I’ve been reading a lot of negotiation blogs on Forbes after my negotiation class last semester, and anchoring is one of those funny human psyche things that I find interesting. Anchoring is basically throwing out a number to set the expectations in a negotiation. The trick is to find a number on the high end, but not so high that it’s too ridiculous to even consider. This is true in a non-negotiating context as well, and the situation on gas prices got me thinking about the anchoring phenomenon.
Gas prices have been falling lately (YES!), down to the low, low price of ~$3.10/gallon in Texas. You all actually think that price is low, don’t you? I do… and at least one Facebook friend does too! Her status update read, “Gas for $3.05? Yes, please!” I was in California over the weekend, where gas was ~$3.90/gallon, so the $3.10 actually does seem pretty cheap. Notice what I did there? I told you the “low, low” price, and gave a reference point considerably higher. My language and examples, combined with your own experience with high gas prices from 2009-2009 (we’re talking nearly $4/gallon in Texas, that’s RIDICULOUS!), and you think $3.10 is pretty stinkin’ reasonable.
But what if I told you how much gas cost when I first starting driving? When I was 16, I managed to get gas for .89 cents… EIGHTY-NINE CENTS per gallon. On average, I could fill up my Honda Civic for .99 cents/gallon, for a total of $16 per tank. Now how do you feel about that $3.10/gallon gas price?
It’s interesting, because I fought the, “less than $3 gas is cheap” mentality for a long time, holding on to my .99 cent price-point far longer than I should have. I had anchored myself at less than a dollar, and I wasn’t having any laughable numbers above that price. The problem is, I’m a price-taker when it comes to gas, so digging in my heels about paying more than a dollar… or two… or three, was useless. I’ve finally re-set my anchor point around the $3.50 mark, so I’m actually quite happy to pay $3.10.
As a marketer, you have to understand and manipulate this anchoring principle. Times change, perceptions change, and margins change, but humans still hold on to some kind of anchor about price. This is why pricing a product or service during a a launch is so critical. Too high, and you’ve priced yourself out of the market, but too low, and people might think the quality is cheap. Too high, and you’re stuck giving discount after discount until you reach the true market value of the item, but then you’ve trained your customers not to buy at full price (see my reluctance to purchase at JC Penney with their new pricing scheme). But, too low, and your margins are shot, but raising the price makes customers feel like you’re just being greedy, even if they would have been happy to pay the price originally.