One of the first things you learn about the value of money as a child is to be careful not to squander it. One of the first things you learn from the behavioral science literature on judgment and decision making is that the value of everything can be arbitrarily established based on anchors.
Let me illustrate with an example from the breakfast table. Norma’s on 56th and 6th in New York is one of my favorite places to have breakfast in the city. Typically, we will show up early and put our name in for a table and then we’ll drink our five dollar cups of coffee and tea in the nearby Knave, while we wait for the line to die down and our name to be called. People love this place! It is in high demand, even in this economy, and it’s not because the prices are so reasonable.
The menu features all sorts of wonderful breakfast indulgences like Super Moist French Toast (with an orange infused honey drizzle created in the 15th Century by Juan del Encina) for the extremely low price of $21, an Egg White Frittata of Shrimp with oven roasted roma-tomato and spinach for only $26, or the Foie Gras Brioche French Toast with asparagus and mushrooms for just $32. Yes, these dishes are decadent and great deals at the same time. What makes a $32 plate of French Toast such a great deal? The price it is anchored against.
Anchoring and adjustment was one of the first great “irrational heuristics” established by Kahneman and Tversky in the 1970’s as the judgment and decision-making literature began to systematically dismantle the descriptive truth of rational economic models of choice.
For example, if you have people spin a wheel with random numbers on it, and then ask them to estimate the size of various cities, their answers will be dependent on the number where the wheel stopped spinning. If we are rational, why would spinning a wheel have any effect on our judgment? Here’s another one: your willingness to pay a high price for a bottle of wine can be influenced by simply recalling the last two digits of your social security number. If your last two digits are high (e.g. 87) you’re more likely to think a $49 price for a bottle wine is reasonable. If your last two digits are low (e.g. 10) you’re more likely to think a $49 price for a bottle wine is unreasonable. Again, this is completely irrational, and yet is a significant influence on our judgment and decision-making. The social security numbers in these examples are called “anchors” or “reference points”, and while they are arbitrary numbers in this scenario, they influence our judgments in ways of which we are not consciously aware.
So why is $32 for French Toast a great deal? Well, if you look closely at Norma’s menu(click on the image below), they have manipulated the cognitive anchor on their prices brilliantly.
The Zillion Dollar Lobster Frittata, for only $1,000 (if you get the 10oz. serving of caviar), is the perfect anchor for this menu. For most customers, that price is absolutely absurd (and the restaurant even plays up the humor of it: “Norma dares you to expense this”), so it can be laughed at and dismissed as “just fun” or “ridiculous” at the rational conscious level. And yet, the subconscious effect of the anchor has already had it’s effect: now a $32 dollar plate of Foie Gras French Toast somehow seems more reasonable, that egg-white frittata of shrimp seems like a downright bargain at only $26, and a $21 15th Century orange honey drizzled stack of egg battered bread is simply a steal!
All jokes aside, these anchors on perceived value are real, and they beg the question for marketers: what anchors are my customers using to assess the value of my products? Sentient’s Applied Choice Architecture practice can help you answer that question and optimize the price points along your product portfolio line.
To learn more, contact us at firstname.lastname@example.org.