How To

Price Anchoring, Or Why a $499 iPad Seems Inexpensive

photo: buckaroobay

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.

Anchoring everywhere

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.

Making it work for you

I’d like to give you some tricks for beating the anchoring effect, though don’t get your hopes up too much: as long as that’s a human brain you’re carrying around in your skull, that you’ll never succumb to it is pretty hopeless.

Sometimes, however, you get to help set the price. And that’s when, if you can be quick and bold, the research is on your side.

Priceless begins in the world of jury awards. Let’s leave aside the debate about whether personal injury awards are excessive and ask: If you’re a plaintiff’s attorney how much should you ask for? The more you get for you client, the more you get paid. But if you ask for too much, the jury may get angry and give you nothing, or much less than you would have gotten if you’d asked for a reasonable amount.

That makes intuitive sense. But it’s wrong. The title of a famous paper sums it up: “The more you ask for, the more you get.” There is zero evidence for a rebound effect. Lawyers who ask for absurd, billion-dollar awards don’t get what they ask for…but they get more than if they’d asked for mere millions. Once that huge number gets into a juror’s head, anchoring takes over.

That’s bad news if someone breaks their leg in your driveway. But if you’re bargaining for a new car or negotiating a salary, says Poundstone, “it’s really a good idea to get your number in first in a negotiation rather than letting the other guy name a number first.”

If you’re selling something, ask for much more than you think you’re going to get. If you’re buying — especially if it’s a big purchase like a car or a house – bring a friend. “Have someone there with you who will take your side and will say, ‘Think of reasons why what you’re saying is right and what they’re saying is a ripoff,’” says Poundstone. “It really does have a measurable statistical effect.”

Now, if you’ll excuse me, I need to go shopping. I’m out of cereal, and—what? Cap’n Crunch is $2 off? Better make it two boxes.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.

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