Marketers, entrepreneurs, and business owners assume that most people make decisions by conducting research and then weighing the options.
But, that’s not how most people make decisions.
People frequently act illogically, making their behavior difficult to predict. And, they rarely take the time to learn the full facts before taking action.
Instead, people tend to unconsciously latch onto the first fact they hear, basing their decision-making on that fact… whether it’s accurate or not.
This phenomenon is called anchoring.
Why should you care that anchoring affects people’s decision-making?
The anchoring effect can work for you or against you. It’s one of the most important effects in cognitive psychology.
When anchoring works for you, it becomes easier to market your company’s products or services. When anchoring works against you, it’s increasingly difficult to do so.
Before diving into ways that the anchoring effect can help or hurt your business, let’s look at how it works.
In 1974, psychologists Amos Tversky and Daniel Kahneman published a research article titled “Judgment under Uncertainty: Heuristics and Biases.” This article documented the first clinical evidence of the anchoring effect.
In the article, Kahneman and Tversky describe an anchoring bias experiment which challenged two groups of high school students to complete a lengthy multiplication problem.
One group was asked to solve the following problem: 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8. The other group was asked to solve this problem: 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1.
The answers to the two problems are, of course, the same. The problems are identical – the numbers are just reversed. But the experiment was never really about math.
Neither group was given sufficient time to solve the problem and arrive at a confident answer – only 5 seconds! The tight timeline forced them to estimate.
The group of students who solved the first problem (1 x 2…etc.) estimated that the solution to the problem would be significantly lower than the group that solved the second problem (8 x 7…etc.).
Tversky and Kahneman concluded that the final estimates (on average 512 and 2250, respectively) were influenced by the numbers with which the two sequences began.
The anchoring effect led the students whose problem started with lower numbers to estimate lower. While the students who solved the problem in reverse anchored to the higher numbers, resulting in a higher estimate.
Both groups were wildly off in their answers. The solution to both problems is 40,320.
The takeaway here is that each group was unduly affected by the first numbers they saw.
Kahneman, in a video interview with Inc. magazine, claims that the anchoring effect routinely happens “everywhere” and calls it “one of the most robust phenomena in cognitive psychology.”
The implications of the anchoring effect for businesses cannot be denied.
So let’s take a deeper look at how you can take advantage of the anchoring effect to price your company’s products or services, negotiate more effectively, market better, and make better business decisions.
The Anchoring Effect in Branding and Design
First impressions matter.
For example, when it comes to website design, if you don’t help people understand in a few seconds how you can solve their problem, they’ll leave your site.
First impressions are quick. A Google study showed that they can be made in 17 milliseconds!
When a prospective customer first learns about your brand, they hear your company’s name or see your logo.
First impressions matter when it comes to your company’s name and your logo. After all, it’s impossible to anchor and create an advantage if your prospective customer can’t remember or spell the name of your business.
The same holds true for your logo. Far too many struggling businesses created their logo from a generic template or an online template logo maker.
The problem is that thousands or tens of thousands of other businesses have identical or similar logos.
It’s impossible for a brand to use the anchoring effect to its advantage when a consumer can’t recognize the brand!
So, how can you apply the anchoring effect to create a stronger brand and make sure that design works for your business and doesn’t undermine your marketing?
How to use the anchoring effect to improve branding and design
- Make sure you find a unique company name for your business. Don’t use online name generators or generic lists of ideas. If you want a catchy business name that stands out from your competition, get help from experts. For example, here’s how one successful entrepreneur crowdsourced lots of new business names and found a terrific new name for his business.
- Don’t settle for a generic logo based on a template or one created by a computer. It’ll look like tens of thousands of other logos and will help your business get lost in the crowd. Instead, understand how fonts, colors, shapes and lines in a logo design influence purchasing decisions. Work with experts to get a professional logo design that helps your business stand out.
- If you sell products, learn how psychology can help you create an eye-catching packaging design for your products.
The Anchoring Effect in Pricing Products or Services
Anchoring has a deep impact on a person’s perception of value – which makes it an essential tool when considering a pricing strategy for your business.
A price without a value attached to it is a number with no power.
The value you assign to a price gives it meaning and helps consumers decide if they are willing to pay it.
Anchoring provides a context for estimating value.
Think of it this way: you walk into a convenience store on a hot summer day hankering for a fountain soda. The sign says you can get a 20 oz Coke for $1.79 or a 32oz Coke for $1.99. For a measly 20 cents, you can get almost twice as much Coke!
Having anchored that a 20 oz Coke is worth $1.79, that 32 oz for $1.99 suddenly seems like an awesome deal! It doesn’t matter that both are overpriced.
So, how can you apply the anchoring effect to how you price products or services for your business? Here are a few options to consider…
How to use the anchoring effect to price products and services
- When setting your pricing, remember that the first option the client sees is likely to be the price that anchors in their brain. So, if your goal is to move your mid-price option, anchor the top-priced item by placing it first or by placing it in the center in a larger font to draw focus. This will make the mid-price option look like a great deal in comparison.
- Want to sell your most-expensive option? Make sure that you set the lower price in a similar range and show how much more value comes with the slightly bigger price. Remember that fountain Coke? How do you say no to a much higher value for a minimal price increase?
- Show a discounted price based on a higher original price. You see this often when someone posts the suggested “retail” price which is crossed out and you’re instead presented with a lower price. Even if the final price is still high, the initial price was anchored and influenced how consumers perceive the actual price.
- Customers can subconsciously anchor to any number – it doesn’t have to be a price. So, featuring any higher number next to your price increases your chance of a sale. Consider showing the number of items sold, the number of customers who have purchased, or even another unrelated item with a higher price.
The Anchoring Effect in Negotiations
The anchor effect plays a role in every negotiation.
The bottom line is that the person who makes the first offer sets the anchor.
And, whoever sets the anchor helps determine the range of the negotiations.
So if you put your offer on the table first, the odds are in your favor that you’ll end the negotiation in a place that you’re comfortable with.
But, if you’ve already missed your opportunity to go first and set the anchor, there is a way that you can reset the playing field.
Daniel Kahneman revealed in this interview with Inc. Magazine that the best way to defend against being controlled by an anchor in a negotiation is to utterly refute and discredit the number proposed.
Assertively denying the credibility of the proposed number helps to wipe it from your own mind and the mind of the opposing party. At that point, you can then propose a new anchor to reset the terms of the negotiation in your favor.
Whatever you’re negotiating, you stand to benefit if you remember the anchoring effect.
How to use the anchoring effect to negotiate better
- If you’re hoping for a higher salary, plan ahead by listing a higher salary requirement right in your application. Ask for more than you expect to receive. This will naturally raise the amount of all subsequent salary numbers offered.
- Are you auditioning vendors and looking for the best price? Then start the negotiations off with a low amount. This will lead the prices to trend lower for the remainder of the negotiation.
- If the terms offered are way off for you, then say so. You can reset the anchor by pointing out that a competitor has made a stronger offer, or simply by assertively discrediting their offer. Do this with conviction and you’ll be in a position to reset the anchor in a more favorable place.
The Anchoring Effect in Marketing
Today’s marketing is ruled by data and metrics.
How do you determine if your efforts are a success? Metrics.
But, choosing the right metrics to measure can mean the difference between success and failure.
And, anchoring doesn’t only impact numbers. The anchoring effect can manipulate how you perceive and value concepts as well.
The anchoring bias in marketing can easily mislead you.
So, when planning your marketing strategy, and how to measure it, keep the anchoring effect in mind.
As marketing expert and author Linda J. Popky explains for the Harvard Business Review:
The Internet of Things will collect and transmit unprecedented amounts of data. This poses a big problem for marketers, who can end up down a rabbit hole of fruitless information.
The anchoring effect may lead you to latch onto pseudo-useful metrics because they were the first to appear on your radar. But, don’t get stuck there.
Don’t just aim for low-hanging fruit (data) that’s easy to collect and right in front of you. Instead, be mindful and carefully consider each option to be sure you’re making strong choices.
How to use the anchoring effect to market better
Careful consideration allows you to escape the pull of the anchor. Ask these questions to ensure that your chosen metrics have value…
- Will this metric really tell you what you think it will tell you?
- Is the metric likely to reinforce a cognitive bias you already hold?
- Or, will it tell you nothing at all?
- Can the metric be easily replicated and gathered?
- Does the metric provide actionable information for your business?
The Anchoring Effect in Your Business
People naturally anchor to concepts – so much so that we often don’t question why we do things.
We just do them that way because we’ve always done them that way. And by then they’ve become a habit.
This sets us up for living with decisions that don’t serve us well because we haven’t taken the time to examine why we made them in the first place.
And, when the decisions you make cost your business money, anchoring on the wrong options may drain your financial resources like a silent vampire.
From the paper supplier you use to your internet provider, it’s worth examining your choices on a regular basis. What are your costs for doing business? And, can they be optimized?
Settling for more of the same just because you don’t have to think about it may cost you in the long run.
How to use the anchoring effect to make better business decisions
- Set up a yearly audit of all your vendor or service provider costs. You may be missing out on stronger, more cost-effective options.
- Create a culture of constant improvement. Examine your internal processes for flaws. Just because you’ve always done it that way doesn’t mean that you have to. And, reward your employees for suggesting more efficient or rewarding processes.
As humans, we’re all prone to cognitive biases that impact our decision-making.
It just comes with the territory.
However, by being mindful of these cognitive biases, we can begin to avoid their traps and make better choices.
The anchoring effect is everywhere.
It can work either for you or against you.
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