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Monday, October 3, 2022

What is price anchoring and how Steve Jobs used it to sell 40 million iPads?

Our brains are responsible for thousands of decisions daily. We can not possibly consider every angle of each choice we are faced with.

To combat indecision, the brain uses “heuristics” or mental short cuts based on previous experience. Heuristics allow for highly accurate & instant decisioning.

But like any short cut, there is risk. Sometimes there are holes in the logic. Holes that make us susceptible to irrational decisions — like accepting a price without objection.

Price anchoring is a loophole caused by heuristics.

It’s the psychological bias to overemphasize the first piece of information (or price) presented to us. This strongly influences how we perceive additional information. Companies use this to boost profits & sales.

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In 2010, Steve Jobs was unveiling the iPad in one of his legendary product launches.

While on stage passionately discussing scrolling experience & WiFi capabilities. He was setting a price anchor.

The massive screen behind him displayed $999 (the assumed price of the iPad). After a dramatic pause, Jobs had one more announcement.

Apple had “exceeded product cost” expectations and will price the iPad at $499. The crowd literally begins screaming & clapping — safe to say everyone there (plus 40 million others) bought an iPad.

Anchored to $999 as the only reference point for value, consumers see $499 as a great deal. A rational mind would try to understand material & labor costs, or utility to determine value.

Considering thousands of data points to make a decision requires too much mental energy. So instead of agonizing over every detail, the brain uses a short cut. And the value is the spread between the anchor and the actual price paid. In this case, $500.

The weird part about price anchoring?

Even non-price numbers can influence buying decisions in a big way. Numbers have a spell-like power over the brain.

At MIT, Dan Ariely (Duke PhD), ran this experiment:

Students wrote down the last two digits of their social security number. Shortly after, they were asked to state the price they would pay for a bottle of wine. The results were staggering.

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Students with higher ending SSN digits would pay up to 400% more for the same wine. Even arbitrary numbers change buying behavior drastically.

Companies have invested time & money into understanding behavioral economics to enhance profits. Price anchoring is widely used because they are notoriously hard to evade because of their deep hold in the human psyche.

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