Anchor Prices and You

Lately, I’ve been thinking about sales and sale prices because of an epiphany I had in a store recently. Sarah and I were shopping for birthday gifts for our daughter. One item that she wanted was colorful earbuds, which seemed like a reasonable gift idea.

While we were looking at the display, we noticed that one pair of earbuds was on sale for about 40% off of the listed price – they were originally $19.99, but were on sale for $11.99, according to my notes. Another pair of earbuds was selling for full price and, interestingly, the full price of this second pair was also $11.99.

Not being an expert on earbuds, neither Sarah nor I had any reason to think that one pair was better than another except for the price. After looking at both, we both essentially decided that the pair that was listed at $19.99 was probably better, though there wasn’t any obvious difference between the two. So, we picked up the pair that was “on sale.”

As we walked away, though, I realized that I had just fallen prey to anchor pricing. Let me explain what I mean.

A lot of customers that go into the store to buy a pair of low-end earbuds aren’t going to have extensive knowledge of the earbuds. They’re not a particularly expensive item, falling well below my $20 threshold for irregular purchases before I start thinking about researching the item.

Because I’m not a knowledgable consumer of earbuds, when I look at the earbuds on sale, I don’t have a whole lot of information to base my decision on. I’m familiar with a few of the brands, but that’s not really enough to make a choice at that entry level.

To be quite honest, the price is the first piece of information that I have that seems like a good way to rank the relative quality of the items. I assume that, because the regular price of the headphones was $19.99, they must have a higher level of quality than the earbuds with a $11.99 regular price.

I assume that the $19.99 earbuds must be “worth” $19.99 and the $11.99 earbuds must be “worth” $11.99.

Thus, when I see that sale sticker, which means I can get the $19.99 earbuds for $11.99, that appears to be the best deal.

There’s a problem, though. I have no real basis for thinking that the $19.99 earbuds are truly better than the $11.99 earbuds. I’m simply trusting that store to price the “better” earbuds at a higher price and the “worse” earbuds at a lower price.

Yet, my life experience has shown me that such things often aren’t true. There are many generic items that are just as good as the name brand version, for example. I see it all the time when I’m buying groceries and household items. I’ve seen two items that are virtually the same thing but have drastic price differences just because of the name on the box.

Eventually, what you realize is that you can’t really trust the prices that are listed on the item as an indicator of the quality of the item.

Why does that happen? Stores have a lot of different motivations for the prices they sell items for, but the central overall motivation is always for the store to make money.

One of the techniques that they use to make money is anchoring, which is what’s happening in this case. Here’s how Wikipedia describes anchoring:

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.

Let’s translate this into my experience buying earbuds.

The store is assuming that the first piece of real information that I’ll see when deciding on earbuds is the price. They assume that I haven’t studied different kinds of earbuds and that I’m not a discriminating shopper of low-end earbuds. And, frankly, they’d be right.

Anchoring means that I’m going to use that initial information as the baseline information for making this decision. I’m going to look at the prices, see that one pair is $19.99 and another is $11.99, and assume that the $19.99 earbuds must be better for some reason. That’s the anchor. Then, when I see that the $19.99 earbuds are actually on sale for $11.99, I perceive that I am actually getting the “better” earbuds for the same price as the “worse” earbuds. They must be a bargain, right?

Actually, that’s not what’s going on at all.

The store is setting all the prices here, which means that I’m thinking exactly what they want me to think. They want me to wander in, use the limited information there to decide that one pair of earbuds is better than another pair, then buy that one since they’re both for sale at the same price.

What’s really important is what I don’t know in this situation.

I don’t know what the actual relative quality of the two sets of earbuds really is. I haven’t the faintest clue which earbuds are actually better. I don’t know which ones are going to last longer as my daughter uses them. I could find that out, but it would require me to do some additional research, which would take some time to actually dig in and find some real facts, and that time might not be worth a few bucks to me.

I also don’t know what the store actually paid for the earbuds and how much money the store is actually making for each sale. Perhaps the store actually did pay more for the ones they are selling for $19.99 – but maybe they didn’t.

The only reason I perceive the $19.99 earbuds as having higher quality is because of their original price.

But here’s the thing – the store is making $11.99 on the sale no matter which pair I buy. It is going to make them more money if I buy the earbuds that they paid less for.

So, let’s put that together. The only real information I have about the earbuds are the relative prices. Both sell for $11.99 but one was originally priced at $19.99. That “original price” gives me a sense that one earbud pair is better than the other, but there’s no real basis for that. The store could set the “original” price however they like. So, the store has used information control and anchoring to convince me that one of the $11.99 pairs is a better “bargain” than the other one, but there is no actual reason for me to think that. It’s all just numbers made up by the store.

That’s the power of anchoring combined with the control over information that a store has. They can convince you that something is a bargain when there’s no real evidence that it is.

What’s the lesson here? There are several.

First, research and knowing what you’re buying is paramount. As I said earlier in this article, I usually don’t do any research on tiny purchases like this, but if the items I considered were much more expensive, spending 15 minutes to figure out what the best one for the dollar actually is would be well worth my time.

For me, the threshold is about $20. If something is going to cost me $20 or more, I’m going to research that item carefully and know which one is genuinely the best “bang for the buck.” That’s because I don’t trust anchor prices. As I’ll explain below, prices aren’t necessarily directly related to the quality of the item; instead, prices are often a marketing tool.

Second, the sticker price is an anchor, nothing more. It’s intended to set a value for that item in your mind. That way, things like sale prices seem like a great deal.

Let’s say, for example, that a store has an item that cost them $10 to bring into the store. They could sell it for $20, but why not mark it as having an original price of $30 and with a “sale” sticker on it that says it only costs $20? They could actually just sell it for $30 most of the time and occasionally put it on “sale” for $20. Their plan is to make most of their sales at the $20 price, where they’re still making their 100% markup – and people will think it’s a bargain! It’s all about that $30 anchor price.

Third, shopping around is well worth it. Check for prices online, especially when the store offers to match the online prices. That way, you’re forcing stores to have to be somewhat careful about their actual pricing – and sometimes you can blow away the anchor prices, too.

So, did I make the right choice? When I got home, I went online and actually looked at earbud prices and I found that, indeed, the $19.99 earbuds had a manufacturer’s suggested retail price of $19.99. The $11.99 earbuds had a MSRP of $11.99. What was interesting is that in every review I could find, they were basically identical. All reviews were in that “average to good” range for both earbud pairs.

Looking back, I’m not disappointed in the purchase, and I’m sure my daughter will like the earbuds. I’m mostly just bothered by how easily I was hooked by anchor pricing. I could have easily convinced myself to buy lower quality earbuds because of that pricing.

Be careful. Do some research on your purchases, especially if they’re big. Don’t trust prices as being indicative of quality. You’ll end up with better stuff that lasts longer for better prices.

Trent Hamm

Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.