04 Jan The Anchoring Effect
I’ve always been a frugal shopper. I clip coupons and look for sales. I love finding deals! There is nothing more satisfying than walking out of a store with a purchase knowing you saved money. This weekend I went shopping for a major purchase: a sectional couch. I did my research and decided to visit three furniture stores that were advertising sales and discounts. I was lucky enough to find a couch I wanted available at all three locations. Perfect! Not surprisingly, the price for this couch was different at each store. But what really struck me is how differently each store advertised its prices.
Furniture Store No. 1 advertised the couch as $998 (originally $1,190).
Furniture Store No. 2 advertised the couch as $775 (a $250 savings).
Furniture Store No. 3 advertised the couch as $725 (everyday low price).
I almost purchased this couch at the first location, but luckily waited till I had visited all three stores before finally making the purchase at Store No. 3. Clearly the third location was the best value. But would I have known that had I not compared the price at different stores? If I had only gone to the last store, would I have felt like I was getting a good deal? The truth is, probably not!
This phenomenon is known as the anchoring effect. The anchoring effect is a common human tendency to rely heavily on the first piece of information offered when making decisions. This first piece of information (the “anchor”) informs our judgment of all information after. By going to all three locations, I could use the $1,190 original price as my anchor. So, in my mind, I saved $465! Score!
But let’s say I only went to Furniture Store No. 3. They advertised my couch at a price of $725, calling it an “everyday low price.” How would I know that was a good deal without having another price to compare it with? I wouldn’t, which exemplifies the power of the anchoring effect. This is a tactic used by many retailers for one simple reason: It works.
J.C. Penny learned the power of the anchoring effect when it changed its store model. A few years ago, J.C. Penny eliminated all sales and coupons at every store location. It opted instead to promote “everyday low prices.” Why inconvenience consumers with searching for coupons or waiting for sales? Just give them the lowest-priced product every time they come into the store.
Sounds like a great idea, right? Wrong.
J.C. Penny’s sales dropped 25 percent that year, and it quickly had to switch back to the old model of sales and coupons. But by that point, the damage to the company was done and the CEO was ousted. What J.C. Penny didn’t understand was that consumers have trouble determining whether they are getting a good price. They need an “anchor” price to help them assess if it’s a worthwhile purchase. Alexander Chernev, a marketing professor at Kellogg School of Management at Northwest University, said it best in this article.
“J.C. Penney might say it’s a fair price, but why should consumers trust J.C. Penney? At the end of the day, people don’t want a fair price. They want a great deal.”
The next time you go shopping, notice how many retailers are using the anchoring effect: clothing stores, electronics stores, car dealerships, online shopping, etc. I would caution you to be wary of this sales technique. Do your homework and research before making a purchase. Had I let the power of the anchoring effect take hold, I would have purchased my couch for $998 instead of $725. But then again, I would have thought I was getting a great deal. And at the end of the day, isn’t that all we really care about?