Price anchoring is a marketing strategy where a business establishes a visible starting price for a product but emphasizes its current discounted price. The initial price acts as a reference point or "anchor" against which the lower-priced option is contrasted, creating a perception of greater attractiveness for the discounted option.
For example, imagine that a business is selling two different products: Product A, which costs $100, and Product B, which costs $80. If the business presents these two options side by side, the customer may perceive Product B as a good value, but may not be particularly motivated to purchase it. However, if the business also introduces a third option, Product C, which costs $120, the customer may perceive Product B as an even better value and may be more likely to choose it over Product A.
Or let's say you operate an e-commerce store specializing in apparel. You intend to sell a T-shirt priced at 19.99 EUR. On your website, you present an initial displayed price of 24.99 EUR, which you cross out, accompanied by a "discounted" price of 19.99 EUR.
The anchoring bias can help businesses design an effective pricing technique, as it leverages people's tendency to make decisions based on relative value. By juxtaposing a lower-priced option alongside the original price, businesses can enhance the perceived attractiveness of the lower-priced option, ultimately driving an increase in sales.
Price anchoring is a marketing technique that is used by many businesses to influence customer behavior and drive sales. While some people may consider price anchoring manipulative or unethical, it is not illegal, as long as businesses use it transparently and do not engage in deceptive practices.
However, businesses need to use price anchoring ethically and transparently, to avoid misleading or manipulating customers. Businesses can use price anchoring effectively and ethically by presenting pricing information clearly and accurately and by ensuring that customers have all the information they need to make an informed decision. By doing so, businesses can drive sales and improve the customer experience, without engaging in deceptive or unethical practices.
Price anchoring works by leveraging people's tendency to make decisions based on relative value. When faced with multiple options, people often compare them and choose the one they perceive as the best value. By presenting a higher-priced option alongside a lower-priced alternative, businesses can influence this comparison and can make the lower-priced option appear more appealing than it would be otherwise.
An example of anchoring in business is strike-through retail pricing. By establishing a benchmark with the original price (anchor), any reduced prices seem significantly more attractive and have the potential to persuade customers into buying or selling products they might not have previously considered.
Important note: It is crucial to take into account the EU Price Indication Directive when devising your price anchoring strategy.
The EU Price Indication Directive is a policy designed to enhance transparency in consumer price reductions. Member States are required to implement the rules outlined in the Directive starting from May 2022. A primary objective of the Directive is to prevent businesses from artificially inflating the original price of a product, ensuring that consumers are not misled about the extent of discounts offered.
As per the regulation, retailers are obligated to indicate the lowest price of an item within the past 30 days when implementing a reduction.
Here are two compliant examples of pricing displays. In the first example, a retailer uses a simple strikethrough to indicate the lowest prior price. As long as this price is indeed the lowest from the last 30 days, it meets compliance requirements. Alternatively, some retailers opt to display three prices: the original price, the lowest prior price, and the current product price, as shown in the second example.
The Directive makes a distinction between various sales channels, such as online or brick-and-mortar stores. The lowest prior price is specific to each channel. For instance, retailers offering discounts online only need to take into account the lowest prior price displayed on their website, not the in-store price.
Download our latest report, written in partnership with law firm DLA Piper, to learn what the EU Price Indication Directive means and why it matters.
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