Price Anchoring: What It Is, How It Works, Types

Price anchoring is a strategy that uses our natural tendency to anchor on the first piece of information we encounter in order to steer purchasing decisions.

When customers shop online, they typically see the original price and sale price displayed together, often with the original price crossed out, like: $800 $600. Or sometimes it’s shown as:

• Original price: $800
• Sale price: $600

The $800 is known as a “price anchor” for the $600 sales price. This pricing strategy, called price anchoring, influences customers’ buying behavior and can impact your ecommerce store’s conversion rates.

What is price anchoring?

Price anchoring is showing customers a higher reference price to make the actual selling price seem like a better deal. 

Price anchoring is based on cognitive bias, a phenomenon first documented by psychologists Amos Tversky and Daniel Kahneman. Their research showed that the first price people see strongly influences what they think something should cost, even if that first price isn't relevant.

When you use price anchoring, you're changing how customers see your prices. The higher benchmark makes your actual price look like a better deal.

Let's say you sell wireless earbuds in your electronics ecommerce store. You could display prices like this:

Premium Audio TX7 Wireless Earbuds

Market Value:$199

Your Price: $149

Customer Savings: $50

By displaying the $199 market value first, you're establishing an anchor that positions your $149 price point as a compelling offer. You could use a competitor's price, a manufacturer's suggested retail price, or your regular price as the anchor.

This strategy works because customers naturally evaluate your offer in relation to the first price they see.

How price anchoring works

A seller sets a higher initial price, or anchor (such as a "regular price" or "MSRP"). The seller then offers the product at a discounted price. The discounted price seems more appealing because it's compared to the higher anchor, regardless of the actual value of the product.

The psychology behind price anchoring

1. Consumer psychology: Buyers evaluate prices in relative terms—a product is cheap or expensive only in relation to other, similar products. An anchor price provides a reference point for comparison shopping.
2. Heuristic: Purchasing decisions typically involve mental shortcuts. Sellers use price anchoring as a marketing strategy to make the decision-making process easier by displaying an attractive discounted price.
3. Decoy effect: Most consumers pick something in the middle when confronted with multiple choices. Sellers leverage this by offering different product or service price variations, with the anchor price often positioned as the high-end option.

Types of price anchoring

Some of the most commonly used price-anchoring tactics include:

• Strikethrough pricing:. Showing an old higher price crossed out next to the new lower price. This makes the customer think they're getting a deal.
• High price anchor:. Putting a pricey version of a product next to a medium-priced one. After seeing the expensive one, the medium one seems like a good deal.
• Low price anchor:. Showing a very cheap version that might seem too low-quality, making customers more likely to buy a more expensive option.
• Tiered pricing:. Offering several choices with different prices, often marking some as "Best Seller" or "Most Popular" to guide the shoppers choice.
• Competitor pricing:. Showing how your prices compare to other companies, highlighting when yours are lower.
• Comparative package pricing:. Offering different bundles of products or services at various price points, usually making the middle option seem like the best value.

Examples of price anchoring

Temporary price increases and sales

Price anchoring is a common retail pricing strategy where stores establish a temporary higher reference price before offering a product at a lower price that appears to be a discount. This technique influences customers' perception of value by creating a comparison point.

For example, a store might normally sell a jacket for $100. They raise the price to $150 for two weeks. Then, they put the price back to $100 but add a big "33% OFF!" sign. Shoppers see the $150 crossed-out price and think they're saving $50, but the store isn't offering any real discount.

Free trial with paid subscription options

When companies offer free trials, they're implementing price anchoring. You get used to having something for free, so paying anything feels like a loss.

Netflix does this by giving you a full month free. You watch shows, set up your profile, and get comfortable using it. After 30 days, paying $17.99 per month doesn't seem so bad compared to losing all those shows you've started watching. 

The free price (zero dollars) is the anchor, making any price seem expensive by comparison, but still worth it to keep the service you now enjoy.

Tiered pricing structures 

When companies offer three price options, they're usually trying to guide you to pick the middle one.

For example, a software company might price their plans like this:

• Basic: $9.99/month (limited functionality)
• Professional: $29.99/month (all main features)
• Enterprise: $99.99/month (all features plus extra support)

This setup works because it enhances the perception of value, making the middle option seem like the best deal. The company doesn't expect many people to buy the expensive Enterprise plan. They include it to make the middle option look like a better deal. 

At the same time, the cheap Basic plan makes you worry about missing out on important features. This "sandwich pricing" pushes most customers toward the middle Professional plan, which is usually what the company wanted to sell you because it makes them the most profit.

Charm pricing

Sellers also frequently use 99 cents in price displays, as a way of making shoppers think a price is lower, by directing attention to the first number in the price display. For example, a price of $199.99 might make a shopper focus on $100 instead of realizing the price is just one cent less than $200.

Luxury goods as anchors

Luxury brands set very high prices not just to make money, but to make their products seem special and high-quality in a $76 billion market. 

For example, Rolex prices their basic watches around $5,000–$7,000, while their fancier models can cost $20,000—$40,000 or more. These high prices do several things:

1. They make people think Rolex watches must be extremely well-made. When someone sees a $30,000 Rolex, they assume it must be worth that much because of how it's made.
2. These prices create status. When someone wears a Rolex, they're showing others they can afford expensive things.
3. Rolex's high prices affect other watch brands. Companies like TAG Heuer or Omega can charge $2,000—$6,000 for their watches and seem "reasonably priced" compared to Rolex, even though they cost much more than regular watches from Seiko or Citizen ($200—$800).

What's really clever is that when Rolex raises their prices (which they often do), it changes what people think is "normal." Someone who thought $6,000 was too much for a watch a few years ago might now think it's a "good deal" after seeing Rolex models regularly priced at $10,000 or more.

When doesn’t price anchoring work?

Price anchoring may not work well in certain situations, including:

• Superficial discounts: Your discount needs to be big enough to get attention. A $10 discount on a $500 TV (just 2%) won't excite many people. A $75 discount (15%) is much more likely to attract buyers.
• Educated consumers: If customers already know a lot about your product and prices, they might ignore your price comparisons. Many shoppers research products online before buying.
• Price wars: If you use competitor prices as your anchor, they might respond by doing the same to you. This can start a price war that's dangerous if you're new to the market or competing with bigger companies.
• Inflated anchor price: Be honest about your anchor prices. Don't claim a product normally costs $1,000 when it usually sells for $500. Customers will notice this dishonesty and lose trust in your business.
• It’s already free: Once you've offered something for free (like newsletters or digital content), it's very difficult to start charging for it with negative customer perception. When the starting price is zero, customers resist paying anything.

Five tips for using price anchoring

1. Display prices prominently
2. Make clear comparisons
3. Differentiate yourself from competitors
4. Offer price ranges
5. Offer bundles

The following tips can help guide you in how to use price anchoring.

1. Display prices prominently

Buyers want price information upfront, not buried in a store display or online advertisement. Don’t make them hunt for this information.

2. Make clear comparisons

If you’re selling several versions of a product at different prices, for example, have side-by-side concise comparisons of price and product features. Many retail websites make it possible to select the specific product and compare it against another selected product.

3. Differentiate yourself from competitors

Focus on price if your product retails for less than your competitor’s. Or if the competition sells a similar product in the same price range, highlight those features of your product that make it superior or a better value.

4. Offer price ranges

Service providers may be more successful in providing a price range as a type of anchor because the time and effort of providing a specific service can vary. For example, a service-based business might give a price range of $200 to $400. That way, the customer has a floor and ceiling on the price.

5. Offer bundles

Create packages that combine multiple products or services at different price points. Bundling works because customers compare the bundle price to what they would pay for each item individually. This creates a natural price anchor that makes the bundle seem like a better deal.

For example, July, a premium luggage company, successfully uses product bundling through Shopify Scripts to create compelling offers. After expanding from Australia to the US market, they saw a 640% increase in year-over-year sales. 

Part of their strategy involves quickly creating personalized product bundles and discounts that make customers feel they're getting exceptional value compared to buying items separately.

👉 Increase your AOV with Shopify Bundles. 

Price anchoring strategy FAQ

Is price anchoring illegal?

Price anchoring itself is not illegal, but some tricky versions can break consumer protection laws. For example, lying about a discount from a "regular price" that was never really charged can be illegal in some places. Check your local laws before using price anchoring in your business.

What does anchoring mean in sales?

Anchoring in sales means setting a reference price that changes how customers see your product's value. Salespeople often show a high price first as the "anchor," which makes later prices seem like better deals, even if that was the price they planned to charge all along.

What is an example of price anchoring?

An example is when furniture stores tag a couch at $2,000 with a "50% off" sale price of $1,000, even though they always planned to sell it for $1,000. Another example is when software companies show their expensive $999/month plan right next to their $99/month plan to make the cheaper one seem like a bargain.

What is price anchoring in economics?

In economics, price anchoring is when shoppers rely too much on the first price they see when deciding what to buy. This explains why the first price you see strongly affects what you think something is worth, even if that price has nothing to do with the item's actual value.

How do consumers perceive anchor prices?

An anchor price serves as a base of reference for consumers, relative to the price they eventually pay. Anchoring bias establishes an initial value for the product or service in the consumer’s mind, from which they can consider alternatives—a lower price for the product, a different product, or a competitor’s product.

Is price anchoring an effective pricing strategy?

Price anchoring can be an effective way to boost sales for businesses, particularly online retailers. Strike-through anchor pricing, and low and high anchors, may steer customers more quickly to a buying decision. Tiered pricing involves a comparison of prices and options, and customers might need more time to make a decision.

Does the placement of the anchor price have a role in its effectiveness?

There’s an old saying in marketing and retailing: Presentation is everything. How and where you place your anchor price can influence its impact on buyers. As a rule of thumb, put prices front and center, to make the buying decision easier.