Imagine you’re at a car dealership, and you see a cherry red Porsche Macan sitting in the lot. The price on the windshield says $114,000. That’s a lot of money for a car, you think to yourself. It’s way out of budget, but you ask about it anyway. The car dealer says there’s a reason why it’s so expensive — it’s a Porsche! But he goes on to say he can get you out the door for only $65K.
That’s a screaming deal, you think to yourself. Only $65K for a Porsche. I probably could afford this Porsche, you say to yourself. $65,000 is pretty cheap… especially compared to $114,000! You ask to take it for a test drive, and the rest is history. You’re the proud owner of a new Porsche.
That is a form of price anchoring. Turns out, the MSRP on that Porsche was only $65K to begin with. You didn’t get a screaming deal, but you technically didn’t get bamboozled either. You paid the going rate, no less, no more. (Porsche Macans really are only $65K.)
Price anchoring is a sales strategy you should absolutely implement on calls with prospects. And there’s a way to do it completely above board, in an ethical way, that isn’t car salesman sleazy. (I know, not all car salesmen are sleazy.) But it takes some finesse and know-how. Don’t worry, I’m covering everything you need to know about price anchoring today. So let’s get to it.
What is Price Anchoring?
Price anchoring is a powerful psychological tool used to close more deals. But like they say — with great power comes great responsibility. You can’t use price anchoring in just any situation; I’ll get to that in a bit. But first, some quick background on anchoring and how it works.
According to hard research on the topic, the anchoring effect happens when a customer relies too heavily on the first piece of information presented to them (in this case, a high price). With that information, they form “cognitive biases” toward the product or service — that is, they see it as valuable or desirable. It’s science, really.
So the moment your prospect hears that dollar amount, that’s the amount that sticks in their mind as a “fair” price, or the going rate. Then, when more information comes, in this case a lower price, they compare the two prices. Suddenly the desirable Porsche is within their reach, and the value first ascribed to the car only skyrockets (hence the screaming deal).
Price anchoring creates the perception that your offer is worth more than it is. The customer or client feels like they’re getting a screaming deal… and you make the sale. It’s a win-win.
But again, there’s a right way to price anchor and a wrong way. Let’s get into that next.
How to Use Price Anchoring Effectively (and ethically)
Unlike the car salesman example, you shouldn’t tell your prospect that your offer costs $45,000 and then later on the call tell them you can do $10K or $15K. That’s unethical in my mind. Don’t explicitly state the first “anchor” price as the actual cost of your offer. Rather, communicate that it’s valued at that price… because it probably is. Don’t worry — I give an example below.
Let’s say you sell high-ticket software in the tech space, and the actual cost is $15,000. After you stack the value — and communicate transformation with tonality — you can drop the anchor. Say something like “$45,000…” and pause. Boom, the hook is set. But after a short pause say “$45,000 is the value of the product… but from talking with you today I can see that it’s the solution to [restate their pain points] and will help start driving revenue tomorrow… so I’m willing to do $15,000 for you.”
That’s how you use price anchoring.
Why Does Price Anchoring Work?
Price anchoring in sales is all about perceived value. That $45,000 software has perceived value because it’s so expensive. When you find out you can get it for only $15K, a lot of the value you had already ascribed to it is still there, but now it’s within budget.
As humans, we can’t help but compare and contrast everything. We compare our lifestyles with others on social media. We compare our homes to the homes of our peers. We compare our kids’ schools, our salaries and benefits packages, vacation spots, you name it and we compare it.
And it’s no different with prices. We take the first price we’re given and compare it to the second price. When one is much lower than the other — for the same product or service — we feel as though we’re hacking the system. We’re not just getting a deal, but we’ve struck gold with a loophole.
As you can see, price anchoring is truly a beautiful and powerful thing.
The Benefits of Price Anchoring
The benefits of price anchoring are many, and include:
- Increased sales
- Improved customer satisfaction
- Increased customer loyalty
- Decreased churn
- Enhanced brand reputation
How NOT to Use Price anchoring
First off, never use price anchoring as a sole tactic in your pricing strategy. It should be combined with other strategies such as value-cost pricing. You should also never inflate the first “anchor” price to more than double the actual price. If you do so, your prospect will sniff it out and second guess everything. Be reasonable. After all, the software package probably is valued at $45,000 — but it’s maybe not worth $80K or $100K. You get the idea.
Another warning is, as mentioned, don’t tell your prospect the anchor price is the actual price, only to change it later. That is unethical. Rather, the anchor price is only the product’s value (it’s all about communication finesse and tonality here). Finally, you should be prepared to talk openly and transparently about your pricing when asked about it. Remember, sales is all about relationships, and you don’t want to muddy the waters this early on.
If you learn how to effectively and ethically drop price anchors in your sales calls, you’ll start closing more deals than you ever thought possible. The anchor effect is grounded in psychology, and I’ve found it incredibly useful in my sales firm.
Just be sure to deploy it with caution, and never compromise trust by lying to your prospect. As you deploy this sales technique, you’ll get a feel for the timing, the tonality, and the other nuances necessary to master it.
So there you have it — it’s time to get out there and communicate your prices like your sales numbers depend on it… because they do!
Until next time…