Sales tips

A quick and dirty guide to price anchoring

We often discuss the different ways agents can use psychology to appeal to buyers and make more house sales.  Let’s explore how price is perceived and some of the ways you might be able to use price anchoring to your advantage.

A quick and dirty guide to price anchoring

What is price anchoring?

Price anchoring is a strategy used to provide a frame of reference for customers.  It allows them to make judgements about the value of the product or service, based on its price in relation to other products or services.

It works because of the way we naturally perceive price to be cheap or expensive, depending on the prices of other similar objects.  In other words, customers will form an opinion of how much something is likely to cost based on the first one they come across, or how much the majority cost.  Once this price anchor is set, it can be hard to sway the customer away from it.

Take the example of a discount offered in a shop.  The sign will usually have the original price (or the recommended retail price) crossed out followed by the new, cheaper, price.  The original price is the anchor point that makes the new price sound reasonable. If you have previous experience in buying this type of product, you may have built up other ideas about the expected cost and can use these to guide you.  But in the absence of prior knowledge, our brains will naturally take this first higher figure as a guide against which to compare the lower price. So making the lower price instantly seem appealing.  

Of course, you can’t just go pricing high and then dropping prices straight away as that would be unethical.  So, what are some of the tactics you could employ to make anchoring work for you?

Start negotiations high

It may seem obvious, but it’s true that sellers get more money when they start their negotiations with a high initial offer.  This high number establishes an anchor point, and regardless of the fact that potential buyers might try to negotiate you down, human nature is to not stray too far from the pack.  So the final settlement is unlikely to drift a million miles from that original suggestion.

How can this work for you:

Consider setting your prices at a point that are not so high that they will be off-putting to potential viewers, but at a level that leaves room for some negotiation.

Choose a precise number

One 2008 study found that when a suggested price was rounded (i.e. £3,000) people were more likely to estimate the actual value of the product to be further away than if the suggested price were a more precise figure (i.e. £2,997).  This is thought to be to do with how your brain attributes to price on its mental scale. A more precise figure will result in more ‘zoomed in’ scale used to gauge value.

You can picture this like a ruler – the more markers of distance that appear along it, the more precise the measurement and the longer it takes to move between the marks.  So, our brains consider a more precise price to be the product of a more detailed sliding scale, and we are less likely to travel so far from the original figure.

How can this work for you:

When you’re setting prices, don’t feel you have to stick to big round numbers.  Perhaps it would be unusual to choose an amount that is too precise, but don’t shy away from figures that end with, for example, 225 or 575.

Take advantage of higher incidental prices

Thanks to the anchoring effect, even prices around us that are seemingly unrelated to the product we’re trying to sell can impact on perceived value.  Studies have found that people are more willing to pay a higher price for something when they’re aware of other high-priced items around.

How can this work for you:

By drawing attention to other, higher priced properties for sale in the local area, you can help to anchor your prospective buyers towards the higher end of the scale.

Sort prices from high to low

Research has found that you can influence customers to choose a more expensive option if you sort products in order from highest to lowest price.  As customers scan down the list, they use the first few options as anchor points. So, if those items further down the list are relatively cheaper, they will be perceived as a ‘bargain’.  However, if items become more expensive further down the list the buyer is likely to feel uncomfortable and stop scanning. They’ll probably just opt for the lowest price item higher up the list.  However, if customers hold the belief that price is linked to quality, they may well decide to go for an item that offers them the best perceived value for money.

How can this work for you:

If you’re conducting a number of viewings, or even just discussing several properties with a potential buyer, try to order them from highest to lowest.  That way you set your buyer’s anchor point high.

Capitalise on sale prices

If you’re dropping the price of a property either online or on a flyer or poster, use psychology to your advantage.  Place the original cost in a large font on the left-hand side then place the reduced, ‘sale’, price on the right-hand side in a different coloured font of a smaller size.  These techniques have been found to trick the brain into thinking the price differential between the two is bigger than it actually is, meaning the offer seems instantly more attractive.  By placing the larger figure to the left, you’ll also be taking advantage of the anchoring effect, meaning the viewer uses this as a reference point.

What do you think?

Have you tried price anchoring before?  How did it work for you? And if you haven’t, why not give some of these suggestions a try and see how you get on?  Of course, it’s important that these strategies aren’t used to manipulate potential buyers, but please do let us know how you get on!

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