Cognitive Bias

Anchoring bias during Black Friday: How numbers affect our decisions

Black Friday – a period of time when you’re being bombarded in every possible way by tons of various ads. From huge billboards to smartphones. Everywhere you go you see how much you can gain. But you need to hurry up. Those offers are precisely timeboxed, meaning that prices will be much higher right after that magic Friday comes to an end! 

It’s also one of the best examples of the anchoring effect additionally multiplied by the charm pricing theory. Believe me, that’s a dangerous combination, especially to our wallets. 

The science behind an anchor number

Anchoring bias is a tendency to rely too heavily on one trait or piece of information when making decisions. It’s a common effect that can be experienced not only during sales but also during negotiations. It occurs when [1]: 

“(…) people consider a particular value for an unknown quantity before estimating that quantity.”

In his book “Thinking, Fast and Slow”, Daniel Kahneman describes [1] the following experiment conducted at the University of Oregon. A group of students standing in front of a wheel of fortune were asked a certain question. The wheel was marked with the numbers from 0 to 100. But there was a trick. The wheel was rigged to stop always and only at the number 10 or 65. Each student was supposed to spin it and answer the question:

“What is your best guess of the percentage of African nations in the UN?”

It turned out that the answer relied heavily on the number that students saw on the wheel. The average answer for those who had seen 10 on the wheel of fortune was 25%, while for those who had seen 65 it was 45%. Even though the number on the wheel wasn’t meant to give them correct answers, they relied on the figure they had seen.

Psychological pricing

Most stores use the power of psychology while making up prices, especially during the sales period. That’s probably nothing new to you. But even though we know it, we are still being tricked by those prices. Of course, as a rational person you know that there is just a $1 difference between $49 and $50, but your brain perceives it differently. Shoes having a price of $49 seem to be almost $10 cheaper than those which cost $50. 

There is evidence that consumers tend to perceive “odd prices” as lower than they actually are [2]. Salespeople know that if they ask you to spend $1.99, you will feel like you spend $1 instead of $2. William Poundstone [3] found out that such a technique can increase sales on average by 24%. 

By the way, do you remember what the regular price for a song on iTunes was? Steve Jobs knew how to use charm pricing. He was able to convince people to buy a single song for $0.99 even though previously they were downloading it for free. Since it was less than $1, our brains still recognized it as super affordable. Something almost for free. What about other companies? In Amazon they use the same technique.

psychological pricing
Source: PrimeMusic

Why do we love nines?

There were a couple of experiments [4] conducted by Eric T. Anderson and Duncan I. Simester, in which the effectiveness of using the number 9 in pricing strategies was analyzed. In one of the experiments, the price of a woman’s clothing item was set to $34, $39 and $44. Everyone would expect to sell most items for the lowest possible price – $34. However, the item sold the best for $39.

You’re probably thinking: ”Why did that happen?”. It doesn’t make any sense. But as it turns out people assumed that the item was discounted just because the number ended with a “9”. This ending gave them a false impression that the offer priced at $39 was better than $34. 

But it all depends on the target

Scientists proved that this method works effectively only when customers have limited information [4]. If you see a brand new pair of shoes for $39, you’ll find that offer attractive. Especially if you haven’t thought about buying them before and you haven’t done the market research. But If you already know the market value of the item, you’ll opt for $34. That’s why not every bargain price ends with a “9”. It just depends on who the target for the offer is. Whether it’s a person who knows a lot about the market or a person who has been attracted just now.

3-tier advertising at its best

Another popular technique you can find is the so-called 3-tier advertising. You can come across it while looking for services like hosting, web applications, subscription programs etc. Typically, it looks like that:

3 tier advertising
Source: trello.com

You are offered three pricing options, from the cheapest to the most expensive one. We tend to treat the highest number as an anchor price. $20.83 seems like the most expensive option but, thanks to anchoring bias, $9.99 turns out to be a reasonable offer. 3-tier advertising gives you the impression that the middle option is the best. It’s not the cheapest (the worst) but also not the most expensive (the best).

By the way, there is another interesting trick here. Take a look at the highest price, $20.83. It contains additional $0.83 which many people won’t even take into account. They just treat it as something which costs $20. That’s the beauty of that bias. You pay extra $0.83 and you don’t consider it an extra $1.

Conclusion

Even when you’re aware of anchoring bias, that effect can still influence your judgement. We rely too heavily on the first piece of information. Black Friday is a great example of that, which is why I recommend you observe the behavior (yours and others) of how purchasing decisions are made during that magic period of a year.


References

[1] Daniel Kahneman. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.

[2] Bizer, George & Schindler, Robert. (2005). Direct Evidence of Ending-Digit Drop-Off in Price Information Processing. Psychology and Marketing. 22. 771 – 783. 10.1002/mar.20084.

[3] William Poundstone. (2011). Priceless: The Myth of Fair Value (and How to Take Advantage of It). Hill and Wang.

[4] Anderson, Eric & Simester, Duncan. (2003). Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments. Quantitative Marketing and Economics. 1. 93-110. 10.1023/A:1023581927405.