Anchor Pricing is the concept of making a product that was first offered seem cheaper when it put alongside another product. An example of this would be initially offering a customer a product that costs 300 GBP but then showing and comparing a more expensive alternative, say 450 GBP to that customer. That first product then acts as an anchor as customers will use that first product as a reference point for selecting a product to purchase. Customers will perceive the price of two products relative to one another, and the customer uses the first product offered as a comparison point for other products as well.
Reasons why price anchors bolster pricing strategies
The price of a product is relative, it is essentially never cheap or expensive for that matter. Because the price of a product is a relative concept, customers tend to compare one product or service to another. A customer might be on the market for a new computer monitor. That same customer might look at a 32 inch monitor that costs 200 GBP and feel as though it is a little bit too expensive. What retailers will do in this situation is offer another monitor that is 35 inches but costs 200 GBP more. The customer will usually think that the 32 inch monitor is a much better deal and will purchase that monitor. The key point that should be mentioned is that the retailer intended for that to happen, using that 400 GBP monitor as an anchor so that the customer will think that they are getting a bargain when they purchase the 200 GBP monitor.
This strategy can also be implemented when trying to anchor a lower-priced product. For example, if a company offers two different types of music streaming services, they would be priced differently. The trick here is that the second option with many more features is only slightly more expensive than the base model. Customers are more likely to choose the slightly more expensive model because they feel they are getting much more for their money thanks to additional features, albeit if it involves paying a little bit more.
Decisions, decisions, decisions
Customers tend to be very indecisive when it comes to choosing what product to buy when they have many different products to choose from. This can become a problem because customers can walk away if they are unable to decide what product is best for them. Firms can avoid this problem by sticking a 'most popular' or 'customer favourite' label on the product.
Using the bandwagon effect can serve as a huge benefit for brands as the bandwagon effect acts as a frame of reference for customers. When this effect is tied with an anchor price, this allows customers to make much easier decisions when choosing a product to buy. Customers will normally decide to buy a product because it is the easiest way for them to get rid of that pain that comes from decision making.
Customers enjoy taking risks every now and then, but they are wary when it comes to leaving the pack and walking towards extremes. This is something that is seen when choosing between three different products of different sizes. Customers tend to pick the middle product because it is not the smallest/doesn't have the least amount of features, and it isn't the most expensive.
When it comes to price anchoring, it is always best to add a higher and lower tier to a product. The higher and lower tier price points act as anchor prices and push customers towards the middle option and making a faster decision. While customers may choose the higher or lower product, having a middle option means that the whole spectrum has been covered and that attracts more customers as a result.
This kind of behavior translates especially to price anchoring as well. Essentially, you should surround the ideal option with a higher and a lower tier. The higher and lower tier on your pricing page effectively function as anchor prices, which then push your customers toward purchasing that middle tier. Of course, smaller customers will flock to the lower tier and larger customers to higher tiers, but letting prospects know that you've covered the whole spectrum pushes the main group of folks directly into your target tier.