare your price to theirs.
So when you are first presenting price, it’s important to to compare to a higher-priced competitor. Because then the comparison will be to a higher number.
You can see this play out in retail settings when the original price is crossed out and a lower “sale” price is written next to it. It seems cheesy, but our minds anchor to the initial bigger number and all of a sudden the sale sounds like a great deal!
3. Offer a More Expensive Option First
Not only can you compare yourself to a more expensive competitor, you can also create higher-priced options within your own products and services. By creating a bundle or a multi-tiered pricing approach, you anchor the prospect’s expectation by presenting the larger option first.
Every once in a while you will sell your top-level options, but more importantly, you’ll make your other options seem lower in comparison. And because the customer has anchored to the first number they were presented with, the rest of your options seem much more attractive.
This is the psychological underpinning of a long-standing sales tool called “Good Better Best” where you offer three options for the potential customer. The “Best” in this case creates the price anchor that makes the “Better” and the “Good” seem much more manageable. But it only works if you start with the best first!