Originally Posted by DADDYDC650
Pretty much this. I'm waiting for the 9970 myself.
Actually, David McRaney runs the excellent You Are Not So Smart blog, but in earlier days, he sold leather coats that, while seemingly priced at around $1,000, he'd offer "on sale" for $400 and quickly move out the door. That's the anchoring effect—someone suggests a number, then gives you another number to consider, and you can't help but base your opinion of the second number on the first. McRaney explains how anchoring works in leather jackets, population estimates, African political analysis, and the biggest mystery of all to some people, car sales:
When shopping for a car, you know it isn't a completely honest transaction. The real price is probably lower than what they are asking for on the window sticker, yet the anchor price is still going to affect your decision.
As you look over the vehicle, you don't consider how many factories the company owns, how many employees they pay. You don't pore over engineering diagrams or profit reports. You don't consider the price of iron or the expensive investments the manufacturer is making into safety testing.
... Even if you've done some research online, you don't know for sure exactly what the car is worth, or what the dealer paid for it. The focus instead is the manufacturer's suggested retail price, and no matter how unrealistic it is, you can't help but be tethered to it. When you haggle over the price, you are pulling away from the anchor, and both you and the dealer know this.
McRaney's post is definitely worth the longer read, if only to give yourself more mental ammunition against that new gadget you'd be "stupid not to buy."
The trick is simple. Once you’ve seen a $150 burger on the menu, $50 sounds reasonable for a steak. At Ralph Lauren, that $16,995 bag makes a $98 T-shirt look cheap.
This mental process has a name. It’s called “anchoring and adjustment,” a term introduced by a famous team of Israeli American psychologists, Amos Tversky and Daniel Kahneman. An initial value becomes a benchmark, “a starting point for estimating an unknown quantity,” says Poundstone, a prolific author of fun books that explore the intersection of academic research and real life.
Price anchoring in small businesses typically results in a higher price threshold that customers compare to lower prices—often characterized as deals or discounts—when assessing the value of products and services.
When Steve Jobs introduced the iPad, he showed off its high-resolution screen, touted its revolutionary features, and said things like “boom!” and “wow!” a lot. But that wasn’t what made the crowd go wild.
“What should we price it at?” asked Jobs. “If you listen to the pundits, we’re going to price it at under $1000, which is code for $999.” He put a giant “$999” up on the screen and left it there for ages before finally going on. “I am thrilled to announce to you that the iPad pricing starts not at $999,” said Jobs, “but at just $499.” On-screen, the $999 price was crushed by a falling “$499.”
Showmanship? Sure. But this stuff works. It’s called the anchoring effect, and it’s been well understood by psychologists for decades. Marketers use it against you all the time—but sometimes you can turn the tables, and I’ll tell you how.
“Any time you have to estimate a numerical value, it turns out you’re very susceptible to the power of suggestion,” says William Poundstone, author of the new book Priceless: The Myth of Fair Value (and How to Take Advantage of It). “Any related value that you hear just before you make your estimate really does have this big statistical impact on what number you’re going to estimate.”
In other words, at the moment Jobs says, “The pundits think we’re going to price it at under $1000,” this plants a seed in your mind: an iPad costs something like $1000. When he reveals the real price, you feel like you’ve just saved $500. If he said, “We were thinking of pricing it at $399, but we decided to go for $499,” that would feel like a ripoff—even though absolutely nothing has changed.
You’ve been MSRPed off
Retailers understand this effect very well. It’s why Manufacturer Suggested Retail Prices exist. You run into these all the time, especially in online shopping. Recently I went shopping for a pair of speakers, and I was pleased to note that they were marked down $60 from the MSRP.
Of course, the MSRP is a completely made-up number, like Jobs’s $999. No one has ever paid MSRP for the speakers. I knew this, but it looked like a good deal anyway.
In fact, studies have shown that “people who are more reflective, are, if anything, even more susceptible to anchoring,” says Poundstone. Phew! “So it’s definitely not just stupid people. This is really about the way the human mind works, and specifically about the way we pull a number out of the air, which we often have to do in a society that’s kind of obsessed with numbers and money.”
Surely, though, if you know about anchoring and how it works, you’ll be relatively immune. Right? Hardly. In one study, the psychologists explained exactly what they were testing and told the subjects to be on guard against it. “When you answer the questions on the following pages,” they wrote, “please be careful not to have this contamination effect happen to you.” The warning didn’t work.
Oh, and I bought the speakers.
Once you know about the anchoring effect, you see it all over the place. At the supermarket, why do they print a double price label showing the sale price and the regular price? Anchoring. It’s not a deal unless you can compare with the old price. (And if you think you can remember the old price, you’re wrong: shoppers are very bad at remembering what price they typically pay, even for their favorite items.)
How about those menus where you can choose between the small and large plates of pasta? The high price of the large plate makes the small one look like a bargain—even though the small plate is probably more profitable for the restaurant and is the one they expected you to order all along. You know the restaurant with the $150 hamburger? What kind of idiot would order that! I’m going to stick with the rack of lamb for only $45.
Anchoring effect: It's marking up a product so that a discounted version seems like a bargain.Edited by AlphaC - 7/13/13 at 11:10am