Marketing Lesson: (Price) Anchors Away
Lesson Background
Ariely's book focuses on "The Hidden Forces that Shape our Decisions"
As consumers, we’d like to think that we have a pretty good handle on what things should cost. But, a growing body of research is proving that we aren’t as smart as we think. One of the pioneers in this field is Dan Ariely, a Professor of Economics at Duke University. If you haven’t had a chance to read his book, Predictably Irrational, you should pick it up. It provides a lot of great examples of how we as consumers act in ways that sometimes don’t make a lot of sense.
One of my favorite concepts in Ariely’s book is anchoring, which he defines as the human tendency to rely too heavily (or “anchor”) on one previously acquired piece of information when making a decision. For a quick discussion of anchoring, check out the Wikipedia entry.
Even if you are not familiar with anchoring, you’ve probably seen it in action. Anchoring is why McDonald’s can charge $3.00 for a medium McCafe Latte and still get people to think it’s cheap, despite the fact that it’s one of the most expensive things on the menu. Since many people are “anchored” to Starbucks’ even higher prices, McDonald’s seems cheap by comparison.
You can demonstrate the power of anchoring to your classes using this activity, which comes directly from Predictably Irrational.
In the activity, you have your students write down the last two digits of their social security number on a sheet of paper. After the students have written down their numbers, they are asked to translate the number into a dollar amount (i.e., if the last two digits of the social are 82, that becomes $82). Finally, the class places mock bids on a series of products (I have them “bid” on things like a car stereo, a wireless keyboard, and a navigation system).
What Ariely found, and what you should find if you perform this experiment with your class, is that students who wrote a higher number tend to bid higher than students who wrote down a lower number. In fact, Ariely’s data shows that students with the higher numbers bid as much as 60 to 120% higher than students in the low group.
This activity works great in Marketing class when you are discussing pricing. I also use it in Personal Finance during my unit on consumer skills. You can perform the experiment using the resources below.
Lesson Resources
Worksheet: Anchoring Activity
Photos: Products for Anchoring Activity
Website: Wikipedia entry for “Anchoring”
Website: Predictably Irrational Excerpt on Anchoring Experiment
Related posts:
Recent Comments