An Introduction to Anchor Prices
We are delighted to host on our blog this article from Alex Macarthur an upper-sixth student at Altrincham Grammar School for Boys. Alex enjoys is especially interested in ‘Behavioural Economics’. In this feature he looks at pricing anchoring in markets. This article was originally published in the student magazine www.lucigmag.co.uk
I’m sure we’ve all been on many long journeys within the UK where a stop at a service station has been the highlight of the trip. If it wasn’t the such a pleasure, you’ve obviously never travelled from Manchester to Cornwall with a fetid panting dog resting on your lap. I’m also confident that you’ve had a right good rant at the ‘extortionate’ prices being charged, be it by WH-Smith, Costa Coffee or KFC. Suddenly three chocolate bars for a pound looks a lot better than one for a pound!
The question most people will ask is why are prices a lot higher at service stations? We, the consumers, are supposedly acting as rationally as possible, yet this question is only asked as a result of undetectable subconscious mechanisms. Ladies and Gentlemen, I introduce you to anchor prices. You’ve probably already met them, you just have never realised.
The only reason we complain about higher prices in service stations (I hope you all actually do complain!) is because of the hidden powers that anchor prices posses. Say you go into your favourite shop and you spot a t-shirt you like; you imagine yourself walking down the street, setting trends with every step. Then the realisation of how much the shirt is hits you. A £150 price tag shatters every single one of your dreams of owning this t-shirt. As you walk towards the exit placing ‘CAUTION – SLIPPERY SURFACE’ signs with every tear you drop into your trail, the shop assistant runs over to your rescue, telling you the shirt is actually on offer with an amazing 75% off. You now instantly feel a whole lot better about buying the shirt for £37.50. You go over to the till, buy the shirt and leave the shop rekindling thoughts of setting trends. However, did you spot the anchor price? For those who haven’t realised, the anchor price was set when you saw that price of £150. From then on, you viewed a t-shirt of that style and quality as worth £150. So when the price of £37.50 was suggested, you considered it a lot cheaper, only as a result of the anchor price you had seen a few minutes before. The anchor price, therefore, influenced your perception of the product. If you initially looked at the price tag and saw £37.50 you may not have even purchased the item.
Likewise, we only view prices to be higher in service stations because of the cheaper anchor prices we have set from shopping at regular supermarkets every week. Since we regularly pay a standard price for a good or service, we automatically have an anchor price affect the way we view that same good or service at a different price level.
An experiment I recently conducted demonstrated how powerful anchor prices can actually be. It involved producing a list of 5 items that are regularly bought by year 7 students at Altrincham Grammar School for Boys: a football, a CD, a mobile phone, a set of headphones and a watch. The students were then asked to put the last 2 digits of their mobile phone numbers in monetary terms next to each item. For example If the last two digits of their mobile phone number were 46 they would then write £46 next to each item in the list of 5 items. Next, the students were asked if they would pay that amount of money for each of the 5 items with simple yes or no answer. They then wrote what they would actually want to pay for the items supposedly based on the perceived benefits of the item on their selves. Students with their last two digits between 00 and 20 would on average pay £23.11 for a watch whereas students with the last two digits between 80 and 99 would on average pay £37.27 for the watch. The anchor price in this case being set when the students were asked if they would pay their last two digits, in monetary terms, for the item.
A simple thought process of whether the students would pay X amount for the product immediately altered their later valuations. Interestingly, students with higher digits didn’t say they would pay more on average for just the watch, but in fact for all the items. Anchor prices can be cheeky little devils sometimes and I bet you didn’t even realise.