I was at a shopping centre last weekend with my family, and you couldn’t help but notice, in the vast majority of shops, how many sales were still going on. Some appear to have year round sales, and I wonder is this a deliberate ploy on their part?
I went into one shop, where I noticed a shirt was on sale for €49.99. It had been originally on offer for €100, so there was a mark down of 50%. What a deal I thought, so I picked up the shirt thinking this was great, I am getting a shirt for half nothing here.
And it wasn’t a case that I needed a shirt, in fact I have more shirts that I can wear. I was only buying it because the price was €50, and the shirt was actually worth €100.
But hold on a second. Who says the shirt is worth €100?
The retailer who was selling it, that’s who. I don’t know how much it cost to make or what the retailer’s profit margin was, and it was then it dawned on me that I was falling prey to a very well-known marketing trick known as the Anchor Effect.
The term anchoring or price anchoring is very often used to manipulate people into buying things they don’t need, which is what nearly happened to me.
When I picked up the shirt, the first price I looked at was the sale price, and then when I looked at what the original price was, my instinct was, ‘what a deal, get to the cash register as quick as you can’. And that was exactly what they wanted me to think and do.
And if you think no, they just want to get rid of unwanted stock, think again.
In the United States, the retailer J.C. Penney knew all about anchoring and how having one price i.e. the original, and a second i.e. the sale price could influence the buying behaviour of the public. Because, astonishingly, at one stage less than 1% of their revenue comes from items bought at full price.
Nearly 75% of their revenue came from items that were sold and discounted by at least 50%.
So, it would seem the original price of something they were selling didn’t matter very much. In fact the higher the better because if someone bought at that price then great, a massive profit would be made. And if they didn’t well they could discount the item by a large amount which appeared to the general public as a fantastic deal - item sold.
And the anchor effect doesn’t just take place in retail outlets, it’s everywhere. If you are an auctioneer the anchor number is vital.
When you see the asking price for a property, right through the process of making an offer and it being accepted, whether we like it or not, the minds of the buyer and seller keep referring and coming back to the initial number it was put on the market for.
And what about when you go out for a meal. Have you ever noticed if you look at the wine list, how the cheapest bottles are the ones always at the top of the list, and as you go down the bottles become more expensive. This is to create a sense of value for the lower priced wines against the more expensive ones.
Let me give you an example of how anchoring may affect your decision making on buying a particular product. Let’s say you needed to buy a mouse for your computer, and you enter a computer store and they have two for sale, at exactly the same price of €20.
Mouse A is on sale for €20 but you notice the sticker on the box saying it was originally priced at €30 but is now on sale for €20.
Mouse B isn’t on sale but the price is the same i.e. €20.
Which mouse would you pick?
Not being a particular expert in this area, I would have no idea which one is better than the other, except for the price. So, my instinct would be to pick the one that was on sale for €20 because It was originally €30 so it must be better than the one that wasn’t for sale.
Therein lies the problem, we look at the price of something and because this is typically the first piece of information we receive, it is the only way we rank the quality of an item.
Watch out as well for another anchor, known as the Anchor Decoy. This is a very clever trick, where a retailer has a particular product that isn’t intended to sell in big numbers. It is used to make other products look attractive by comparison. The anchor decoy gets people to spend more money by not buying it.
There is a well-known example of this, where a company who manufactured bread making machines began selling one for $279, but no-one was buying it. They didn’t think the price was a problem, they thought people simply wanted a bigger and fancier machine, so they built a bigger and better one, and began selling it for $429.
Guess what happened? The more expensive model flopped and sales of the cheaper one doubled. The model priced at $279 on its own looked expensive, but when the $429 model came out, it looked like a bargain. This is the anchor decoy in action.
But of course you will still have people who will buy the $429 model, because they always want to buy the most expensive item, whatever that is, because they like the status of having something that is perceived to be exclusive and expensive. And the type of product, that falls into this category is referred to as a Veblen, named after the economist, Thorstein Veblen.
The anchoring effect in all its guises is everywhere and there is no way to avoid it, other than don’t take one retailers price for granted, comparison shop and get some other price anchors to compare against.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie