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The Price is Stuck

Category: Blog & News

A while ago I watched an episode of The Price is Right, a game show where contestants guess the price of goods to win prizes, prizes, prizes.

I’m not proud of it and I realise this could mean a hit to my credibility, however I have chosen to out myself for a couple of reasons. First, I want to intellectualise the experience to make myself feel better, and second, showcase a critical behavioural principle that you think only appears on TV but actually appears everyday in your business. So come on down...

Imagine you have made it to the final showcase. Your task is to rank a list of goods from least to most expensive. One by one you rank a car, food processor, watch, lounge, holiday and television. Lock it in.

Bap bow.

You lost. What went wrong?


Anchor in the way

Thinking like it was the 1990’s you placed the TV closer to the car than the food processor. You hadn’t readjusted your concept of a TV as a luxury item even though these days they are relatively inexpensive and most households own multiple.

The principle we have just seen in action is ‘anchoring’, where your customer gets fixed to a concept of how products like yours should be priced. Once they are anchored it is extremely difficult to shift them from this position; they’re stuck. This can work well in your favour if you are priced below the anchor - you’ll seem like a bargain - but wreaks havoc if you are trying to charge more.


Shifting the anchor

Imagine you are a coffee company that wants to enter the market at a higher price that what people are used to, say three times the price. That’s what Starbucks did in the US when consumers were used to paying $1 for coffee at the diner. But they couldn’t just charge more for a product that was mentally anchored to $1 so they had to completely reconceptualise what coffee meant. From the store fit out and ambiance to the smell of freshly roasted beans, Starbucks had to support its pricing strategy with change in what coffee represented.

Still on coffee, how can you shift people from relying on instant coffee at home? If you’re Nespresso you introduce pods of coffee and get people used to one coffee costing $1.70 rather than a few cents. Oh, and have George Clooney sell it. Please.

Now imagine you are in the carbonated beverages market. Coke and Pepsi dominate market share and are anchored as cheap, aspirational, great tasting drinks. How to interrupt this market? Bring in a funny tasting, expensive, functional drink that will give you wings. That’s right, Redbull distanced itself from alternatives by changing what it meant to consume a fizzy drink.

As these three companies have shown, re-anchoring requires a complete adjustment to what the product represents to the consumer. How it looks, feels, tastes, is branded, and is positioned.


Anchor #fails

Examples of where re-anchoring has been botched?

Aside from TVs on TV game shows, look to most of the online news sites that have introduced a subscription model after being anchored as free as examples of botched re-anchoring. For instance while News Limited sites were re-skinned they did not do enough to force a change in how people saw value in their service.

The Toyota Prius was originally aimed at buyers looking to save on running costs, but suffered because it was more expensive than other economy cars. By shifting the positioning to environmentally conscious buyers and loading it with features not in cost-conscious alternatives, Toyota were able to re-anchor the Prius as a more expensive car.


Steps for re-anchoring

1. Understand how you are anchored

Gauge the reaction to your prices. If you are getting sticker shock, ask customers what they were expecting to pay. If you can, ask customers from whom they will buy if not you because it will help you understand who they think of as alternatives - they may not be the same as who you consider your competitors to be.

2. Develop a market strategy to re-anchor

How are you going to interrupt the way the market anchors your product? New brand, product, positioning, market? Will you use a product decoy or loss-leader to influence purchase?

3. Use behavioural techniques to structure the launch

We've been talking about the task of dealing with one behavioural principle, anchoring, but there are others you should be using to help you succeed. How are you going to structure the choice you want your customer to make? How will you leverage social influence to persuade? And importantly, how can you take existing customers with you?