All value is relative. No value is absolute!
You have found the perfect home to buy. How much should you pay?
It all depends, doesn’t it? To come up with an answer, the primary question may be what the price of the home is RELATIVE to other similar homes in the neighbourhood. The first thing you might consider is its original list price, and then what the lowest and highest list prices are for homes with similar features, age, and construction. These will become your primary “anchor” and “reference points” for the purchase consideration and any future negotiations.
The one thing you probably won’t do is add up the costs of all the labor, brick, mortar, and other materials, that went into its construction. At this point in your consideration the costs of building the home are not yet important. Your primary questions will remain, “what are the owners asking for the home?” and “how is it relatively priced against similar homes?”
Anchoring is a cognitive bias that we often fall prey to by placing too much importance on the first piece of information offered (the “anchor”). This anchor then affects all subsequent judgment about how to interpret new information as it becomes available. In our home purchase example, the list price sets the anchor for the negotiations. It especially affects perceptions like what is proper, right, fair, or inconsequential.
To test this theory, consider the following two scenarios:
A) You are considering purchasing a new camera. You’ve researched the model, and its competition, and have now arrived at the camera store to inspect the device in person. Surprisingly enough its on sale! The original price for the camera was $350, but today the sale price is $250!
Question: Would you buy the camera at this store, or go to another retailer to try your luck at finding a better deal there?
Got the answer? Ok here’s scenario B.
B) You are considering purchasing a new camera. You’ve researched the model, and its competition, and have now arrived at the camera store to inspect the device in person. Surprisingly enough its on sale! The original price for the camera was $255, but today the sale price is $240!
Question: Would you buy the camera at this store, or go to another retailer to try your luck at finding a better deal there?
Marketing guru and Wharton School professor, Jonah Berger asked a similar set of questions to a test group of 100 people, 75% said they would buy the item in scenario A, while only 22% would purchase it in scenario B.
But wait a minute! The 2nd store has the lowest price for the SAME camera!! Shouldn’t people have a HIGHER desire to purchase here? Apparently not. Because of their original list price anchor ($350), the “sale price” in scenario A is much more seductive (you are saving $100, or almost 30%!!) than in scenario B, and consequently people pull their wallets out 3.4X more often. But here’s the point those people miss. You can only derive a tangible benefit by buying the camera at the lowest possible price, and not by saving some illusory amount of money from an arbitrary “list price” (the anchor).
The sad result is that …
The sad result is that retailer B is going to be punished for not making his customer’s “feel” as good about the purchase as retailer A, EVEN THOUGH HE IS OFFERING THE BEST DEAL!!
Here’s another example for you to try:
- What is the answer to this calculation? 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8
- How about the answer to this? 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
When a test group was asked question a), the average answer was 512, when a 2nd group was asked question b), the average answer was 2,250. The correct answer is of course 40,320, and both computations are identical EXCEPT for the order of the numbers. The mere anchor of the starting number (1 or 8) is enough to generate an answer with a swing of almost 4.4X! (… but remember, both groups still got the answer wrong!)
Don’t let this cognitive bias hamper your sales and marketing! Your customer’s brain is actively looking for anchors and reference points. Give it to them!!
Here are some ways to do this:
- Publish the original list price against the competition’s to show its relative value
- If on sale, calculate the savings offered so the customer doesn’t have to do it themselves
- Demonstrate ALL aspects of your offer
- Detail the workmanship and materials that went into its manufacture
- Wrap it in additional products or services so it can’t be compared directly, feature for feature, with the competition
- Show them the primary points of difference that make you the clear choice
- etc.
By providing your customer’s brain with carefully selected anchors and reference points, you will have greater control over the sale process.
photo credit: Khushroo Cooper
