Have you ever wondered why companies set a ridiculously high price for their product and then advertise an unbelievable discount to bring that price down to a reasonable sale price? Do they think people are so gullible and stupid that they can’t see through this gimmick? As a customer (and therefore, a target of such promotions), how much do you think you are influenced by the inflated “original price” claim? If not, then why do companies continue to engage in such sales promotions?
To examine this issue, let’s take a simple scenario. Let’s say you are in the market to buy a wristwatch. A salesperson shows you two watches that you find comparable. In the absence of any additional information, you are indifferent to choosing between the two. You like both of them equally and are ready to buy the one that the salesperson is willing to sell you at a lower price. Given that both watches are equal in your eyes, even a small price difference (say, Rs10) would make you buy the lower-priced watch. The salesperson then tells you that both the watches are on sale for Rs1,000. He happens to add that the “excellence” model’s original price was Rs2,000, while the “exquisite” model had an original price of Rs1,500. Now which one would you buy? If you are like most of us, you’d prefer the “excellence” model. Even if the sale price of that model were Rs1,050, the chances are still pretty good that you’d have opted for that watch instead of the “exquisite” model that was marked down from Rs1,500. A few moments ago you were ready to buy the watch if it were just Rs10 cheaper, and now you favour the option that is actually Rs50 more expensive! Why?
Our assessment of an offer is greatly influenced by the standard we use for comparison—something psychologists refer to as the “anchoring effect”. It is a robust, universal phenomenon to which all of us are susceptible. Basically, the anchor serves as a starting point from where we adjust our estimates. What is most interesting about this effect is that we fall victim to it even when we know the anchor has no real meaning. For example, in the watch example, it can be argued that we prefer the “excellence” model because we assume that a higher original price indicates that its intrinsic quality is better. But what if you were told the original prices for both the watches had nothing to do with their intrinsic quality? Will your decision be different? The chances are, it won’t.
In an interesting experiment, researchers asked respondents if the percentage of African nations which were also a member of the UN was higher or lower than an arbitrary anchor (65% for some and 10% for others). They were then asked to estimate the correct percentage. Those who were exposed to the higher anchor (65%) estimated a much higher percentage than the other group. In a similar experiment, subjects were exposed to anchors that they themselves admitted were implausible (for example, did Mahatma Gandhi live to age 140 or age nine?) before being asked the question of interest (What was Mahatma Gandhi’s age at death?). Those who were exposed to the higher anchor (age 140) guessed Gandhi’s age at death as being much higher than those who were exposed to the equally implausible anchor of age nine. Research has shown beyond doubt that anchors have an impact on our estimates despite their absurdity or implausibility. This is the reason why it makes sense for marketers to continue to use “original price” claims even if every buyer in the market feels that the “original price” is not really very believable.
So, how do you defend yourself from falling victim to the anchoring effect? The first step, of course, is awareness and acknowledgement of this phenomenon. Once you are aware of it, a practical way of mitigating its effect is to deliberately introduce a “counter-anchor” in your assessment. For example, it has been shown that a high anchor thrown in at the beginning of a negotiation has a significant impact on the final outcome of the negotiation. Introducing a low anchor into that discussion can mitigate the inflationary impact of the high anchor. Another effective way of countering this effect is to validate the authenticity of the original anchor by comparing it to other anchors. One can, for example, compare the sale price of a given product at a number of retail outlets and develop an average “anchor” against which current and future offers can be compared. In the watch example, the moment you feel yourself being swayed towards the watch with a higher “original price,” you should step back and check the prices of these two models at several other stores before making a decision. Beware the salesperson who tells you that the sale is a “special” that is valid only on that day—he may be using the “scarcity effect” against you, which we will feature in a future column.
Next time you are out shopping and comparing prices, look out for those anchors thrown in your way—even when you are aware of their presence, you may still stumble on them!
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