Ever since I was little, I’ve loved closing deals. Whether it was going around the neighborhood selling Sally Foster gift wrapping paper or convincing middle school classmates to pay 50 cents for single sticks of the latest and coolest gum flavors, I’ve always loved selling.
As I’ve moved on from my bubble gum selling days to selling more high end products/services, I’ve learned a lot about how we behave as consumers as well as how we are sold on a daily basis.
Here are three things I’ve discovered:
1) We heavily rely on anchoring in our everyday decision making process.
A lot of the times when we are thinking of buying something, we don’t know what price to associate with a product. Everything is based on prior experiences and/or the information companies present us with at that moment.
Think about it. When you go to IKEA looking to find the perfect chair for your dorm room, you come across a few options.
On the left hand side, you have the “economical” option. This option is created for people who value price over quality. It’s perfect for a college student on a budget. At the same time though, there are two other options.
In the middle, we find the “value” chair. This is aimed at your average consumer. Why this is targeted at your average consumer is something we’ll explore after we introduce the third option.
Finally, we have the “high-end” chair. This is created to target the type of person who likes nice things and is willing to pay a premium for a higher quality product.
Now if you were to survey 100 college students, which chair do you think would be purchased most frequently?
If you guessed the “value” chair, you’re right. But how does this relate to anchoring? First of all, what is anchoring?
Anchoring is a way that companies get you to the option they want you to buy all along. They use basic elements of game theory by setting a low and high option to get you to the middle. It’s a classic Goldilocks scenario.
The thing is, most students (and consumers in general) like to perceive themselves as doing just fine. It’s the same reason why a majority of people earning $100,000 or more still consider themselves middle class.
If you were to bucket all the types of people who buy things into three categories, you would have the discount seeker, the value shopper, and the premium shopper. Most of us would consider ourselves a value shopper that sometimes opts for the premium option. We don’t like to think that we would always choose the premium option, because we don’t want to come across as “that person”. At the same time, we don’t want to be labeled “cheap”. So that leads us to the middle.
From IKEA’s standpoint, the pricing of the high and low end chairs really doesn’t matter as much as the ideal price they’d like to charge for their value chair. They understand that this chair is going to be the most popular in terms of units sold. So what they do is start with $60, and then think about what features they could strip and add to the middle-tier chair that would justify pricing it $20 less/more.
But what happens though if you introduce a fourth option, an “ultra-premium chair”, to anchor the original “high-end chair”. Let’s see.
If you were to survey 100 college students again, which chair do you think would be purchased most frequently?
This is where it gets a bit trickier. If you guessed either the “value” chair or the “high-end” chair”, you’re probably right. You see, with the introduction of the “ultra-premium” chair, the “high-end” chair is no longer perceived the same way. Some of us who originally would have bought the “value” chair would now buy the “high-end” chair.
IKEA does a few clever things here. First, they price the “ultra-premium” chair at more than twice the price of the “high-end” chair. Why do they do this? They do this because out of 100 consumers, there’s always going to be a small segment that wants the nicest option. Therefore, if they are willing to pay that premium, why not increase your profit margin as a company and capture these buyers at that price?
At the same time though, the “ultra-premium” chair anchors the “high-end” chair. If I generally classified myself as a value shopper who occasionally splurges, I now actually consider the “high-end” chair because in context, it seems like a great deal. I get the second “best” option and feel good about myself for being a “high value” shopper. It’s also nice that there’s a NEW LOWER PRICE, making me feel like I’m getting an even greater deal than I would have if I had visited IKEA any other day.
Companies will often create a highly priced product with respect to the rest of their product line in order to price discriminate and increase profit margins.
As consumers, we have learned to anchor things in stores. It’s the same reason why whenever we buy a new thing that we’ve never bought before, we look at the surrounding options to get a sense of the general price range for that item. Regardless of what’s being sold, anchoring is used on us every day, so it’s something to think about the next time you’re buying a computer, furniture, or even beer.
2) Sometimes it’s not even about the product, so much as how buying it makes us feel.
We buy things for many different reasons, but I think a key reason simply boils down to how the product makes us feel.
A lot of sites these days create landing pages that outline all the neat features their product does; then, they launch their site hoping everyone comes their way. This is a “build it and they will come” mentality. They then take this approach into their marketing strategies, crafting copies that highlight the awesome features their product has. Why does this fail? It fails because it does not evoke an emotional response.
A friend recently asked me how to go about marketing his startup. His service helps artists accept bookings for galleries, classes, and performing art events. He was struggling to capture the attention of these artists and to have them adopt their platform for bookings. I asked him to show me his e-mail campaigns, and there was the issue: his e-mails only outlined the features.
Why was this not effective? It wasn’t as effective as it could be because the target audience is an artist! Generally speaking, artists could not care less about the technical facets of the service. They care about what the service enables them to do and how the service makes them feel.
An artist looking for a way to book their events in a more seamless manner is seeking a solution because of an even more fundamental reason: they want to do what they love. They want to not worry about wasting their energy on menial scheduling tasks and instead focus on sharing their passion with others.
They want freedom.
They want to reach a point in which their artistic pursuits can become their full-time job. Isn’t that the reason why so many abandon their artistic careers in the first place?
Once we got to the core need and the value the service provided, the crafting of the message became much easier. Now, rather than simply hitting on the features, my friend wrote a copy that hits on the exact pain point of the customer and then invites the customer to try their service out as the first step to achieving that freedom. This is beautiful marketing. When you can get somebody to read your copy and think to themselves, “Yes! This is crazy. It’s like this person is reading my mind”. That’s when you know you’ve practically closed the deal. Then, you can count on your great product to bring it home.
Looking back, this is why I was able to to sell gum at absurdly inflated prices in middle school. I remember back then I wasn’t emphasizing the newness of the flavor I was selling, but more importantly the fact that my peers could chew gum in class. In middle school, there were few prouder ways to signal your “defiance” or inner “rebel” than chewing gum in class. It was the cool thing to do.
So if you find yourself selling a product, service, or even proposing something to do with friends, focus on the emotional pull over the rational logistics.
3) Pricing confusion triggers irrationality.
By now, we’ve realized just how much of our buying behavior is based on perception and emotion. It shouldn’t surprising as these two things are key factors that make us human. So what happens if we go into a store looking to buy something, and find a random product thrown into the mix of what we’re buying?
Chaos.
Okay, that’s a little dramatic, but we do begin to struggle with how to value the random product. Here’s an example. The other day, I wanted to buy Tide detergent. I was about to buy a single container when the corner of my eye came across a single container, with a small packet of their pods included. I looked at the prices of the two, and they were relatively similar, but the one with the pods was slightly more expensive.
How do you price that add-on though? It’s not an apples to apples comparison. While Tide detergent just cleans, Tide Pods clean, remove stains, and brighten clothes all while being packaged in a different form.
This is a classic example of pricing confusion. When companies want to test out the waters on new product lines or to better price discriminate, they’ll throw in a random product that is somewhat aligned with the original product you were purchasing, but not the same thing. It makes it difficult for us to decide how to value that add-on. We’re forced to rely on our intuition and gut feeling as to whether or not that add-on is worth the extra X.
One one hand, you just want what you were looking for. On the other hand, you’ve been offered everything you were looking for, and more. Consumers practically always want more, so the introduction of this extraneous variable in our decision making process throws us off guard.
This becomes even trickier when the add-on is framed as a “free sample”. How do you value something that’s not really free, while it’s framed in a way where it feels like you’re getting a great deal?
I think the big observation here is the affirmation that we typically always want more of something so when introduced with a slightly related add-on, we lose a bit of our rationality in our buying decision.
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Ultimately as consumers, we are irrational. It’s interesting to take a step back from just buying something and to think about why we decide to buy certain things. From doing so, we become more aware and perhaps just a little more rational when we do buy things.