Rule #1 of our recently published ChangeThis manifesto…
A few years ago, Williams-Sonoma, the high-end American retail company, offered a home bread maker priced at $279. After a period of mediocre sales, they decided to add a second model—similar features as the first but slightly larger. This new item was priced at $429— more than 50 percent higher than the original bread maker. So what do you think happened?
Sales of the newer, higher priced model were a flop, but sales of the original, less expensive bread maker almost doubled. Clearly there were people charmed by the idea of a quality bread maker. The only thing that stopped them from buying was price. Once the store added the $429 model, the $279 machine was no longer seen as such an extravagance.
This effect on sales illustrates the powerful effect of when you change alternative options associated with buyers’ purchase decisions. When Williams-Sonoma offered just the one bread maker, there was no basis for buyers to determine value other than that single appliance.
And with a price of $275, buyers judged the item to be relatively expensive. But when the store added the higher priced bread maker as an alternative, buyers used it as their “anchor” by which they now relied on to determine value. With the price of the bread maker now anchored at $429, the smaller model became a bargain in the minds of the buyers.1
While the anchoring effects unleashed by the placement of the second bread maker were unanticipated by Williams-Sonoma, it is well-understood and common practice among luxury goods retailers today. Have you ever gone to a Coach store and wondered why the $800bag was displayed so prominently? It’s there, not to be sold, so much as it is to make their large assortment of $500 handbags seem all that more reasonable.
And it’s not just luxury goods retailers who have caught on to this phenomenon. Most restaurants offering wine know that diners will generally not buy the most expensive bottle on the list; rather, they tend to buy the second- or third-most expensive bottle. Knowing this, restaurateurs usually plant an overly expensive bottle on the list to act as the anchor, and then list the next two bottles at a price that looks reasonable compared to the “plant,” but priced high enough to deliver healthy margins to the restaurant.
Value always resides in the mind of the buyer. How price is presented and framed can be one of the most effective tools in your sales arsenal.
1 William Poundstone, Priceless, (New York, NY: Hill and Wang, 2010), p. 156.