Why we, as consumers, should care about the Anchoring bias?
Because most of companies are very well aware about it and they strategically leverage it to influence our perceptions of pricing and value.
Many use it ethically and responsibly. Some other might spoil it. In this article we will go through 2 pricing strategies (kinda of similar between each other) that leverage the anchoring bias
Premium Pricing Strategy
When introducing a new product or service, a company can first present a high-priced premium option as the anchor. This higher-priced option sets a reference point for the customer, making other options appear more affordable in comparison.
Even if most customers end up choosing a lower-priced option, the initial high anchor can boost the perceived value of the product line and increase the likelihood of upsells.
The most obvious example everyone can relate to is Apple. Every time a new device from Apple is introduced, several version of it are brought to the market. Some very expensive, some less expensive
The difference between those devices – and I hope this does not break anybody’s heart – in terms of fulfilling a regular user need, are very very limited. The amount of satisfaction – from a daily usage standpoint – you can get from the iPhone 14 PRO and the iPhone 14 is very much similar. One costs 30% more than the other though.
Same goes for AirPods. Why do you think AirPods Max were added to the mix? In order to boost the sales of AirPods Pro.
So, here’s what’s behind the Premium Pricing Strategy:
- Introducing the Premium Offering: Companies first introduce a high-priced premium version of their product (or service), loaded with additional features, benefits, sometimes with a premium branding (PRO). This premium offering sets the anchor for customers’ decision-making processes
- Establishing Perceived Value: The premium offering creates a perception of exclusivity, luxury, or top-tier quality in customers’ minds. It helps establish a reference point for the value of the product or service
- Creating Contrast: After the premium offering is introduced, the company presents other lower-priced options. Customers compare these options to the premium anchor and perceive them as offering better value for money
- Enhancing Perceived Savings: Customers who find the premium offering too expensive or unnecessary are more likely to opt for the lower-priced alternatives. These options, when compared to the premium anchor, appear more affordable choices and offer perceived savings, leading to increased customer satisfaction
- Increased Perceived Value: Customers often associate higher prices with higher quality or superior features. The premium offering helps reinforce the perception that the company’s products or services are top-notch and worth the investment
- Competitive Differentiation: Premium pricing can help companies differentiate themselves from competitors and create a perception of exclusivity, making it harder for competitors to directly compare on price alone
- Margin Protection: The premium pricing strategy can safeguard profit margins, as customers willing to pay a premium for exclusive features or branding will provide higher revenue per sale
Companies can influence customers’ decision-making by positioning high-priced premium offerings as anchors. As highlighted, this increase the perceived value of the product (or service), creates contrast with lower-priced alternatives and ultimately leads to increased customer satisfaction. Though, companies must be mindful of the consumer preferences of the market they want to target and make sure the premium offering genuinely delivers additional value and benefits (to a portion of the potential buyers at least) to justify the premium price point.
You can observe this going wrong many times that companies try to “copy” the Apple approach. Not every company can afford such strategy. At least, not to that extent.
Subscription Tiering
Companies that offer subscription-based services can leverage anchoring when designing their tiered pricing plans. By presenting a higher-priced tier with a wealth of additional features and benefits, a company can encourage customers to select a lower-priced tier that might have fewer features but still satisfies their needs. The higher-priced tier serves as the anchor, making the other options seem more reasonable and justifying the cost for the added features
This is very relatable to the Business to Business (B2B) world; many software vendors tend to highlight in contractual discussion a relatively high priced option (or 2) next to amore reasonably priced one that lacks few fringe benefits. It is full of examples – literally any B2B software vendor has a wealth of tiering options, sometimes sub-tiers as well. I picked up just one to avoid bore you
Airtable is a very good software used in the B2B space for several different reasons. As you can observe from their Pricing options, on top of the Free Plan (PLG basic need nowadays) and the Enterprise (totally on demand price) they offer 2 priced plans: PLUS & PRO. PRO costs twice as much as PLUS and offers a number of additional features that one could consider somehow “fringe” if you will. Let’s put it like this, 80% of companies looking at buying Airtable will most likely be satisfied with the PLUS. If you have additional needs, you will most likely need the ENTERPRISE package anyway.
But anchoring your eyes on the “Most Popular” option at 20 USD a month price, will make the 10 USD of the Plus look really like a good deal. You will most likely, unless you just want to play around with it or need the software for a One-Off project, not go with the FREE plan.
Below a screenshot of the upper part of the feature comparison of Airtable’s plan. You can find the all the details here
Here’s how subscription tiering works basically:
- Creating Tiered Offerings: Companies create multiple subscription tiers, typically with increasing levels of features, services, or access. The tiers are structured in a way that the highest-priced tier contains the most comprehensive set of features and benefits
- Anchoring to the Premium Tier: The highest-priced tier serves as the anchor for customers’ decision-making process. By presenting a premium offering with a wide range of features and perceived value, customers use it as a reference point when evaluating other tiers
- Establishing Perceived Value: The premium tier helps set a perception of high value and exclusivity. Customers may view the premium tier as the ultimate package, making the lower-priced tiers seem more attainable and cost-effective
- Providing Choice: Customers can select the tier that best matches their needs and budget. The range of options allows companies to target different customer segments and ensures that each can find the right plan without feeling limited
- Increased Revenue Potential: Offering multiple tiers allows companies to capture a broader range of customers. Some customers may be willing to pay a premium for extensive features, while others may prefer a more basic, cost-effective option
- Upselling Opportunities: The premium tier acts as a reference point for customers, making the lower-priced tiers appear as excellent deals. However, some customers may perceive the additional benefits of the premium tier as worth the extra cost, leading to upselling opportunities.
Like with Premium Pricing, also in this case it’s important for companies to ensure that each tier provides real value to customers, as misleading pricing will lead to dissatisfaction and attrition with customers. There’s no hiding nowadays; on websites like Reddit & Quora you can find hundreds of different opinion and experiences about the “worth” of each subscription offered from each software vendor.
Well executed subscription tiering can lead to increased customer satisfaction, stronger brand loyalty, and sustainable revenue growth.
Leveraging the Anchoring Bias is not a synonym of adopting manipulative strategies. The goal is to enhance decision-making processes by providing customers with meaningful choices that align with their needs and preferences. Using anchoring in an ethical way, companies can improve customer satisfaction and increase the perceived value of their products or services, ultimately building a more robust relationships with their customers.
