“Anchors” as a pricing cue is a concept taken from one of THE BEST books I’ve read: Priceless: The Myth of Fair Value (and How to Take Advantage of It), and the idea of pricing cues I think would be interesting for everyone to learn about.
It goes along the lines of something like this:
“In the luxury trade, [anchor] describes an obscenely high-priced article displayed mainly to manipulate consumers.
The anchor is for sale – but it’s okay if no one buys it.
It’s really there for contrast. It makes everything else look affordable by comparison.”
The beginning sentences of Chapter 26 of Priceless: The Myth of Fair Value (and How to Take Advantage of It, an excellent book!
We keep these prices in our head of what we think it’s worth, but we aren’t actually evaluating anything on its basis of worth — we’re doing it based on anchor pricing cues that are given to us.
We think someone is buying it (or else why would it be on display?).
SHOPPING FOR CLOTHES
J. Crew is the King of anchor pricing cues.
They are so good, even I get suckered in sometimes.
They’ll put something that is insanely expensive, beside something comparable but for way less money.
Examples all taken from the J. Crew Website:
J. Crew Collection Leather Pants versus the J. Crew Pixie Jodhpur Pant
See how the leather pants are almost $1000, but the SIMILAR-looking pants are a steal at $198?
At 1/5th of the price, you can buy those Pixie jodhpur pants and feel like you’re wearing the quality and style of the $1000 ones.
And yet another example with ballet flats:
J. Crew Ballet Flats – Cece and Classic
Notice how since we read from left to right, the most expensive pair of shoes is on the left, then the mid-priced, and then cheapest ones (on sale for $71 no less!)?
They don’t expect you to REALLY shell out $1000 for a pair of leather pants, or $345 for a pair of “snakeskin ballet flats”, but all that does, is make you see the rest of their goods on sale as being a great bargain.
Frankly, if I’m paying $345 for a pair of snakeskin ballet flats, I’d rather buy Repetto ballet flats made in Paris, which fit and feel like a dream on my feet (I tried on a pair once).
A stock that is worth a penny to start, will most likely not reach a price of hundreds of dollars.
If you price something cheaply, people will instinctively want to stay anchored around that benchmark that has been set in their head.
They can go up to let’s say 50% more or less than the benchmark, but they’ll stay within that range.
Something that costs a penny, won’t go beyond maybe $20 in our head (not even, maybe), but something that starts out at $25, wouldn’t drop down to $0.01 (unless they’re really tanking).
WE BENCHMARK AROUND THOSE NUMBERS
With those above examples, it means that now we think of ballet flats in terms of $50 increments, but penny stocks in $0.10 increments.
We think of everything relative to what the base price was. Something that was originally $500, marked down to $350, makes us feel like it’s a deal, even though we’d really only pay $350 at retail, based on its worth to us and our life.
If something was priced at $500, and then marked down with just $10 off, no one would think it was a deal.
A stock priced at $50, dropping $10 in value however, may trigger people to purchase it, thinking it’s a deal.
Everything is also relative to what the anchor pricing cue we were given.
I AM NOT SAYING TO NEVER BUY ANYTHING
I am the Queen of paying the price for something.
Buy it once, lest you end up buying it twice and creating more waste, I say.
What I am saying, is be careful when you’re shopping whether or not your anchor pricing cues are anchored in your head based on what is on the tag.
Try your best to objectively evaluate what you are buying is worth to you, and then price it from there.
Just take a look around the next time you shop, and keep in mind ” anchor pricing cues”.