Barrett O'Neill

@BarrettJONeill

Steve Jobs used this pricing strategy to sell 40

million iPads:

Price Anchoring.

What it is & how to use it:

3,531 Retweets 15,357 Likes

 Barrett O'Neill
@BarrettJONeill

1 Our brains are responsible for thousands of

decisions daily.

We can't possibly consider every angle of

each choice we're faced with.

To combat indecision, the brain uses

"heuristics" or mental short cuts based on
previous experience.
 Barrett O'Neill
@BarrettJONeill

2 Heuristics allow for highly accurate & instant

decisioning.

But like any short cut, there is risk.

Sometimes there are holes in the logic.

Holes that make us susceptible to irrational

decisions -- like accepting a price without
objection.
 Barrett O'Neill
@BarrettJONeill

3 Price anchoring is a loophole caused by

heuristics.

It's the psychological bias to overemphasize

the first piece of information (or price)
presented to us.

This strongly influences how we perceive

additional information.

Companies use this to boost profits & sales.

 Barrett O'Neill
@BarrettJONeill

4 In 2010, Jobs was unveiling the iPad in one

of his legendary product launches.

While on stage passionately discussing

scrolling experience & WiFi capabilities...

He was setting a price anchor.

The massive screen behind him displayed

$999 (the assumed price of the iPad).
 Barrett O'Neill
@BarrettJONeill

5 After a dramatic pause, Jobs had one more

announcement.

Apple had "exceeded product cost"

expectations and will price the iPad at $499.

The crowd *literally* begins screaming &

clapping -- safe to say everyone there (plus
40M others) bought an iPad.
 Barrett O'Neill
@BarrettJONeill

6 Anchored to $999 as the only reference point

for value, consumers see $499 as a great
deal.

A rational mind would try to understand

material & labor costs, or utility to determine
value.

Considering thousands of data points to

make a decision requires too much mental
energy.
 Barrett O'Neill
@BarrettJONeill

7 So instead of agonizing over every detail, the

brain uses a short cut.

And the value is the spread between the

anchor and the actual price paid.

In this case, $500.

 Barrett O'Neill
@BarrettJONeill

8 The weird part about anchors?

Even non-price numbers can influence

buying decisions in a big way.

Numbers have a spell-like power over the

brain. At MIT, Dan Ariely (Duke PhD), ran this
experiment:

Students wrote down the last two digits of

their social security number.
 Barrett O'Neill
@BarrettJONeill

9 Shortly after, they were asked to state the

price they would pay for a bottle of wine.

The results were staggering. Students with

higher ending SSN digits would pay up to
400% more for the same wine.

Even arbitrary numbers change buying

behavior drastically.
 Barrett O'Neill
@BarrettJONeill

10 Companies have invested time & money into

understanding behavioral economics to
enhance profits.

Price anchors are widely used because they

are notoriously hard to evade because of
their deep hold in the human psyche.

Here's a few more examples:

 Barrett O'Neill
@BarrettJONeill

11 One of the most recognizable is Amazon's

"strikethrough" price.
On nearly every product, they show:
1. High Price (struck through)
2. New, Lower Price
3. Savings Amount
With every purchase customers can see the value
they're getting right in front of them. Brilliant!
 Barrett O'Neill
@BarrettJONeill

12 Another type is a "Competitor Anchor. "

The goal is to anchor the consumer to your

top selling point...

In this case, getting your consumer to

prioritize price over data/coverage in their
decision making.
 Barrett O'Neill
@BarrettJONeill

13 But price anchors aren't reserved for Fortune

500s.

Your SMB or Startup can boost profits &

sales by using this behavioral science
technique.

In addition to the the strategies above...

Here's 2 more:
 Barrett O'Neill
@BarrettJONeill

14 Understand customer anchors:

Unless you've created a new product

category (unlikely), then your customers
already have an anchor.

Craft your offer relative to their existing

anchor to create more perceived value for
your product.
 Barrett O'Neill
@BarrettJONeill

15 Highest option first:

Consider presenting your highest priced

option first -- it will serve as the anchor.

If you lead with your lowest priced option, it

becomes tough to create perceived value
with your higher priced option.

Start high, then come down (if needed).

 Barrett O'Neill
@BarrettJONeill

16 Lastly, as a consumer how can we avoid

being subjected to price anchors?

1. Don't negotiate against yourself

Undoubtedly, anchors are powerful, but as

time passes the effect fades.

Realize it's best to walk away and re-engage

once the rational mind is in control.
 Barrett O'Neill
@BarrettJONeill

17 2. The seller cannot be the reference

Anchor pricing garners power from the

reference point you were provided.

Usually the SALESMAN is the one setting the

anchor. You need an unbiased reference
point to make a rational decision.

Find another anchor.

 Barrett O'Neill
@BarrettJONeill

18 The human mind is Mother Nature's super

computer.

But sometimes the rational/logical mind is

easily tripped up. Understand how holes in
logic are formed and adjust offers
accordingly.

Then you'll be doing business like the best.

 Barrett O'Neill
@BarrettJONeill

19 For more on anchor pricing check out...

Predictably Irrational by Dan Ariely

Thinking Fast, And Slow by Kahneman &

Tversky
 Barrett O'Neill
@BarrettJONeill

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