Can you Defend the most widely-used Negotiation Tactic?

Sometimes we lose a negotiation before we even know we’re in one.

Let me illustrate what I mean: In my quest to perfect the Buying Excellence videos, I was recently shopping online for a new microphone and encountered this image:

 

microphone_anchoring

Note that below the picture and product info, there are two prices: $260 is crossed out, and $159 is written next to that.

So I thought: Pretty sweet deal! A microphone worth $260 for less than $160… wow!

Pow – they got me.

It was too easy, really. With just a few pixels on the page, the canny Canon marketers led me to believe that the microphone was worth $260. With that price point in my head, I can see that I better act fast to capture this value!

This is an example of price anchoring. It simply means setting a price reference for a purchase. When anchoring is used successfully by a seller, the anchor price is seen as a valid comparison point. It makes the asking price appear attractive.

Anchoring is Everywhere

You may know the term anchoring, and you’ve certainly seen it in practice. Anchoring is used EVERYWHERE that anything is sold. From:

  • online electronics,
  • to canned tomatoes at the grocer,
  • to retail clothing,
  • to auto sales,
  • to real estate,
  • to high end seven-figure corporate service purchases.

Anchors dress differently in these different uses. A price anchor can be a Manufacturer’s Suggested Retail Price, a competitive product’s price, the listed price of a comparable house, a spoken reference to “how much would you pay” for a product… just to name a few.

In any setting, the anchor message is always the same: “See, THIS is how much it’s worth. You should be happy to pay anything less.”

Why is anchoring used so much?

Why do sellers use anchoring? Simple – it works.

It works on me. It works on you. It works on all of us.

The recent experience of JC Penney is a fascinating experiment in the power of anchoring, writ large. In February 2012 Penney’s largely abandoned their decades-long practice of relying on sales, discounting, and coupons. Instead, they assured shoppers that they had low pricing every day. The argument made logical sense, and even had an ethical appeal: the CEO said he believed customers were insulted by how department stores offered items at high prices, then offering discounts (i.e., relying on anchoring).

How did customers react to these new, “fair and square” prices? They ran to other stores. Without seeing that pre-markdown price, Penny regulars felt like they weren’t getting as good a deal. Sales dropped 25% in a year at one of America’s retailing legends. Recently, Penney’s changed back to their prior pricing strategy, or as one headline puts it “JC Penney Brings Back Fake Prices.”

Why does Anchoring work?

Why do “fake prices” work so well? There are psychological and economic answers. (If you’re looking for more depth here, two books that explore this topic well are Predictably Irrational by Dan Ariely and Priceless by William Poundstone.)

Here’s my take on it (informed by those books and my Buying Excellence POV): It’s just HARD to figure out what something “is worth” to you. It requires wrestling with heavy questions which are often personal and sometimes philosophical.

We can’t do all of that thinking for every purchase without blowing a fuse. So we build patterns and we take shortcuts. If I’m wondering how much a widget should cost, I’ll look for how much something comparable costs, or simply how much the seller says it should cost.

That’s probably a great strategy when you’re buying a $3 bottle of dishwashing soap. It’s less good when you’re buying a coat, still less for a car, and unacceptable when you’re buying an enterprise software system or an outsourcing project.

In those higher-dollar cases, it pays to get a better definition of what something is worth than to rely on the seller’s assertion.

How to Defend Against Anchoring

So what can you do to avoid falling victim to the most widely-used negotiation tactic? Here are three suggestions:

1 – The Quick fix: Set your own anchor.

It can be false, or it can be related to something else. (That BMW’s not worth $45,000 because I can buy a Ford for $25,000!) This won’t always work, but it’s better than nothing, and can help if the seller’s basis for the anchor is weak.

2 – The Better Way: build more options.

Find other solutions, other products, other vendors, and other prices. (In my case, research other microphones and find comparable prices.) Those data points collectively become your anchor.

3 – The Best Way: Start with understanding your benefit.

The best definition of what something is “worth” is specific and personal. It is only worth what it’s worth to YOU. Figure that out, and then follow tip 2 and build more options. You’ll be in great shape to get the most value.

We build skills for 2 and 3 in the online course Negotiate Value. It is a self-study course, email and video based, and is now offered for FREE. If you haven’t signed up and want to improve your buying and negotiation skills, enroll here.
Bonus for enrollees: If you find the price anchor on the sign-up page and send me a note identifying it, I’ll send you a free gift. 

You will see the anchoring tactic used sometime in the next 24 hours. When you do, try tip 1, 2, or 3.

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