MBA1909 How to Implement Price Anchoring in Your Business

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Visit Dell.com deals. Hey, welcome to the $100 MBA Show. Practical business strategies you can use every single day with our daily 10 minute business lessons. For the real your host, your coach, your teacher, Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company I started with my co founder back in 2014 and in today's lesson you will learn how to implement price anchoring in your business. Regardless of what you sell, a product, a service, a software, a book, an online course. Price anchoring is a strategy, a sales strategy that has been used for decades. It's one of the oldest strategies in business and in marketing because it helps you use human psychology to get people to buy. The fact of the matter is, is that when we make decisions, our brain is actually quite simple and it's hard for us to understand if a price is a good price, a bad price, an expensive, a cheap price, if we have no frame of reference, if we don't have anything to compare it to. This is why anything you buy, from a car to a flight on an airline to a service like getting a car wash, price anchoring is utilized to help customers make the decision to buy and to steer them in the right direction in terms of which product they should buy, which price point they should buy. In today's lesson, I'm going to show you why this is so important and how you can start implementing it in your business. Regardless of what you sell. If you're not doing this or you're not doing this at its full potential, you're really leaving a lot of money on the table. Let's make sure you don't. Let's get into it. Let's get down to business. Let me tell you about Intuit QuickBooks. When I was starting out my business, I remember sitting at my desk late at night, not working on my business, but cleaning up numbers, tracking and reconciling payments, and wondering how this became my life. But once I automated the admin side of things, of my finances, those nights had disappeared and I felt a whole lot better. Outdo it with Intuit QuickBooks. QuickBooks is the trusted end to end solution that businesses rely on for getting paid, managing finances, paying employees, finding new customers, and more. QuickBooks provides a team of AI agents and trusted experts. So doing it yourself no longer means doing it alone. Their payment agent gets you paid faster, their customer agent finds leads, follows up and secures more sales, and the accounting agent automates and categorizes transactions. Get your critical business jobs done with QuickBooks on the Intuit platform. In my local neighborhood, there's a woman that you might run into from time to time. And for a lack of a better way to describe this, she is down on her luck. She is a beggar and she's just known in the community. She's been around for years and if you pass by her, there's a good chance she'll stop you and ask you for some money. Recently, I actually observed her do this. I was standing in line at a takeaway shop and she approached the man next to me and she asked him for $400. She said, I really need $400. Can I have $400? And the man was like, I'm really sorry, but I don't have $400 to give you. She then proceeded to say, I really need your help. Can you please give me $400? He then replied again, I wish I could, but I don't have $400. She then came back and said, all right, can you give me $20? He pulled out his wallet and gave her $20 with zero hesitation. This woman in my neighborhood, she used price anchoring even when asking for a handout. The point of the story is when she approached him, $400 sounds like a lot of money. Like I can't give you $400. I don't know if I'm carrying $400 with me. When she even just mentioned the amount $400, the man is forced to think about how much $400 is. He might even picture $400 in the actual cash dollar bills in his head. So when she countered later on with $20, $20 seems so insignificant compared to $400. So it was much easier for him to give up $20 and hand it over. Now, would she have the same success if she approached him and said, hey, can I have $20 right off the bat? We may not know for sure, but my guess is no, I don't think she would have the same success. But the point of me sharing the story with you is price anchoring is something that really works with human beings. It doesn't matter what the context is. It doesn't matter what you're selling, it doesn't matter how much you're selling it for. This is why any product in any department store will say, this is the retail price, this is the sale price, or this is how much we're selling it for. And often it's less than the original price. This gives you the impression you are getting a deal. This gives you impression that you should be paying more, but actually you're paying a bit less. You're getting a deal, but we're going to take it a bit further. We want to use price anchoring to steer our customers in the right direction. For example, the app Shopify that has a great tool to build e commerce stores. If you sign up for Shopify, they have a free trial. And then when your free trial is up, you got to choose a plan. They will show you the plan and with monthly pricing, okay, they'll start off with say, hey, you can go with a plan that's $29 or $79 or $150. I'm not totally sure on the prices, but it's around that once you choose your price, let's say you choose the lowest one, $29. The next thing is they show you four different options. You can pay monthly and pay $29 every month, or you can pay annually, which is what they say recommended. And you would save about $60 if you pay the annual price. Or you can pay for two years and save like $120. Or you can pay for three years and save $230. So you have four choices. Notice that the annual is the recommended. Why? Because they want all their customers to go annual. Because they want to get as much money up front as possible and and lower their churn by having less cancellations or even people with declined credit cards. Or it's called involuntary churn from month to month when they're being charged. But they can't just say, hey, please sign up for annual. They gotta show you other options to make the annual look valuable. Look amazing. So the annual price is not too expensive in comparison to the two year and the three year plan. But you would not think that, you would not think it's inexpensive if there was nothing to compare it to. If they just showed you an annual plan and a monthly plan, the annual plan would look expensive. But showing the two year and three year plans gives the impression that the annual plan is inexpensive. Because there's context. And this is just how the brain works. This is why whatever you sell, you should always have some sort of tiers, some sort of way of showing value for any price. This is why if you buy, let's say a brand new car like a Honda Civic, Honda will have four different models of the Civic. They'll have the base model and then they'll have like what's called the LX and then the EX and then something called like the exl which comes with leather. And the EXL is the top of the line, it's the most expensive and there is a reasonable amount of money, a reasonable amount of difference in money between each tier. Now what do you think is the best selling model for Honda? The base model? No, it's actually the LX model, the model that's right above the base model, the second tier. Now everybody just loves the LX the most. That's just the one that everybody loves. No, it's because it's anchored. Maybe people don't want to spend all the money of the exl. There will be people that will do that. There will be people that want all those features and for them they can afford it and really they see the value in that. Maybe some people take the EX the third tier, but most people, and it's like overwhelming, like 60% go for the LX because it's not the cheapest model. It comes with a bunch of features that people really want and it's not priced so expensively. And I'm saying this in comparison to the ex and the EXL, the tier 3 and 4, but if there was no EX and EXL tier 3 and 4, the LX model would look expensive compared to the base model. So look at your products, look at your services. How can you package your services, your products, your software, your book, your courses in tiers. And I say a minimum of three tiers. I think the sweet spot is three and four tiers, depending on your product. But with three tiers you can show real value. So don't give everything away in one package. Give more price more. Right? The more value, the more you charge. And people that value those things that have everything. The product that has everything, the course that has everything, the service that has everything. They will pay for it. And those who don't want to pay for it will pay less. But the point here is that you're not valuing what you're offering. If it's not tiered, this might mean breaking up some of the things that are included in your current offer or your current product. This might mean that creating new services or new offerings. What about physical products? Well, you don't have to look far. Go to nike.com are all the shoes the same price even within the model? Like, say, for example, you're going for a pair of Air Jordans, right? Not all the Air Jordans are the same price. Even if it's the same model, the ones that have unique colors or colorway are a little bit more expensive. Does it cost them more to manufacture that shoe? No, but it's all about price anchoring. Maybe you won't buy the one with the unique colors, but now you're thinking about the other Jordans that are a little bit less and you're pulling out your credit card and ordering the shoes. This is what price anchoring does. It changes the question from should I buy this? To which one should I buy? And you could do the same in your business. If you, your parent or spouse served in the military, you could join our family. Our members saved an average of $70 a month on auto insurance when they switched. Tap the banner or visit usaa.com join today to check your eligibility restrictions apply. To wrap up today's lesson, a lot of people ask me when it comes to price anchoring. Okay, so what do I price my tiers if I only have one price right now? Well, start with that one price and make that your base price. Why? Because most people undervalue their products or services. They're underpriced. This is a good chance for you to now change up your prices and really bring in more revenue. So use that price as the actual baseline and then move up in the tiers and increase your price. And how much more? Well, you can experiment, but a good rule of thumb, and of course it depends on every product is different. But a good place to start is 15 to 20% increase in each tier. So if your base product is $100, the next tier would be 120 and the next year would be around 145. Now, you may want to experiment with your highest tier. Many people do this and it works really well. Depending on your product, your Customers, your service, your market. You may want to increase your highest tier price to a price you might feel a little bit uncomfortable actually having on your website. So say, for example, go back to those tiers. You have tier one, it's 100, tier two is 120, and tier three is 500. That might seem like a huge jump. And you might think, who's going to buy 500? Well, there are people that are going to pay whatever they need to pay to get the best. This is just how they shop. And if there's good value in that top tier, $500 worth of value, there will be lots of people that see that value and buy it. Now, this is just an example, but my point is that it doesn't have to be. Even in terms of the jump in price in each tier, a lot of people go really big on the hu tier to really anchor and make the second tier really attractive. Wow. I get so much more than the first tier and I only have to pay a little bit more versus the third tier is really expensive. And let me just go with the middle because at least I'll get some value for just paying a little bit more. This is how we think. This is how we shop. Thank you so much for listening to the $100 show. If you love what you hear, hit subscribe so you don't miss another episode. You'll get our next episode automatically right on your dev. We'd love to hear what you think about the show. Just leave us an Apple podcast rating and review. We read every single comment. We have nearly 1300 reviews from across the world and we want to hear from you. Before I go, I want to leave you with this. Pricing is not set in stone. You can change things. You can experiment. This is expected. You have to do this. A lot of people worry customers are going to get upset if I change my prices. This is all in your head, mostly. Yeah. Maybe a customer too will get a little bit upset for a day, but that's not worth you holding back on experimenting. What's the best price for you and your business? I mean, personally, as a consumer, if I go back to a shop and I see something that's that I bought that is less expensive now than when I bought it, I don't get too upset. I bought it when I needed it. And that's just business. That's just how commerce works. Thanks so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care.

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