Ben Guttmann
A few days ago, I was plopping my credit card down for some new piece of software, and I was met once again by a familiar sight: the three-columned pricing page, a foundational component of nearly every sales website.
We’ve all seen this a thousand times. One of these options seems outrageously expensive. One of them looks like a complete rip-off. But then, right there in the middle – the best deal of all time!
Maybe we know what’s happening here, but that doesn’t mean it doesn’t work on us. This is the anchoring effect.
The anchoring effect is when our mind is anchored by a reference point that influences our attitudes and choices, even if the anchor is completely irrelevant. When we see an option priced at $1,000, then when we see one next to it at “just” $200, that cheaper option now seems like a steal (even if we wouldn’t have thought so in the abstract).
The behavioral science duo of Amos Tversky and Daniel Kahneman first identified this phenomenon in a 1974 paper. One of the studies asked participants to estimate the percentage of African countries that were in the United Nations, with two groups being exposed to a rigged “random” spin of a wheel that always landed at 10 or 65. For those exposed to the spin landing on the lower number, they answered with 25%, and for those exposed to the higher spin, on average, they estimated the answer was 45%. In theory, this spin should have no impact on anybody’s knowledge of geopolitics, but in practice, just seeing larger or smaller numbers can wildly change our answers. Here’s what they wrote:
In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. 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. We call this phenomenon anchoring.
In the decades since, more studies have confirmed anchoring’s effects on our perception of home values and stock prices and even things like the length of the Mississippi River and the average temperature in Germany. Everywhere we make judgments or decisions, we’re influenced by the first things we see.
We don’t live in a vacuum. Everything we experience, everything we choose, is in relation to the world around us. This also applies to whatever you’re selling. We buy stuff by comparing it to other stuff – and we have to start somewhere. So once we anchor ourselves by seeing an initial value, what comes next is an adjustment to that anchor, not an entirely new assessment. So when I see a huge headline number on that software’s pricing page, that’s my starting point, and I’m judging everything else in relation to it.
While they don’t have neat little landing pages like a SAAS startup, stores like Costco famously use anchoring as well. What’s the first department at the entrance to every Costco warehouse? Electronics. Big, beautiful screens fill your view… and correspondingly big, beautiful price tags anchor your mind in the thousands. Suddenly, every $17.99 16-pack of soap and $29.99 100-count box of garbage bags seems like a bargain. (Similarly, TJ Maxx and Marshalls have made billions with price tags that first ask you to “compare at” a much higher, often fictional, price.)
Like that pricing page, the anchoring effect works even when we know it’s happening. And it affects everything we do: planning schedules, pricing our work, buying clothing, working out, and more. But by being aware of this quirk of the mind, we can at least try to use it for good.
In the meantime, check out my new book, available for $99.99 $21.95!
