The Neuroscience of Sales: The Anchoring Effect

Why do car dealers still put sticker prices on car windows when we all know that “Dealer Invoice” is not what the dealer actually paid and MSRP is just an artificially inflated number? It would stand to reason that if we recognise this obvious sales tactic, it won’t work … but it does.

In fact, experiments show that even a randomly generated price has a direct influence on what we are willing to pay for an item, even when we know that the price was randomly generated. This phenomenon, called the anchoring effect by social physiologists, suggests that we have a common human tendency to use the first available piece of information to make a decision. The initial information is the anchor and provides our brains with a mental shortcut when considering a decision, such as what a reasonable price is for a specific product or service.

The Anchoring Effect In Action

In 2006, Drazen Prelec and Dan Ariely of MIT conducted research to test just how influenced we are by an initial anchor price, even if we know that the price is completely disconnected from the value of the item we are buying. In the experiment, Prelec and Ariely auctioned off everyday items, such as a bottle of wine, a trackball, and a textbook, to their students. Before students could bid on an item, however, they were asked to write down the last two digits of their own social security number next to the item, as if it were the price. Amazingly, students with social security numbers from 80 to 99 paid significantly more for items than those with numbers from 00 to 19. For instance, those with high social security numbers, on average, paid $26 for a trackball, while those with low social security numbers paid an average of $9 for the exact same item. Even when students knew the number was unrelated to value, they could not overcome their subconscious bias. (Ariely, “Predictably Irrational” referenced by youarenotsosmart.com.)

Leveraging the Anchoring Effect in Your Sales Dialogue

So as a seller, should we artificially inflate our prices and let the anchoring effect work its magic? Probably not a good idea. There is an offsetting sales principle called “price integrity,” which, as it turns out, is essential for building trust and sustainable business relationships. We shouldn’t demand a higher price without demonstrating more benefit, and likewise, we shouldn’t lower our price without a reduction in benefit. In both directions, clients should expect and see integrity in our price.

Does that mean we should disregard the anchoring effect altogether? That doesn’t seem like a good idea either; clearly, there is power in this natural bias. As sellers of value, our objective should not be to inflate prices, but to use the anchoring effect to help us deliver the highest level of benefit for which our clients are willing to pay. This might mean layering our solutions in a good, better, and best approach for a particular need. Our best solution is our anchor and provides the most benefit to our client. Consequently, it has the highest price. If our client is unable or unwilling to purchase this solution, then we have established a point of reference for both benefit and price, allowing us to tier down our solution until we fit the highest level of benefit with the highest acceptable price.