Price Anchoring: How Anchor Prices Increase Sales
For many of us, money is an uncomfortable subject. When you're trying to run a business, setting prices is one of the most challenging aspects of your work, particularly for service-based businesses; there are just so many variables to consider when setting your prices.
But by far the most difficult aspect of deciding how much to charge your customers is beating away the uncertainty that follows the all-too-common questionable looks you get from customers. You know that look; the one that says, "wow, that's expensive". It's incredibly frustrating to have to convince people of your worth.
Now, you're smart enough to have spent time considering how much to charge for your services, so let's continue with the assumption that you're confident you're charging the right amount. If you're having trouble getting customers over the line, here's a strategy, and it's called price anchoring.
What Is Price Anchoring?
Humans often rely on a single piece of information when coming to informed decisions. To determine whether something is "cheap" or "expensive", we need context, which often comes in the form of the first number we come across.
Have you ever paid attention to the price of a single Pink Lady apple? Like most shoppers, you probably only see the price per kilo if you're even paying attention. Well, at the time of writing this article, we can tell you that Pellegrinos Fresh Fruits is listing their single Pink Lady apples at 85c. Pretty cheap, right? Woolies, on the other hand, has them listed at $1.03 individually, while the Queen Victoria Market has them going at just 80c.
Price is relative. Since we told you about Pellegrinos first, that 85c is the anchor price that you'll now compare all other apples to. Now you might be wondering why Woolies' apples are so expensive. That mindset is the reason why price anchoring works - and it's something you can apply to your business as well, which we'll show you how. But before we get off the topic of apples, let's discuss the most commonly referred-to example of price anchoring.
It also involves apples.
Comparing Apples with apples
On the day Steve jobs came out and introduced the Apple iPad, he went through a lengthy discussion of the features of the product before coming to the price. He said that he had been advised to charge $999 for the product, a price he displayed on the screen behind him. After some more talk, he then announced the actual sale price, which was $499.
Now, the price was never going to be $999. There was never any intention to list the product for $999. But by displaying that price, he anchored that number in viewers' minds as the price for an iPad. When he slashed it almost in half, people were delighted because, in their minds, they were saving $500 on this revolutionary new product.
Relative Price Anchoring
We've said it before; price is relative. If you're the first or only one around providing your services, you get to set the benchmark. But you're not creating new technology; you're providing a service that's been around for decades, if not centuries, and people generally know where in the ballpark they expect your prices to be. So, your job is to create relativity.
We'll use another example; let's look at streaming services. If you look at
Netflix, Binge, or Prime, there are levels of membership that come at different prices and offer additional features. Often, there's the cheapest option which comes with very few features; perhaps the streaming quality is poor, and only one user is allowed at a time. Next, the price jumps slightly, but the benefits increase significantly. Finally, there's a premium option with all the features at a high price point. Now, because of the small price difference between the lowest price point and the middle, coupled with the jump in benefits, it's likely you'll chose the middle option. Which is great, because that's the one you were meant to pick. The outlying options, while perfectly valid selections, are really there to act as price anchors, setting the bar of low and high so that you, the consumer, feel as though you're getting a great deal.
As a tradie, you can use price anchoring in a similar way.
How To Implement A Price Anchoring Strategy
No matter how you phrase it, customers will always remember the first price they've heard. If yours isn't the first quote they get, this can be tricky to get around. There's nothing you can do about your competitors' prices, but you can use price anchoring within your own pricing structure.
You can use price anchoring to help your customers adjust to your prices.
Create A Price List
List your services and prices in a handy document that you bring along with you on quotes. On that list, you can:
use the "strikethrough" method of simply striking through prices and listing lower prices besides them to give your customers the sense that they're saving money.
bundled packages of services: listing price savings by comparing the individual costs of services as compared to the bundle.
compare your prices to your competitors if you can access their costs. If your competitors list their services and costs on their website and yours compare favourably, list these prices on your price list to show your customers how much they can save by selecting your company.
Pricing Pitfalls To Avoid
Common sense is key when preparing a fair job costing strategy to entice customers. Here are a few of the lessons we've learned the hard way.
Don't assume that lower prices will get you more business
Logically, you'd think that the lower price would attract more customers, but this isn't always the case. Lowering your prices too much will cheapen your perceived value. But mistakes happen, and you could now be in the position of needing to raise your prices to keep your business afloat. If that's the case, here's a link to a nifty article about how to scale your pricing without scaring customers.
Don't forget to offer services at different pricepoints
Offering services at varying price points speaks to multiple marketing practices. When people find a tradie they like and trust, they'll keep calling on them. So, by offering small services at lower price points, you'll get your foot in the door.
Postponing the embrace of automation
One of the most costly mistakes most trade businesses make is estimating how long a job will take and quoting based on that number. Even if you're off by an hour, that's still money your business will need to absorb, and over the course of a year, these hours can add up. Integrating job tracking software into our business model will give you access to the precise information you need to quote jobs efficiently. Moreover,
Not focusing on the customer experience
Perceived value should be the determining factor in how you price your services, even more so what your competitors are doing or what you feel may offer the best deal to your customers. This is because perceived value puts you squarely in the position of your target audience, keeping the customer experience front and centre. Rather than strictly adhering to your company's costs, put yourself in the shoes of your customer and consider what would give you the best experience.
Pricing your services competitively is one of the most challenging aspects of running a trade business. The thing is, costing is fluid; you can't ever rest easy because so many factors contribute to how you price your jobs. That's why implementing some price anchoring tactics can make a real difference to how your customers adjust their expectations - no matter how much or little you're charging for your services, they'll always be much happier if they think they've gotten a really good deal.
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