Do You NEED Price Anchors to Help You Make Money Decisions?

One of the more interesting things I read recently was a story from The New York Times web site. The post, titled, “Sometimes, We Want Prices to Fool Us,” deals with anchoring and the idea that we want fake prices to help give us an idea of what we should be paying when we make purchases.

The post mentions the recent move by J.C. Penney to try and focus on its regular low prices, rather than make it all about the sales and the deals. Unfortunately for Penney, the strategy has backfired, and resulted in profitability problems.

Because customers want to feel like they’re getting a deal. And they need those artificially marked up prices to let them know that they are saving money.

Price Anchoring

In behavioral economics, this is known as price anchoring. You are provided with a price so that you know what it’s supposed to be like. One example is when you go to a restaurant and ask for the wine list. There is a high-priced bottle, designed to set your expectations of high prices. Then there are very low-priced bottles. In the end, you pick something at the high-end of the middle, since the anchoring makes you think you are getting good value. You aren’t paying for the highest-priced bottle, but you are paying for something you feel is high quality, and you feel that you are getting your money’s worth because it’s not the most expensive item.

This psychology also works with sales at retail stores — as J.C. Penney discovered. Customers like to see that there is a high price on the clothing. Seeing the high price on the tag, and then getting 50% off, or seeing a red slash through the price and seeing a much lower price below, makes a big difference. The higher “original” price on the tag cues shoppers as to what something should cost. Then, shoppers feel great when they pay much less than they’re supposed to.

I notice this tactic all the time with Kohl’s. There’s a sale happening at least once a month, purporting 15% or 20% off everything in the store. There’s a big deal about this regularly, so you know that you are “saving” money when you go in. Penney got rid of those cues, and there wasn’t the hype to draw shoppers to the store.

What about Your Own Money Decisions?

Chances are that you need price anchors in your own life as you make money decisions. Many of us look at the highest-priced items, then at the lowest-priced items, and choose something in the middle. That anchoring gives us a sense of what we’re supposed to be paying, and provide us with a point of reference.

Without that point of reference, it can be difficult to know whether or not we’re getting a good deal. Even when the deal is artificial (like furniture stores marking up items a couple weeks before a holiday, just so they can say they marked it down big for the sale), it appears that we prefer the price anchoring.

What do you think of the post from The New York Times? Do you let price anchoring influence your money decisions?

Image source: My name’s axel via Flickr

About the Author

Miranda writes about financial topics for several web sites. Her blog is Planting Money Seeds, and her book, Confessions of a Professional Blogger, is available on Amazon.