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Amazon’s Psychology Based Pricing Trick

Amazon has become an extremely successful online retailer for a variety reasons, including taking advantage of a psychological phenomenon called anchoring. This post will detail what the anchoring effect is and how websites like Amazon use it to their advantage.

What is the Anchoring Effect?

In the book Thinking, Fast and Slow, the author, Daniel Kahneman, explains the anchoring effect as a reliably reproduced behavior that occurs when a person considers ‘a particular value for an unknown quantity before estimating that quantity’. When a person is exposed to a value his or her estimate will stay close to it. Therefore the presented value acts as an ‘anchor’ for the estimate.

Visitors to the San Francisco Exploratorium took part in an experiment that demonstrated the effect. Some participants were presented with the following questions:

Is the height of the tallest redwood more or less than 1,200 feet?
What is your best guess about the height of the tallest redwood?

Other participants were presented with the same questions, but with different values. In the first question 1,200 was replaced with 180. This created two question sets with either a high anchor, 1,200 feet, or low anchor, 180 feet.

The answers to the questions were very revealing. The mean estimate for the low anchor questions was 282 feet, while the mean estimate in the high anchor group was 844 feet. That is a difference of 562 feet! An anchoring index can be established by converting the ratio of the difference between anchors and the mean estimates, 562/1020, to a percentage. For this experiment the index was 55%. For the anchoring index, 0% would represent people who completely ignored the anchor with 100% being people who fully adopted the anchor for their estimation. Based on the index the different anchors had a powerful influence on the participants’ estimations.

The anchoring effect has been replicated in numerous other studies and unsurprisingly, businesses have used it to their advantage.

How Amazon Uses Anchoring

When you come across a product on Amazon’s website there is often a ‘list price’ that is crossed out. Above that is a lower price in larger red font.

Amazon Pricing
Amazon Pricing Example

To a shopper it looks like there is a good deal. The product’s list price is $16, but Amazon will sell it for $9.07. What a steal. This is the anchoring effect in action.

The initial $16 list price is the high anchor price. The shopper now thinks that the product should be worth $16, but he or she only has to pay $9.07. The shopper believes he or she is getting a bargain, but the lower price is really the normal price Amazon would charge for the product. By using the anchoring effect, Amazon tricks consumers into buying goods at prices that seem like deals because of a high anchor price.

Although Amazon uses the anchoring effect throughout their website, the company also often sells products at a loss. In these cases the consumer really does get a deal. A good way to avoid falling for the price anchoring effect is to research a product’s cost on multiple websites and at other retailers to determine its market value.

Conclusions

The anchoring effect is a reliable and reproducible psychological concept that has been utilized by many online and physical retailers. The next time you search for a product online be cognizant of this trick and be sure not to fall for a company’s use of high anchor pricing.

Source:
Thinking, Fast and Slow

Further Reading:
Using Psychology to Increase Conversion Rates by Smashing Magazine: Link

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