How to Master Anchoring: A Guide.
How To Master Anchoring Bias To Close More Deals
With the passing of Daniel Kahneman on March 27th of this year, I thought it pertinent to write about a bias he's covered in great detail throughout his career: anchoring, or the "anchor bias."
Whether you’re buying tickets to a ball game, negotiating salary for your new gig, or trying to convince your 2-year old to go to bed on time– you can use anchoring to your advantage.
It’s been a bit of a life hack for me– as I’m sure it can be for many– so let’s jump in and see what all the fuss is about.
First Impressions Shape Our Decisions
Anchoring is a cognitive bias that describes the tendency for individuals to rely too heavily on the first piece of information they receive (the "anchor") when making decisions (Tversky & Kahneman, 1974). The initial information you receive– even if comically arbitrary– can have an outsized impact on your final judgment.
Two classic experiments demonstrate the power of anchoring:
In a study conducted by George Quattrone and colleagues in 1981, participants were asked to estimate the number of physicians listed in their local phone book. Before making their estimates, they were asked to write down the last two digits of their own phone number. The researchers found that participants' estimates were influenced by these arbitrary two-digit numbers: those with higher two-digit numbers (e.g., 80) tended to give higher estimates than those with lower two-digit numbers (e.g., 20) (Epley, N., & Gilovich, T. 2001).
In Kahneman and Tversky's famous anchoring experiment, participants were asked to spin a rigged roulette wheel numbered from 0 to 100 before guessing the percentage of African countries in the United Nations. The wheel was designed to stop only at 10 or 65. The median estimate for those who saw 10 was 25%, while for those who saw 65, it was 45%, demonstrating the anchoring effect in full display.
These experiments are just two examples of how otherwise arbitrary information will influence your judgments and decision-making.
Anchoring in Salary Negotiations
Chris Voss– former FBI hostage negotiator and author of the book "Never Split the Difference–" provides examples of how anchoring can be used in salary negotiations.
For example, your employer will almost always start by offering a lower salary than what they’re actually willing to pay you for that role.
Candidates beware: this happens ALL. THE. TIME.
The initial offer here serves as the anchor. Subsequent offers– though they may seem more reasonable to you– are still lower than what you were initially expecting. So the sandbox you’re playing in just got smaller, and you find yourself adjusting expectations down without even realizing it.
That’s anchoring working against you.
To counteract this, make sure you never enter negotiations without a clear understanding of your worth and the market rate for the position. Don’t just respond to the initial offer, assert your own anchor by proposing a higher salary that reflects your value. You’ll shift the negotiation closer to a more favorable range, and you’ll find middle ground that actually meets your career and financial goals.
On the other hand– if you’re able to provide salary expectations as a candidate– set your anchor high. Ask for a desired salary higher than what you actually expect to receive. This will almost surely influence the employer to make a more favorable counter-offer, even if it's lower than your initial request.
Never Split the Difference is a veritable treasure trove of tactics for sales professionals. Highly recommend if you haven’t already picked it up.
Using Anchoring in Your Sales Strategy
You can use anchoring to your advantage in a sales context too. How you present pricing is ripe with opportunity.
Charm Pricing: The Power of 9-Ending Prices
For example, instead of offering a flat rate of $25,000 annually for your SaaS offering, you might consider presenting your pricing as $24,999 per year.
Although the difference is obviously negligible, anchoring on the lower number can make the price seem more attractive to your customer. In a 2006 study, Bray and Harris examined the impact of charm pricing (using prices ending in 9) on retail sales in the UK. They found that using 9-ending prices can significantly increase sales compared to rounded prices (Bray, J. P., & Harris, C. 2006).
It’s important to be cautious here. If customers are well-informed about market prices for similar products, anchoring with a slightly lower price can backfire. A well-informed customer may perceive a slightly lower price as an indication of lower quality or even inferior features. This can lead them to question the value of your product (Zeithaml, 1988), and is especially true for seasoned buyers at enterprise-level businesses who are more likely to compare prices and features across multiple providers (Urbany et al., 1996).
In these instances, focus on your unique value props rather than relying solely on anchoring.
Urgency Through Scarcity
Another approach you might consider is offering a limited-time promotion, such as "sign up now and get 3 months free – limit of 50 seats available at this price." The “limit of 50 seats” is the key here. The implied scarcity creates a sense of urgency that makes the offer seem more valuable, subtly encouraging your customer to take action quickly (Cialdini, 2021).
Again, be careful. If customers feel manipulated or misled by artificial scarcity, it can damage your brand's reputation, and erode trust in you and your solution. Always ensure any limitations on offer are genuine and clearly communicated.
Caution: Navigating Anchoring When It’s Used Against You
Now let's consider a few situations where anchoring can be used against you– and what you can do about it.
Scenario 1: Competitor Pricing as an Anchor
We’ve all been here: a customer comes into negotiations claiming they have rock-bottom pricing from a competitor. The competitor's price serves as the anchor, and you’re feeling the pressure to match or even beat that price.
Don't get pulled into a price war. Instead, emphasize the ways in which your offering is superior and provides better value for money.
Scenario 2: Demanding Premium Features at Base-Level Pricing
Here’s another example I’ve seen far too often: the customer demands the premium package at base-level pricing. This is especially common when all your pricing tiers are made public.
In these scenarios, you need to stand firm on your solution’s value, and I’ve found it helpful to use anchoring to your advantage here.
Flip it on them. Reverse the anchoring.
Present your premium package first, along with its full price. You’ll establish the anchor for your product’s value first and then– if necessary– you can point to lower-priced options that still provide value to the customer while protecting your margins (Kolenda, 2023).
Conclusion: Master the Art of Anchoring in Your Pricing Strategy
Understanding the anchoring effect and how it influences decision-making is important for developing your pricing strategy. By using anchoring and being aware of when it might be used against you– you can navigate pricing discussions more confidently and to greater success.
If you're struggling with pricing or want to learn more about how to leverage the anchoring effect in your sales process– don't hesitate to reach out.
Our team is here to help you close more deals.
