The importance of anchoring in pricing research
Identifying the right price for your product or service can be challenging. This is especially true in B2B markets where the decisions are often complex, have high dollar amounts associated with them, involve multiple decision makers, and prices are often fluid based on discounting and other sales strategies.
Many organizations use research (sometimes informal such as internally conducted customer interviews and customer advisory boards; sometimes formal primary studies) when setting the price for new products and services. One of the questions that frequently comes up is whether or not to prompt the participants in your study with a price.
Many companies instinctively don’t want to provide the participants with a price point to react to. They worry that they will leave money on the table if the market is willing to pay more than the price point the company proposes. They want to ask, how much would you pay for the new offering and see what the market says – with the hope that it will be a larger amount than the company had anticipated.
However, in most cases the opposite is true. Asking the market how much they would be willing to pay—or the value they would place on something—in an open-ended fashion is more likely to leave money on the table. This is due to the behavioral effects of anchoring and adjusting, which is a psychological heuristic that shapes how people intuitively estimate quantitative information (price, quantity, weight, time, etc.). When estimating quantities people start with an anchor (either directly or subconsciously) and use that as the reference point for the quantity they are estimating.
The anchoring and adjusting effect is always present in pricing research whether or not you specifically prime the respondents with potential pricing information – decisions are never made in a vacuum. That said, they do play out differently depending on the nature of the category.
In well-established categories prices are fairly well known to the market and consistent. Therefore, when asked their opinion of the appropriate price for a new market entrant they have a frame of reference of other products as an anchor to evaluate the new product against. This is one of the reasons pricing research is more effective in consumer markets; in many cases the products and services are simple, the costs are straightforward and people have accurate and consistent comparison points. As a result, even if you do not provide the research participants a price point you can be fairly certain that their responses will be within the market’s reasonable price tolerance.
In less established categories such as a new product, a new combination of features, a new delivery approach, and in many B2B categories generally, the lack of a stated anchor becomes problematic. Without direct stimuli the research participants unconsciously set their anchor low. This can be a result of them not realizing or including all of the costs of the solution being replaced. Or it may result from their general desire to spend as little as possible or what their current budget would allow – which may be zero. These lowball anchors pull down their perception of acceptable price points. Regardless of the cause of the anchor you end up with a false positive in terms of how much they would pay.
Studies also show that anchoring extends beyond the specifics of a product to random factors that can influence perceptions. Economists such as Daniel Kahneman have shown that spinning a roulette wheel influences the anchor point people use when making estimates about price, estimates of age, etc. A fun example of random anchoring can be found in Steven Martin’s book The small BIG – small changes that spark big influence. In it he describes a European Italian restaurant chain that has a Vespa scooter for $4,500 on the menu. The purpose is to make the prices of the soups and salads seem cheaper – compared to the Vespa they are.
The reality is we cannot escape framing and anchoring effect as humans or as researchers. Consciously or not the individuals in research will primed by one thing or another. It might be a purchase they just made, a financial report, the clock in the room, the weather report they heard on the ride over, etc. etc. Therefore, when testing pricing in formal or informal research it typically makes sense to prime the respondent to ensure their initial reactions to price are in within the realm of reality.
Anchoring and framing is a key aspect of a standard approach to pricing research, the Van Westendorp’s Price Sensitivity Meter. In this approach respondents are presented with a continuum of pricing and asked a variation of the following four questions: At what price does the product/service…
- Become too expensive for you to consider buying
- Become a bargain
- Start to get expensive
- Seem so cheap you begin to question its quality
The analysis of the data provides an optimal price range for the market. Many proprietary pricing models are further enhancements of this conceptual approach. The key to the success of the Van Westendorp and other pricing models is they provide the respondents with a price range to react to. Identifying the appropriate range to present to the research participants often requires preliminary effort and research.
When asking someone about the cost or value of a complex product or service it is important to help people frame the issue to ensure that you and the person answering the question are talking about the same thing and that the person has a realistic anchor. The most common approach to this in research is to set up the question by asking the respondent to think about what they pay for x and y and z. Even after doing this most will people will still underestimate what they pay today, particularly in hidden costs and employee time. But it gets the individual into the realm of reality. Beyond research considerations, thinking about framing and anchoring can be useful for the sales process and creating ROI calculations.
In B2B markets there is no silver bullet for identifying the best price for your product or service. However, if you reach out to customers and prospects for feedback when setting your prices it is important to anchor the respondents. If you don’t someone or something else will.