Making use of the anchoring effect

Anchoring

Anchoring can have a huge effect on the prices you charge and the prices you pay. Image: Flickr / gertcha / CC-BY-ND

When we are deciding on the value of any item, we tend to use all the supporting information we can find. The psychology of this, however, can be manipulated to create what is generally known as the anchoring effect.

The basics of anchoring

Simply put, the anchoring effect is when a number is put into our minds as the benchmark of value. This could be a restaurant pricing one thing on their menu at $40, when everything else is $50. That $40 item may be macaroni and cheese, but we are willing to pay it because it is a “good value” at that particular restaurant. Anchoring is also why grocery stores put the “original” price next to the sale price: our brain reads that original price as the true value of the item, and the sale price as a deal on that item. Anchoring puts an idea of value, against which we judge all further pricing.

[Anchoring is why most people do not consider the fact that paydayloans are cheaper than overdraft fees, when they need quick cash.]

How anchoring convinces us to spend more

Most of us encounter anchoring in our everyday lives when we are shopping, especially for big-ticket items such as computers and cars. An item is anchored in our minds by the advertising and prices that our research tells us the item is worth. When an item is anchored at a more expensive price, we are more likely to spend more money. This is especially true when shopping in locations that are more expensive, when we do not directly have anything to compare the price to.

Using anchoring to your businesses’ benefit

If you are selling an item, or attempting to set prices for your small business, then anchoring is an important thing to consider. Deciding what you should charge is one thing, but deciding how to set your prices is something entirely different. Always quote your prices higher than you want to actually charge, and offer a reduction down to the price you are actually hoping to be paid. The cliche may be that a discount sells, but it is a cliche for the simple fact that it is true.

Using anchoring to your own benefit

Anchoring can help you make estimations about your everyday life, from how long it takes you to drive from point A to point B to how much you are willing to pay for coffee. You can start using anchoring to your benefit by resetting your anchor for things. If you feel like you are spending too much on coffee, then start reminding yourself of what it costs to make your own coffee. Eventually, by re-setting this anchor, you can talk yourself out of spending more money than you need to on a regular basis.

Sources

Mint.com
Get Rich Slowly
You Are Not So Smart

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