What is Price anchor?
A price anchor is the reference point against which a price is judged. Hardly anyone assesses a number on its own; it is almost always compared with another one: the first amount mentioned, a price list, a struck-through price, a competitor's proposal or what someone paid last time. Psychology calls the mechanism the anchoring effect, described by Amos Tversky and Daniel Kahneman in 1974. The anchor pulls the estimate towards it, even when it is recognisably arbitrary and even among people who know the field.
How strongly this affects experts too is shown by a 1987 study by Gregory Northcraft and Margaret Neale. 21 estate agents from Tucson toured a house, received a ten-page information pack with comparable properties and were asked to estimate its value. The only difference was the stated listing price. At 65,900 dollars the agents estimated the value at 67,811 dollars on average, at 83,900 dollars at 75,190 dollars. In a second round only 19 per cent of the agents named the listing price as one of the factors they had considered, compared with 37 per cent of the amateurs. The anchor works even where nobody notices it.
For proposals this means two things. Whoever names a reasoned figure first sets the frame for the negotiation. Whoever sounds like everyone else gets the anchor from outside: the competitors' proposals become the yardstick and every number is measured against the average. A counter-anchor can also be a different reference point, such as the cost of the current situation or the total cost over several years. Struck-through prices used as anchors are regulated towards consumers: in Germany, section 11 of the Price Indication Ordinance requires the lowest price of the previous 30 days to be stated for any announced price reduction on goods, and section 9a of the Austrian Price Marking Act does the same for goods. The term has nothing to do with anchor text, the link text in search engine optimisation.
Why does Price anchor matter?
The effect is real but smaller than its reputation. A 2021 meta-analysis by Li, Maniadis and Sedikides of 53 studies on willingness to pay and willingness to accept finds a moderate effect, smaller than in the early studies, and the authors read it as an upper bound. It was stronger for anchors that were not chosen at random and outside the laboratory, which is exactly where proposals are written.
Price anchor in practice
- 01An agency names the range from its smallest to its largest project of the past year in the first meeting, before the actual proposal follows.
- 02A plumber puts the repair next to the cost of a complete replacement in the proposal, so that the competitor's quote is not the only yardstick left.
- 03An online shop only strikes through an old price when it states the lowest price of the past 30 days alongside it, as section 11 of the German Price Indication Ordinance requires.
