Hello again my friend,
Today I thought we’d have some fun using price anchoring to help you grow your business.
Start by answering the following question:
How many gallons of gas does it take fill up a semi truck? Is it more or less than 100 gallons? Be exact with your answer.
Ok here’s another one:
How many miles can a modern train travel on a gallon of gas? Is it more or less than 10 miles? Again be exact.
What did you come up with?
My guess is that you assumed a semi truck held more than 100 gallons but how close do you get to the right answer of 300 gallons?
You probably also correctly guessed that a train can go farther than 10 miles on a gallon of gas but how close did you get to the correct distance of 492 miles per gallon?
If you want to really get the full value out of this exercise, grab a friend or coworker and ask them the same questions but switch the anchor numbers of 100 and 10.
Their answers will likely be lower than yours to the first question and higher to the second.
It all has to do with a little thing we call anchoring.
The Power of Anchoring
We humans have a tendency to rely too heavily on either the first piece of information offered or a prior decision we’ve made.
This is true even when the information is arbitrary, (as in the numbers I gave you in the questions above) or when the decisions we’ve made previously should have no impact on future decisions.
Understanding this truth about human nature can have a huge impact on your life.
How to Use Anchoring in Negotiations
When entering any negotiation, it rarely pays to be first to act. Let’s say you’re trying to negotiate the sale of your business. It’s best if the buyer gives you an offer first rather than you putting up an asking price.
Psychologically the buyer feels as though they are in the weaker position since the came to you. And since they acted first, you know the price will never be lower than the opening offer.
You may even get lucky and they may offer you more than you were hoping for.
If, on the other hand, you set the opening price there is zero chance you will ever get more for that business than you initially offered.
The opening number sets the context for the negotiation. And context is everything.
Most people have a difficult time valuing things they don’t purchase on a regular basis. The more rare and specialized your product, the harder it will be for your customers to value it.
By giving them a frame of reference to draw from their minds will begin to make some assumptions about what your product or service should cost.
How I Use Price Anchoring
One of the ways I use price anchoring is when talking to prospective consulting clients.
Most entrepreneurs can’t afford a full time marketing officer for their company since those salaries range between $180,000 and $420,000 a year.
But most small business owners need someone on their team who understands marketing, branding and sales. Someone who can help them write sales copy, come up with creative offers, as well as develop branding strategies to attract and retain clients.
I offer a fractional CMO service to clients who need that kind of help but don’t have hundreds of thousands of dollars to hire someone full time or, who simply aren’t big enough to need a full-time CMO.
Instead they hire me and my team for only $4800 a month. We act as the marketing arm of their company and each client gets a specific number of dedicated hours or specific work product from me.
Here’s how I present it like this the offer to my clients:
“A good secretary is going to cost you between $40,000 and $60,000 a year. That’s before benefits and taxes. Not to mention the added liability and expense that comes with having a large staff. For the price of that same secretary you get me and my team dedicated to your business each month without any of the headaches or liabilities.”
When placed in that context it seems stupid not to hire my firm.
By the way if what I just pitched sounds appealing to you I be happy to help.
Just fill out this intake questionnaire and we’ll set up a time to talk.
The frames and anchoring we use to justify price and manipulate perspective are extreamly important, especially when it comes to your business. You need to take it seriously.
Defense Against Anchoring
If you want to make sure you don’t fall victim to this type of anchoring in your daily life try removing the frame or anchor from the equation.
If you’re buying a car and the price is $30,000, an extra $1,500 for the sport package might not seem like much when compared against the total purchase price.
But that’s a 5% bump for the dealership.
Ask yourself, “What else would $1,500 buy and would I rather have that?”
By removing the forced anchor and applying a new one we see the $1,500 in a new context. You may still end up buying the sport package but at least you’ll know it’s not because of a price distortion.