From: alexhormozi
The anchoring tactic in business involves placing an extremely expensive item or service on a menu, even if there’s no immediate plan to sell it [00:00:15]. This strategy leverages the_psychology_of_price_anchoring to influence customer perception of value for other products or services offered [00:00:32].
How the Anchoring Tactic Works
By having a product or service that is 10 or 100 times more expensive than the core offerings, it “anchors” all other prices on the menu [00:00:27]. This makes the main offers appear significantly less expensive in comparison [00:00:53]. The goal is not necessarily to sell the high-priced item, but to shift the perceived value of everything else [00:00:32].
Benefits of Using the Anchoring Tactic
- Increases Sales of Core Offerings: Customers are more likely to purchase the core offer because the high price anchor makes it seem like a better deal [00:00:43].
- Allows for Price Nudging: Businesses can gradually increase the price of their main offers, as they will still appear inexpensive relative to the much higher-priced anchor [00:00:50].
- Overcomes Fear of Raising Prices: Introducing an ultra-expensive item, with the expectation that it won’t sell, can help business owners overcome their reluctance to raise prices across their offerings [00:01:22].
- Attracts “Whale” Customers: Approximately 10% of customers specifically seek out and want to buy the most expensive option [00:01:37]. Not offering a premium-priced item means potentially missing out on significant revenue from these buyers [00:01:46].
Example
A friend with a generic online weight loss business implemented this strategy by adding a version of his offer that was six times higher in price [00:01:05]. Surprisingly, people started buying this more expensive option, leading to a tripling of his profit overnight [00:01:11].
Raising Prices
Raising prices generally leads to more profit, even if it results in fewer sales [00:19:15]. Many business owners are hesitant to raise prices, even by small percentages [00:20:01]. However, in many industries, pricing is more inelastic than commonly believed, meaning significant price increases do not lead to proportional drops in demand [00:19:37]. For example, a product that costs 1,000, with a 50% margin, if its price is doubled to 1,500 [00:20:56]. Even with a 35% reduction in conversion rate, the absolute profit can still double [00:21:17].
Higher prices also lead to fewer customers, which can reduce costs associated with delivery and make the business easier to run [00:21:26].
The Impact of Inflation
Inflation is a compounding threat to businesses that do not adjust their prices [00:22:43]. If a business selling a $100 product with a 20% margin in 2017 did not change its price by 2024, its costs would have increased by approximately 20%, effectively eroding all profit and resulting in zero margin [00:22:06]. To keep up with inflation, annual price increases of at least 3-6% are necessary [00:22:51].
Warren Buffett, for instance, has raised prices for See’s Candies 50 years in a row, sometimes by as much as 17% in a single year, which has generated over a billion dollars in profit [00:23:10].
Implementing Price Changes
When changing prices, consider new customers and existing customers [00:23:29]. For new customers, simply change the price [00:23:35]. For existing customers on recurring services, a price increase letter can be used [00:23:51]. This letter should:
- Explain the benefits customers will receive from continued investment in the business [00:23:54].
- Justify the increase due to inflationary pressures [00:24:00].
- Offer to “grandfather” loyal customers into their old price for a specified period, honoring their loyalty and delaying the pain of the increase [00:24:21].
It is crucial to measure conversion rates before and after a price change and gather a statistically significant sample size of interactions with the new price before making final decisions [00:24:43]. Do not make emotional decisions based on a few initial “no” responses [00:25:25].
The “Look Back Window”
Customers evaluate the quality of a purchase based on the most recent experience [00:44:22]. This is known as the “look back window” [00:44:28]. For example, an agency that made a client 5,000 fee but only $5,000 in the second month for the same fee, might see the client cancel in the third month, even though overall value was delivered [00:45:00].
To leverage this, businesses should extend the look back window by billing less frequently [00:45:26]. If billing is done annually instead of monthly, customers have fewer opportunities to churn and are more likely to perceive overall value over the longer period [00:45:46].
Offering options like prepayment discounts for longer durations (e.g., three, six, or twelve months upfront) can also be beneficial [00:46:53]. This increases customer lifetime value (LTV) and significantly boosts upfront cash flow [00:46:48]. Even if only 10-15% of customers take an annual prepaid option, it can double the business’s cash flow [00:47:50]. This increased cash flow allows the business to reinvest more aggressively in advertising and sales, leading to faster customer acquisition and growth [00:48:19]. This creates a “cash conversion cycle” where the money spent to acquire a customer is quickly recouped and can be used to acquire more [00:48:34].
Proof Over Promise
When starting a business, proof is more compelling than promises [00:15:00]. Beginners often focus on creating “grand slam” offers with many bonuses and guarantees, yet struggle to sell because they lack testimonials and verifiable results [00:15:05].
A thousand testimonials will always be more persuasive than an amazing promise [00:15:35]. Proof functions as an approximation of the likelihood that customers will achieve a desired result, making it more believable [00:15:48].
To make proof more compelling:
- Recent Proof is Better: Proof from last week is more impactful than proof from five years ago [00:16:11].
- Visual Proof is More Compelling: Screenshots of bank accounts, before-and-after pictures, or videos demonstrating results are more effective than mere words [00:16:18].
- High Volume of Proof: Most businesses have more proof than they realize but fail to capture or leverage it [00:16:41]. Collecting screenshots of reviews from platforms like Yelp, Google, and Facebook and displaying them prominently can be overwhelming proof [00:17:07].
- Capture Pain: Testimonials that begin by describing the customer’s initial pain point convert significantly higher [00:17:37]. This allows prospects to relate to the person’s journey from their current struggle to the desired outcome [00:17:57].
The best time to ask for a testimonial is at the moment of greatest customer satisfaction [00:18:27]. This contrasts with the best time to sell, which is at the moment of greatest pain or deprivation [00:18:32].
Starting for Free
For new businesses or products, always start by offering services or products for free [00:11:29]. This lowers the stakes for customers, who are still “paying” in terms of time and inconvenience [00:11:54].
The goal of starting free is to gain conviction and confidence in the product by achieving results for initial users [00:13:03]. This process generates valuable testimonials and referrals, which can then be used for marketing to acquire paying customers [00:13:28].
People who work with you for free can provide value in three key ways:
- Testimonials: They can provide written or video proof of success [00:14:25].
- Referrals: They can refer new customers through word-of-mouth [00:14:27].
- Future Payments: If the service is excellent, they may choose to stay on and pay once it’s no longer free [00:14:32].
This strategy allows the business to gather feedback, iterate on the product, and prove its value before charging, leading to a smoother transition to higher prices over time [00:14:00].