
Price Anchoring, Or Why a $499 iPad Seems Inexpensive - jeff18
http://www.mint.com/blog/how-to/price-anchoring/
======
gizmo
I agree with the premise, that the iPad seems inexpensive because of
anchoring, but I completely disagree with the analysis, that the keynote
presentation where the $999 is "crushed" by $499 had anything to do with it.

Fundamentally, people expect the iPad to be expensive because the iPhone was
very expensive. Because Macbook Pros are very expensive, and because Macbook
Airs are very expensive. Because Apple DVI connectors are expensive, because
iPhone headset replacements are expensive. Because basically, everything with
an Apple logo costs an arm and a leg.

So when you hear that you can get an iPad for less than twice the cost of an
iPod touch then of course, that seems like a really good deal. (And only $100
more than a high-capacity iPod touch.)

The foldable iPad case $40 + keyboard dock $70 + spare charging cable $30 =
$140. That's 30% of the iPad right there. So _relative_ to all other Apple
products and _relative_ to its accessories an iPad for $500 looks like a
steal.

~~~
dabent
If I recall, Jobs indicated the $999 price was analysts. I don't have a
reference, but that's also the price I'd expected the base model iPad to be.
So I think Jobs just took what he saw as everyone's expectation of the anchor,
let that sink in for a bit, then "crushed" it with $499.

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ciniglio
It's interesting that he mentions that naming a number first in salary
negotiations is to your advantage, when the usual advice is that the first
person to name a number loses. If there is really no rebound effect, why don't
we hear stories of people asking for outrageous amounts of money, instead of
letting the hiring manager name a salary first?

~~~
zaidf
I read on here few months ago that naming your own price first is better. Now
I believe it! Recently we hired a sales person on PT basis. At the interview,
she gave her expected salary to be about 2.5 times what I had thought about
paying her. Now, I _know_ about this notion of anchoring and yet I felt kind
of embarrassed to make my initial offer. I fought off the urge to buy into her
frame and ultimately made a decent offer but it was still significantly higher
than what I had originally planned...and I credit much of it to her naming her
price first!

I do think there is an upper limit which if you cross, you risk getting the
other party to TOTALLY ignore it as a joke. I came pretty close to doing that
with our PT person.

~~~
mcantor
It feels so hilariously appropriate that you were hiring a sales person, and
they did a spectacular job of, as they say, "selling themselves."

~~~
whatusername
<http://xkcd.com/125/> covers it nicely.

------
lotharbot
This works the other direction, too -- adding features without changing the
initially-quoted price.

That's often the tag on infomercials: after they set you up for the cheez-o-
matic for such-and-such price, they "also throw in a free" mini-cheez-o-matic.

Or you get a year of free support, or the 3 megabit connect for the 1.5
megabit price, or some other "added features" that make you feel like you're
getting a deal even if you're really not.

~~~
mortenjorck
This is going to be a killer with the iPad.

I managed to avoid pre-ordering one, but as the app library grows and the
iPad's potential use cases multiply, that $499 will start to look like an
increasingly better deal.

~~~
thorax
Though the apps are at $9.99+ on iPad. With the "anchoring" of the iPhone apps
at $0.99 and $2.99 (and free), Apple and other companies are having to fight a
slightly different battle of re-anchoring everyone higher.

~~~
Splines
Is the answer here then for Apple to release two versions of iWork for the
iPad then? For example, have one version of iWork that only lets you read
documents for $13.99, and then for $14.99 have version that lets you read +
write documents?

------
jsm386
There was an interesting article back in December in New York Mag about how
restaurant menus are often designed with this intent (I believe it made it
here but can't find link).

 _2.The Anchor: The main role of that $115 platter - the only three-digit
thing on the menu - is to make everything else near it look like a relative
bargain, Poundstone says._

<http://nymag.com/restaurants/features/62498/>

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gcheong
I wonder now if Apple had been leaking the $999 figure to set the stage for
the $499 reveal or if they had just taken advantage of pure speculation.

~~~
duck
This might shed some light on why the entry level MacBook never went lower in
price like a lot of people had speculated as well.

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rmorrison
_Now, if you’ll excuse me, I need to go shopping. I’m out of cereal, and—what?
Cap’n Crunch is $2 off? Better make it two boxes._

I seriously bought two boxes of Captain Crunch last week because they were on
sale. Now I am stuck much more sugar than I can handle. Ugh.

~~~
sailormoon
Just throw them away, dude. You shouldn't be eating that stuff.

Watch this: <http://www.uctv.tv/search-details.aspx?showID=16717>

~~~
jws
Good news! During the 90 minute video you will burn 100 calories, which is
right at one serving of Captain Crunch, if you eat it without milk.

The video is also on youtube at <http://www.youtube.com/watch?v=dBnniua6-oM>
if you have a better youtube player than their little flash thinger.

~~~
sailormoon
Yeah well, I like linking to original sources.

------
jamesbressi
I believe the famous paper he is speaking of in relation to asking for more
and getting more is:
<http://www3.interscience.wiley.com/journal/21451/abstract>

------
ajj
It also depends on whether the deal is optional or required, in some sense. In
the example, the jury believe some award is fair, then price anchoring has an
effect, as demonstrated. However, I think this might not be equally valid for
"optional" deals - if I find a cool gadget that I am not sure about buying, if
the seller quotes 10x the price I expect, I might just walk (as opposed to
say, 1.5x). With deals that have to happen in some sense, and only the price
is not set (say a job offer, or an injury award), price anchoring seems more
effective. Of course I have nothing to back this up, just my feeling.

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ExtremePopcorn
Dan Ariely gives a related TED talk: "Are we in control of our own decisions?"

[http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_o...](http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html)

Look around 11:30 for a few examples of how comparing options affects us more
than looking at each individually.

On a side note, it also seems inexpensive because it's $499 and not $500!
Psychological pricing is one of my larger pet peeves...

~~~
hugh3
This doesn't bother me as much as the movie-popcorn pricing system, which
seems to be rapidly spreading to everything (Cold Stone and Jamba Juice are
two particularly egregious offenders). You can have the miniscule size for $5,
the "medium" size for $5.75, or the insanely large size for $6.95. Of course
they never even expected to sell the other two sizes, they're only there to
make the medium size (which is still way more than I wanted to eat) look
cheap.

While I'm on the subject, here's a fun fact: a chocolate-peanut-butter
flavoured milkshake from Cold Stone, in their largest size, contains over two
thousand calories.

~~~
nitrogen
_While I'm on the subject, here's a fun fact: a chocolate-peanut-butter
flavoured milkshake from Cold Stone, in their largest size, contains over two
thousand calories._

Sounds like a great way for a highly active person to put on weight.

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kadavy
Dave & Buster's uses this technique - as well as something called "foot-in-
the-door" when persuading you to buy more gaming credits: [http://blog.kadavy-
inc.com/post/465860827/psychology-hacks-o...](http://blog.kadavy-
inc.com/post/465860827/psychology-hacks-of-dave-busters)

For Apple, the "foot-in-the-door" is probably the iPod or iPhone.

------
auston
I feel like a lot of people missed a pretty important point...

Why does the $499 seem inexpensive to the people who _DID NOT WATCH_ THE SJ
presentation? There is no text on the apple website that says "pundits said it
was going to cost $999, but we made it for $499"?

------
xox
_If you’re selling something, ask for much more than you think you’re going to
get._

Very often that can be simply offputting and can turn away would-be buyers.
There's a difference between being susceptible to an effect and being
completely controllable by it.

~~~
trjordan
According to the article, that's not what happens at all. In the case of
personal injury lawsuits, there is no rebound, and people who ask for more
simply get more.

It may be true that if you set a high price, and delay telling the customer
about a deal, they will leave before you reveal the lower price. However,
that's not what is typically done, and it seems like showing a deal is always
more effective that just starting at a lower price.

~~~
xox
_it seems like showing a deal is always more effective that just starting at a
lower price._

If you were to believe the article's unambiguous take on this, then your
interpretation would be correct. However, I believe this is a naive view or
one that is only true in limited situations and often not true in the reality
of the marketplace where an unreasonably high price can simply turn someone
away without leaving the possibility for any further negotiation.

~~~
Periodic
I think the key that the buyer must believe there is room for negotiation. If
I walked in to a Best Buy and saw the only TV there was being sold for $10k,
I'd walk out. But if I saw that one TV was $10k, but with slightly fewer
features and slightly smaller size was less, then I have entered a negotiation
where we agree on what I'll pay for a given feature set, but I may have
anchored on the $10k figure already.

~~~
trjordan
The point is not actually negotiation, but a perceived deal to be had. You
don't have to think you can argue for a lower price, you just have to see that
the TV is being sold for $10k, then see the "SALE!" sign next to it that tells
you the TV is on sale for $3k. By then, you've already anchored to 10k, and
the "negotiation" took 3 seconds.

Full negotiations will definitely drive some people away, but to use anchoring
effectively, you can definitely advertised a "standard" price and the real
price. With that, I don't see how you'd lose somebody based on that original,
and you'd gain a few based on the perceived deal.

~~~
Periodic
You're right. My point only applies when we're talking about making offers in
a vacuum. This thread was discussing making offers or demands such as for
salary, where there aren't different numbers floating around. In fact, if you
were the first person to interview for a job and demanded a high price, the
next guy might look like a bargain in comparison. It is when the other side
believes there is room for negotiation that you can make a high/low offer and
take advantage of anchoring. If they don't believe they can negotiate then
you'll just drive them away.

------
callmeed
Does anyone have a good example of using this tactic in a web startup? (if it
applies at all)

Our product has a setup fee + monthly fee ... is there a way to employ price
anchoring on my landing or pricing pages?

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paraschopra
I am curious whether there are any examples of price anchoring for web apps. I
know it is a very specific request, but if anyone knows such anchoring
happening in web app space, please share the link.

~~~
kolya3
How about this: <http://highrisehq.com/signup>

If most of their customers fall into the $24/month "basic plan" category, then
the highlighted plan of $49/month makes the $24/month plan look like a steal.

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davidedicillo
oldest trick in the world. raise the price and discount it :)

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GrandMasterBirt
Wait, are you saying that for less than $500 I can get another device I have
absolutely no use for? Oh man better than $999. I'm in!

He is right. I remember when I learned to bargan, at first I was like "They
are asking for $10, how dare I ask for $1?" Now I know that by asking for $1 I
am more likely to get $3 which is probably the real value of the product.

Before saying noone is immune, you must first talk to people who haggle
EVERYTHING. Talk to them, hang out with them, look at how they look at the
world because it is different. These techniques work quite differently on
them.

It is not being told about these techniques, it is living them, just like
while doing a test for a research, the researcher can't just tell you that
they are actually grading you on your sense of balance, and expect you to
never stumble, because that is not what your brain normally processes.

Anchoring works today because we are trained for it. Literally. In Russia I
remember we never bought a peanut without reducing the price by 50%+. Here
everything is labeled and final. Online everything is labeled and final, its
not like you can open a chat with amazon's reps and get a book from $10 to $2
due to good haggling.

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Dellort
That does not seem inexpensive when you take into account what you actually
get.

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josh33
Another example of price anchoring: Points on Hacker news. I feel like this
comment deserves 32 points. Can you meet my offer?

~~~
hugh3
_1 point by josh33 5 hours ago_

Apparently not.

In fact, I'm sure I'll get modded down for this, but it seems to work the
other way around; if you say "I'm sure I'll get modded down for this" then
you'll get modded up. Of course since I've transparently pointed it out in
this case I'm sure I actually will get modded down for this.

~~~
jrockway
Correct.

~~~
hugh3
I love it when I'm right.

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Zot95
Agree with all the points on price anchoring... but $499 does not seem cheap
to me at all for what you get with the entry level iPad. Maybe I need to watch
Jobs presentation?

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NathanKP
In my opinion a $499 iPad doesn't cost enough. $499 does not reflect the true
cost of the device in terms of materials, labor, and shipping. Your cheap iPad
is subsidized by ripping off underpaid miners and workers in third world
countries. Even if Apple makes sure their device is not assembled using slave
labor they can't be sure that all the parts and materials were produced using
fair labor practices, and the reality is that they probably weren't.

Price anchoring may make it seem inexpensive, but in truth it is inexpensive
when you consider what it is and how much work went into creating it for you.

~~~
mikecane
>>>Even if Apple makes sure their device is not assembled using slave labor
they can't be sure that all the parts and materials were produced using fair
labor practices, and the reality is that they probably weren't.

What company can say that, tho? What devices are we all using that contain,
for example, Coltan? [http://www.nytimes.com/2001/08/12/magazine/the-dirt-in-
the-n...](http://www.nytimes.com/2001/08/12/magazine/the-dirt-in-the-new-
machine.html?pagewanted=1&pagewanted=print)

Even here in America, think about meat packers and such. Every time you eat,
you could be perpetuating a system you might want to change if you saw what it
was.

