From: alexhormozi
Price anchoring is a strategic pricing technique designed to influence customer perception of value and encourage sales of desired products or services [00:00:05]. This method leverages cognitive biases to make certain prices appear more attractive by comparison [00:02:19].
Core Principles
The fundamental idea behind price anchoring is to introduce a significantly higher-priced item first, which then becomes the “anchor” against which all other prices are judged [00:01:41]. This stretches the perceived range of pricing, making subsequent, lower-priced options seem more reasonable or like a “great deal” [00:01:52].
For example, if an initial price of 100 or $10 will sound significantly less expensive [00:01:55]. This concept applies across various industries, including wine, software, and memberships [00:02:17].
Benefits of Price Anchoring
Price anchoring offers two primary benefits:
- Influencing Perceptions of Other Offerings: For the majority of customers who will not purchase the most expensive item, the high-priced anchor recalibrates their internal reference point, making other options appear more affordable and attractive [00:01:41].
- Attracting “Whale” Customers: A certain percentage of the population consistently buys the most expensive option [00:04:43]. Including a premium, high-priced item ensures that these high-value customers, often referred to as “whales,” have an option that aligns with their purchasing behavior [00:04:35]. Even if only 1 in 20 customers opts for the anchor, it still provides a significant sales opportunity [00:05:12].
Implementing Price Anchoring
To effectively implement price anchoring:
- Offer Extreme Price Multiples: Businesses should consider offering products or services that are 10x, 50x, or even 100x more expensive than their average offering [00:00:18]. The objective is to identify what value would justify such a high price point [00:04:22].
- Lead with the Most Expensive Option: When presenting a pricing menu, display the most expensive option first. This ensures that customers’ perceptions are immediately calibrated by the highest price, making subsequent choices appear more favorable [00:02:10].
- Aim for a “Gasp”: The anchor price should be high enough to elicit a surprised reaction (“gasp”) from the customer [00:04:54]. This indicates that the “rubber band of pricing” expectations has been significantly stretched [00:04:57].
- Structure Other Options: When offering multiple tiers (e.g., small, medium, large), the placement of the middle price can influence purchasing behavior [00:02:38]. Strategically setting the middle price just below the highest can drive sales to the medium option by making it seem like a significantly better “deal” [00:03:06]. This is part of using tiered pricing to influence buyer behavior.
Value, Price, and The Deal
It’s crucial to distinguish between price, value, and the “deal” [00:03:22]:
- Price is what the customer pays [00:03:22].
- Value is what the customer receives [00:03:23].
- The Deal is the discrepancy between the two [00:03:23].
Customers seek “great deals” rather than just “cheap stuff” [00:03:19]. If a customer truly understands the value of an expensive product or service (e.g., a Ferrari for $10,000), they will find a way to afford it because they perceive a massive bargain [00:03:32]. The belief that customers “cannot afford it” is often a misconception; instead, it indicates that they do not yet understand the full value being offered [00:04:04]. This highlights the importance of defining value in pricing strategies.
Customer Segmentation and Value-Based Pricing
When setting prices, it’s vital to consider customer segmentation and the value delivered to specific “avatars” [00:05:32]. Different customer segments have different needs and can derive different levels of value from the same service [00:05:37]. For example, a conversion rate optimization expert’s services will provide more value to a large e-commerce store making 10 million) than to a smaller store making 100,000) [00:05:51]. Therefore, pricing should be commensurate with the value the customer stands to gain, not just the service provided [00:06:03]. This approach underpins effective pricing strategies and adjustments.