Since all people are subject to various cognitive biases on a regular basis, at least some of those biases act as double edged swords — they can negatively impact on a business owner’s decision making by distorting the reality of the business and the market. They also can be USED and capitalized on — using what one knows about them to make a positive impact on customer behavior.
The “anchor bias” is one of these. By becoming more aware of this bias, you can make better informed decisions and develop more effective sales strategies.
What Is The Anchor Bias”
As can be seen from the graphic, the anchoring bias pushes us to use the first thing we come across (e.g. price) as the benchmark for our judgement. For example, if a supplier gives us an initial price of thirty dollars, then drops his price to twenty dollars, all things being equal we will see the final price as positive. If, however, the initial price quote was TEN dollars and the vendor raises that price to twenty dollars, we will see the final price as expensive.
The INITIAL price affects our judgement of whether the twenty dollar price is a a good deal.
Your Bias, Your Distortion
If you allow your initial assessment of something to influence your judgement of subsequent “things”, the risk is that you will distort the reality of the value of the item and its market value. That can mean that you will overpay simply on the basis of your initial contact. In our example above, let’s assume that a twenty dollar price is both fair, and allows you to make a decent profit on resale. If you had been approached initially at a price of thirty, dollars then dropped to twenty, you may well make the deal , and a good deal that would be.
However, if you started at ten dollars, and then the vendor increased the price to twenty dollars, you probably would not make that deal simply based on anchor bias. The result? You would miss out on a fair and profitable deal.
The same things apply to any kind of negotiations, whether it’s about delivery time, or project details.
Customer Distortion, Your Advantage
Here’s the double edged sword. You customers are susceptible to this same bias. Present them with an initial price of thirty dollars, marked down to twenty dollars, and they will be more likely to purchase the bargain. Increase your prices, and customers will tend to see the increased price as unfair.
Of course, if you’ve lived in the world for any length of time, you understand the idea of “having a sale”, and discounting from a higher to a lower price. NOW, you know one reasons why that’s done. The anchor bias causes potential customers to see a discounted price as better value.
Tips To Maximize Upside and Manage Downside
Here are a few tips to harness this bias in your favor. Note that some of these apply to all the biases we’re going to cover.
- When negotiating with vendors, suppliers, etc, there is NO substitute for knowing the market and the value of what you may be purchasing. This applies to physical inventory or services (accounting, consulting, banking, etc), that you may purchase for your small business. Learn the market before negotiating so you can ground your decisions in reality, not distortion. Shop around.
- Pay attention to what goes on in your head during negotiations. there is also NO substitute for self-awareness, identifying a bias is in play, and applying critical thinking to your initial or subsequent responses.
- Raise prices slowly rather than in big jumps. Large, salient increases will compare poorly to the original price compared to smaller more frequent increases.
- Make sure that you don’t offer your best price at first when negotiating, or selling. Better to come down, than to be stuck at your best final price.
- Provide explanations for price increases. Customers may have come across lower prices elsewhere, so they need to know WHY you are more expensive. Is the quality better? What’s the unique selling proposition (USP)? Explanations will help to prevent customers from thinking you are gouging because of greed.