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By Patrick Lefler
A few years ago, Williams-Sonoma, the high-end American retail company that sells kitchenware, furniture and other housewares, offered a home bread maker priced at $275. After a period of mediocre sales, they decided to add a second model—similar features as the first but slightly larger. This new item was priced at $429—more than 50 percent higher than the original bread maker. So what do you think happened?
Sales of the newer, higher priced model were a flop, but sales of the original, less expensive bread maker almost doubled.1
This effect on sales, which Williams-Sonoma had not anticipated, illustrates the powerful effect of what happens when you change the alternative options (or choices) associated with buyers’ purchase decisions. When Williams-Sonoma offered just the one bread maker, there was no basis for buyers to determine value other than that single appliance. And with a price of $275, buyers judged the item to be relatively expensive. But when the store added the higher priced bread maker as an alternative, buyers used it as their “anchor” by which they now relied on to determine value. With the price of the bread maker now anchored at $429, the smaller model became a bargain in the minds of the buyers.
This concept of “anchoring” is well known among behavioral psychologists today. The pioneers in this research were two Israeli-American psychologists, Amos Tversky and Daniel Kahneman, who began studying this type of behavior almost 40 years earlier. Their primary field of study was called behavioral decision theory—the study of how people make decisions.
While the anchoring effects unleashed by the placement of the second bread maker was unanticipated by Williams Sonoma, it is well understood and now common practice among luxury goods retailers today. Have you ever gone to a Coach store and wondered why the $2,000 bag was displayed so prominently? It’s not there to be sold so much as it’s there to make their large assortment of $1,000 handbags seem all that more reasonable.
And it’s not just luxury goods retailers that have caught on to this phenomenon. Most restaurants offering wine know that diners will generally not buy the most expensive bottle on the list; rather, they tend to buy the second- or third-most expensive bottle. Knowing this, restaurateurs usually plant an overly expensive bottle on the list to act as the anchor, and then list the next two bottles at a price that looks reasonable compared to the “plant,” but priced high enough to deliver healthy margins to the restaurant.
In a different context, however, anchoring is not so effective. Were a store such as, say, Target or Walmart to use the same tactics as Coach, the results would be quite different. Placing a selection of $600 shoes next to a pair of $900 ones would not have the same affect at Target or Walmart as it would at either a Bloomingdale’s or a Saks because there are too many low price anchors at the discount stores that shoppers encounter throughout their shopping experience. The shoes would remain unsold for a long time.
So how does the concept of anchoring affect the selling and buying of business services? For companies that sell products or services where it’s relatively difficult for buyers to determine value, the concept of anchoring can be a powerful tool in your sales arsenal.
The most common example of this is the technology and consulting firms whose offerings of software and/or professional services are non-commoditized and difficult for the buyer to ascertain value. This is also especially relevant for firms that use a value-based pricing model as opposed to a cost-based pricing model for their offerings. For sellers of these types of products and services, it’s best to offer your prospects at least two pricing options. Price the premium-value solution high enough so that it acts as a realistic choice even if there is little expectation that buyers will choose this option. (You never know—buyers may for some reason select your premium choice, so you need to ensure that you’ve factored in a healthy margin.) Second, it also needs to act as an effective anchor that sways buyers’ value perceptions. Remember, once the anchor is set, there is usually a bias toward that value. With the anchor in place, your next offering should be similar in the features that buyers most desire, but different in size or scope with a price that is somewhere in the range of 30 to 50 percent less than that most-expensive option.
You also need to ensure that you’re not the equivalent of a Walmart trying to sell $600 shoes. This means eliminating any other perceived anchors that may sway your buyers in the wrong direction. The most basic example here is combining both relatively expensive software or professional services offerings in the same environment with relatively inexpensive add-on services. If you have such a diversity of offerings with regard to price and value, it’s best to separate these as much as possible. Otherwise, the power of your high-priced anchor will be significantly diminished.
Remember, value is all in the mind of the buyer and there are a number of different cues that communicate this—everything from the quality of your sales materials and presentations to the reputation of your brand. But as the sales cycle nears the closing stage, the most important cue is the price itself and how it’s framed and presented.
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1 William Poundstone, Priceless, (New York, NY: Hill and Wang, 2010), p. 156.
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Patrick Lefler is the founder of The Spruance Group; a management consulting firm that helps growing companies grow dramatically faster. He is a former Marine Corps officer and a graduate of both Annapolis and The Wharton School. The Spruance Group acts as a trusted partner by offering unbiased advice and providing unique solutions to help clients solve their most pressing product strategy needs. For more information, visit www.spruancegroup.com or contact Patrick at: plefler@spruancegroup.com |