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 Hewlett-Packard lowered the price of its new TouchPad tablet from $499 to $399 in August 2011, the price point failed to turn the TouchPad into an iPad competitor. HP later discontinued the tablet and offered it for $99 in late August 2011. The fire sale created the type of feverish demand HP hoped the tablet would generate from Day 1. The $99 price point was so successful that HP is set to produce another run of the discontinued tablet in late October.
The HP example shows how businesses can use price anchoring to create a buzz among their customers and boost sales. Anchoring can be effective for small businesses, as well.
Here are three examples:
1. Present multiple options.
Price anchoring with two tags—one with a high price, another with a reduced price—in front of the same product was not an effective strategy for Lenny Kharitonov, president of Unlimited Furniture Group Inc. in Brooklyn, N.Y.
“When the original price is $10, and the sale price is $5, the consumer thinks that $5 is the regular price,” Kharitonov says.
Instead, he features several pieces of furniture in one showcase, including one product with an expensive price. The piece of furniture he wants to sell will look similar to the expensive product, but it will have a lower price.
Kharitonov also employs price anchoring for his delivery services. Customers can upgrade from free delivery to Gold ($199.99, including 30-minute assembly) or Platinum ($249.99 with complete assembly). Kharitonov priced the Platinum service first and then priced Gold lower. The anchoring tactic works—he has yet to sell the Gold package.
2. Focus on time.
Small business owners who offer services with specific time frames can follow the strategy of RealPractice, an Orange County, Calif., company that offers SmartRules, a service that provides procedural guides for litigators. Customers can purchase a day pass for $50—either to try it or if they only need content for one day—or a monthly pass for $67.
“While the $50 establishes a less risky way to try it, the higher price for less time does motivate people to take the slightly more expensive, but higher value, monthly subscription,” says RealPractice CEO Carey Ransom, adding that virtually everybody purchases the monthly pass.
3. Engage the customer.
Pamela Bruner, owner of Make Your Success Easy, a Zirconia, N.C., company that provides business coaching, says owners can rely on customers to help set the price.
She asks prospective customers to write down their salaries and, above that number, the salaries they could attain by taking advantage of her services. She then has customers subtract the two numbers, which typically results in a difference between $20,000 to $100,000. Bruner says that difference makes the cost of her services look very reasonable.
Related Resource: The Pros and Cons of Giving Discounts