The Anchoring Effect: The Trick That Makes You Overpay

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Before I get into explaining what the anchoring effect is all about, let me tell you a little story first.

The Story

On January 27th, 2010, Steve Jobs introduced the iPad to the world for the first time. Back in 2010, people barely knew the functions within an iPad. It was an alien product to them. The iPad didn’t have a camera, and many of the features in the iPhone were unavailable. It looked like it was only good for people who wanted to sit on the couch and watch videos all day.

There were many critiques who believed that this was definitely going to be a flop. Many jokes were made about the iPad and everyone thought it was ridiculous.

Amidst all of this, Apple did what Apple does best – they marketed their product.

Ten years later, the iPad has generated over 200 billion dollars for the company, having sold over 400 million units. That’s more than the entire population of America.

But how? If everyone found it ridiculous, how did they manage to pull this off?

The answer lies within 60 seconds of the 91-minute presentation where Steve Jobs introduced the iPad to the world back in 2010.

During the presentation, Steve Jobs asked the crowd “What should we price it at?”. Instead of mentioning the price right away, he said “If you listen to the pundits, we’re going to price it under a thousand dollars — which is code for $999.”

The Twist

Immediately after Steve mentioned this, a massive $999 was shown on the big screen.

Steve went on to talk about the features of the iPad and continued justifying as to why the iPad is worth the price. All the while, the massive $999 was staring at the audience who was already expecting a ridiculous price.

And then, after all the justifying, in less than one second, this happened:

“I am thrilled to announce to you that the iPad pricing starts not at $999 but at just $499.”

The crowd went wild. The massive $999 on the screen had suddenly changed to $499 – in less than two minutes. The iPad was suddenly affordable to everyone. What Steve Jobs did in 2010, is called the anchoring effect.

In order for you to understand what just happened, let me first run you through the psychological process that the crowd in the hall experienced that night.

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What Is The Anchoring Effect?

‘Anchoring’ is our mind’s tendency to look for any existing reference point when it makes decisions or judgments.

Our brains find it extremely annoying to have to figure things out from scratch. So it tends to look for anything that it can use as a starting point and then make comparisons from there onwards. It tried to use initial pieces of information as a reference point. As messed up as it can be at times, it is a natural flaw in the brain that we humans can’t prevent.

Our brains are aware that it should definitely go for other types of reference when making decisions – for example, quality or quantity. However, our minds will still end up trying to use price as a reference point eventually. This psychological flaw due to cognitive bias is called the ‘anchoring’ effect.

If someone comes and tells you “Normal people have at least 10 close friends”, you will immediately compare it to yourself and think “Do I have enough?” or “Am I not normal?”. Even if they come back and tell you “Hey! I was just kidding. April fools!”, you will most likely still keep thinking about it for a long time. The piece of information you received will still stick inside your mind. What you experience in this situation is the anchoring effect. Your brain has latched onto the initial piece of information that you received, regardless of its integrity.

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The Anchoring Effect In Marketing

The anchoring effect applies to almost all situations where numerical values are involved. When it comes to marketing, since ‘price’ is in numerical format, it is very easy to make use of this effect to get people to purchase your products.

Retailers provide an initial price point for customers to remember when making purchase decisions. This way, all the information they later gather will be compared against the initial price.

Presentation Tips

When marketing products, it is important to note that the way you present them makes a big difference. Take the below image as an example. Notice how all the options below are priced exactly the same. However, depending on the way it is presented, the customer’s attraction will differ.

Does the first one make you feel like you need to buy it? What about the second? How about the third? Did you notice how strangely your mind is a lot more attracted to the third option, despite knowing that all of them are the same price?

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Examples Of The Anchoring Effect

I will give you a few examples of when the anchoring effect could be taking place so you can take note of it in the future.

1. Discounts:

Everyone loves a good discount with an awesome deal. Throughout the year, companies tend to raise the prices of products just to give major seasonal discounts to make it look more attractive. To the buyer, this is a great deal! But little do they know that they’re buying products at their original price with the “illusion” of a discount.

2. Car Dealerships:

When you go to the car dealership to buy a car, you ask “How much is this?”, the chances that the dealer tells you a price above its actual price are almost 100%. This is because they are trained to make use of the anchoring effect in order to get the sale. Every detail they tell you in the sales pitch will be compared against that initial price that they tell you. Towards the end of the conversation, when you try to negotiate your way to get a better deal, you aren’t exactly winning. You’re simply getting closer to the actual price of the car.

3. Salary Negotiations:

When you go for a job interview, you’ll most likely have an idea of how much you want to get paid. Let’s assume you’re at an interview and you’re at the part where you discuss salaries. You expect to receive $50,000 for your position. However, the interviewer stops you right there and informs you that the pay is only $30,000.

There is a large difference between $50,000 and $30,000. Asking for a lot more than $30,000 seems unethical and therefore, you try to meet him halfway by asking for $40,000. The interviewer accepts agrees to $40,000 and you’re now happy with the pay because to you, you were about to get $30,000 but you raised it to $40,000. You will never know if the interviewer would have happily given you $45,000; or even the $50,000 that you initially asked for.  

4. Real Estate:

The anchoring effect is a very common sales tactic used by real estate agents.

Let’s say you want to rent a place to stay, and your real estate agent takes you to a few houses. You have a budget of $2,000 in mind.

The first few houses he shows you will usually be a bit messy and a bit worn-down. He will most probably tell you that these houses cost $2,000. Next, he will take you to a few other houses which look much better than the previous houses and tell you that these cost around $2,500.

In your mind, you will come to the conclusion that if you want a nice-looking house, the price is around $2,500. You come to this conclusion solely based on the initial worn-down houses that you visited which were priced at $2,000.

5. Retail Stores:

When you visit retail stores, the first items you see are often strategically placed to trigger the anchor effect. The items at the store window display are usually the most expensive items in your store. The $20 T-shirt inside the store seems like a better deal compared to the $100 T-shirt on the display window.

The same is done by luxury brands as well. The $1,000 pair of Gucci shoes set an anchor for the $200 Gucci wallet inside the store.

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Tips For Customers To Take Note Of

1. Explore all Features

Before buying, make sure you compare all of the features of the product. It can be difficult to come to a proper judgment with the anchor effect clouding your mind. Try to think about the features and if they are worth the price you’ll be paying.

2. Set a Mental Anchor

Before you visit a store to check out a certain product, set a mental anchor inside your mind. Have a rough estimate of how much you would be willing to pay for that particular product. This will let your mind know that the initial price point for later comparison is the price you set inside your head.

3. Do Your Research

Before you buy an item, go to different stores or research online to check the actual market price of products. This will help you to stop being mentally caught in anchors.

4. Delay Your Purchase Decision

Tell yourself that you will explore five more options before deciding if you want to buy the product. This way you will sway your mind to look at other options and decide on an average price. This will not only increase your awareness of the actual price but will also prevent you from making a poor decision.

In conclusion, there’s no doubt that the anchoring effect is used all around us. Throughout our lives, on many occasions, we have all been tricked by our minds to pay more than what we need to. I hope this article helps you to understand exactly what goes on inside our minds when faced with this situation. If you found this article helpful, please share it with your friends. Also, you might want to read my other articles that are similar to this! Check out our social media pages – Smartiac and Smartiac Finance!

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