Question

Anchoring effect: how to take advantage of this cognitive error to your advantage

Answer 1

Anchoring effect: definition of the psychological phenomenon
Unconscious and conscious anchors
How is the anchoring effect produced?
Application tips: the anchoring effect in marketing
Summary: the different forms of the anchor effect
Tip 1: prices of 99 cents
Tip 2: design product ranges
Tip 3: design your discounts effectively
Tip 4: Offer Pricing Packages and Annual Subscriptions
Tip 5: successive price increases
Tip 6: use USP
Tip 7: design the website environment

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Anchoring effect: how to take advantage of this cognitive error to your advantage

How much would you spend on a dinner? How far do you think the closest office building is? It may sound absurd to you, but if they tell you the lottery numbers before they ask you, this will influence your answer, even if the questions have nothing to do with it! Our brain unconsciously uses this data as an anchor to make subsequent decisions..

Our example is curious, but it does not have much relevance in the real world. For companies, however, this mechanism has enormous potential to help them position their brands and increase their sales. Of course, it only works if they understand how the anchor effect works and apply it strategically.

Index

1. Anchoring effect: definition of the psychological phenomenon
2. Unconscious and conscious anchors
3. How is the anchoring effect produced?
4. Application tips: the anchoring effect in marketing
   1. Tip 1: prices of 99 cents
   2. Tip 2: design product ranges
   3. Tip 3: design your discounts effectively
   4. Tip 4: Offer Pricing Packages and Annual Subscriptions
   5. Tip 5: successive price increases
   6. Tip 6: use USP
   7. Tip 7: design the website environment
5. Summary: the different forms of the anchor effect

Anchoring effect: definition of the psychological phenomenon

The anchoring effect, anchor effect or anchoring bias, also known as anchoring heuristics, was discovered by cognitive psychologists. It is one of the so-called cognitive distortions, to which people are subject when making decisions..

It was first described in detail by American psychologists Daniel Kahneman and Amos Tversky in the 1960s.

Unconscious and conscious anchors

Among the unconscious anchors is the one known as priming : in this, people obtain information from their environment and use it as a reference to make a decision. The information works as a suggestion at the unconscious level that influences subsequent activities..

To illustrate the phenomenon, Kahneman and Tversky carried out an impressive experiment. Experiment subjects had to spin a roulette wheel and then estimate the number of countries in Africa. The result: the higher the number they got on roulette, the more countries postulated that they had Africa.

However, the anchor effect can also be applied consciously, in the form of adaptive heuristics , for example, to stimulate decision-making in situations where people have little data. In this case, the available information is used as an anchor, although it is not particularly useful when making the decision.

For example, if you ask a customer how much he would pay for a drink with caffeine and substances to strengthen the immune system, he will use the price of normal coffee as an anchor, because he has no other references to estimate the price of the new product.

Done

It is almost impossible to protect yourself from the anchor effect. Even if you inform yourself about it now, this will not protect you in the future from falling into the same cognitive error. Whether you're a layman or an expert, the anchor effect works on an unconscious level . Cognitive researchers Furnham and Boo found that the mechanism works even if the subjects know about it beforehand.

How is the anchoring effect produced?

The anchoring effect results from a judgment heuristic , an orientation mechanism that our brain uses to make decisions.

At an evolutionary level , the use of heuristics is advantageous . In many situations, there is no time to gather all the information or record it and weigh it to make the best possible decision. In prehistoric times, if a wild animal approached, there was no time to wonder if it is dangerous or not, because there was an imminent danger of death. To this day, thinking approaches and shortcuts have proven their worth in countless situations in our everyday lives.

These judgment heuristics allow us to save energy and willpower, since they take place as unconscious and effortless cognitive processes . Our brain only activates conscious and controlled thinking when something unexpected happens that attracts our attention. An experienced driver can walk the drive to work almost with his eyes closed. However, if a construction site blocks the usual route, it will keep your eyes peeled. Our brain also uses judgment heuristics when we are tired, distracted, or overloaded.

The anchoring effect is a cognitive bias resulting from this heuristic . Kahneman and Tversky theorized that this occurs because people are unable to correct a judgment made from an anchor. Later research contradicted the theory, so that today there are several explanations, but ultimately it is not clear why our brain is vulnerable to the anchoring heuristic.

One thing is certain: this is not the only cognitive distortion that influences our thinking. Other known distortions are the IKEA effect, the halo effect, the lure effect, the endowment effect, and the drag effect. Like the anchor effect, all of these phenomena can be used in marketing and sales.

Done

In 2002, Daniel Kahneman received the Nobel Prize in Economics for his research on decision making.

Application tips: the anchoring effect in marketing

The anchoring effect in the sense of priming is used successfully by many companies in marketing practices to influence the behavior of their potential customers.

It is advisable to take the anchoring effect into account even when naming the company . In one study, Critcher and Gilovich found that customers of the restaurant? Studio 97? they spent an average of $ 8 more than customers who came to the restaurant "Studio 17".

However, even if your company already has a name, don't worry. You have numerous possibilities to take advantage of the anchor effect in other ways. Here are some of the most common and established strategies:

Tip 1: prices of 99 cents

Why are 99 cent prices so popular? The customer uses the number before the decimal point as an anchor to estimate costs.

Kenneth Manning and David Sprott demonstrated this in a ballpoint study. The test subjects were given a choice between two commercial and virtually identical pens. One cost $ 1.99 and the other cost $ 3. 82 percent of the subjects chose the cheapest pen. When the researchers raised the prices to $ 2.99 and $ 2.99, only 56% of the subjects chose the cheapest. Suddenly the price difference seemed smaller. In day-to-day business, a difference of just a few cents can lead to a significant increase in sales volume.

Combined with successive product bundles and price increases, the 99 cent effect can be further enhanced.

Tip 2: design product ranges

Create a favorable environment for the products of your online store. Are you selling an organic cotton t-shirt for 40 euros? This could be very expensive at first. However, if next to the first product you sell a T-shirt for 99 euros, the 40-euro T-shirt will no longer seem so expensive.

Companies that focus on a few products or services often use the price anchor effect. They offer three variants of their product: one with a low price, another, a medium and one with a high price. The more expensive option serves as an anchor to increase the customer's tolerance for product price in the mid-range. This strategy has proven its success time and time again in the real world. By offering the premium product, sales of the "average" product increased, although its quality and quantity did not change.

Tip 3: design your discounts effectively

Do you want your discount to seem as big as possible? Always indicate the price change in percentages. With discounts, customers cannot easily calculate how much they actually save. Your brain just registers? It's cheaper than before, don't miss out on the bargain ?. This will also attract customers for whom the original price was too high an anchor.

By the way: you can also use the percentage representation in reverse. Our brain records the percentage changes as less than if we saw them in euros. This is particularly helpful in reducing customer unwillingness and the number of contract cancellations.

Tip 4: Offer Pricing Packages and Annual Subscriptions

The subscription model is particularly common for digital services and SaaS. The company is interested in retaining customers for as long as possible. One way to do this is to make them pay an annual fee instead of having to decide to pay again every month. Here you can also apply the anchor effect to convince customers to subscribe.

Offer customers a small discount for paying an annual fee directly, and put the slightly lower monthly price of the annual subscription next to the price that customers would have to pay for the monthly subscription. Many people will choose the annual subscription in an effort to save.

A similar strategy can also be applied with physical products, offering them in multi-unit packages rather than individually. The unit price on the package is slightly lower than the price for the individual product. Thus, the latter serves as an anchor. This encourages the customer to buy more directly.

Tip 5: successive price increases

To what extent can you raise prices without affecting your previous customers? For example, think of Apple. This business leader has been raising prices for years, although his critics stress that his technology has not undergone improvements that justify it. However, as each new price serves as an anchor for the next price increase, the relatively small change is acceptable to customers. Rather than spending a lot of time on big, expensive innovations, it's worth successively launching products with small changes; customers are happy to pay.

Tip 6: use USP

Does paying 5 euros for a coffee seem completely absurd? At Starbucks, many people pay exactly that price without blinking. Starbucks has succeeded because it does not sell just coffee, but also a lifestyle. The Spiced Pumpkin Latte and Blond Roast Macchiato are only available in Starbucks and there are offered only with a glass labeling personally. Among its other USPs (unique selling propositions) is the atmosphere of Starbucks coffee shops, which stand out among other places for their armchairs and sofas. How can you make your offer stand out from the crowd? How can you stage your product in such a way that it stands out from the rest, and in such a way that the prices of the competition stop serving as an anchor?

Tip 7: design the website environment

The website offers companies great possibilities to design the environmental factors that influence customer decisions.

You can set anchors, for example, by marking a default option in forms . If you sell products with a subscription model, set the annual subscription as the default option. Do you sell a basic variant and a premium variant? Set premium as standard.

Another way to establish anchors is testimonials : embed customer reviews on your website. Positive reviews influence the user's unconscious and support their decision to make a purchase. On hotel pages, small banners have a similar function, with texts such as: "Three users have just made a purchase."

advice

If you want to know more about the operation and power of the anchor effect, you will find extensive information in the book Think Fast, Think Slowly by Daniel Kahneman.

Summary: the different forms of the anchor effect

The anchor heuristic is a powerful psychological mechanism that companies can use for sales and marketing. As it acts on an unconscious level, it is effective, even if the person knows of its existence. To enhance its impact, you can use other cognitive distortions, such as loss aversion or selection bias.

By itself, the anchor effect is not a panacea : if a product is defective, there are no anchors that will work. However, if you take advantage of cognitive distortions consistently and cleverly in your online marketing strategy , you can benefit from them and generate more sales.

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