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Pricing – Insufficient Adjustment Anchoring



This article concerns the underlying psychological factors business managers should consider when thinking about effective pricing. The definition of price this article will be working with is the following: Price of something is the total cost of adopting the product which includes purchase price, cost of switching, inconvenience and disposal. Each market segment can be characterised by dissimilar price sensitivity factors including: ratio between total and disposable income, level of involvement in purchase, ease of comparison, switching cost and perception of the market price of product (anchoring and heuristics).

The decision to buy, as far as the price of the product or service is concerned, depends on valuation. It is positive if the valuation a consumer makes of the good is greater than the actual price, and vice versa. Valuation is a cognitive process and consists of two underlying factors: Anchor and Insufficient Adjustment. Anchor is a piece of information (a reference price of the same or similar product) stored in person’s memory which is relevant to the item subject to valuation (a product). The process of valuation continues until adjustments fall within an implicit range of plausible values and this is an Insufficient Adjustment. (Epley and Gilovich, 2012).

Reference Pricing is a process of displaying the price of a product together with price of the same product sold elsewhere. A reference price is a kind of ‘artificial anchor’ where the seller facilitates the process of insufficient adjustment by subjecting the buyer to the anchor (in this case at the POS – point of sale). The routines in the process of buying are structured according to Heuristic. The human mind develops rules (software of the mind) which govern the processes of information processing when making decisions to buy. Marketers can blur proper functioning of Heuristics by using arbitrary and random numbers to distort valuations.

Most basic pricing methods are:

• Demand pricing – prices are altered or lowered according to the supply and demand for the product or service. The higher the demand the higher the price.

• Skimming – is the practice of starting with high price for the product than reducing it progressively as sales level off.

• Timing – is a procedure in pricing which helps managers predict repeat purchases. Marketers, mainly using CRM systems, can remind their customers about subscriptions. Here, the most obvious catch is if payments are disassociated from benefits the consumers gradually forget about them.

 

Reference
  • Maciejovsky, B., 2012. Anchor and Insufficient Adjustment, Consumer Behaviour. Imperial College London, unpublished.
  • Epley, N. and Gilovich, T., 2012. The Anchoring-and-Adjustment Heuristic. Why the Adjustments Are Insufficient. [ONLINE] Available at: http://www.psych.cornell.edu/sec/pubPeople/tdg1/Epley&Gilo.06.pdf. [Accessed 10 November 2012].

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An experienced marketing manager with proven success in starting up businesses and Imperial College London graduate. Please don't hesitate to contact me if you need help with the topic described on this page.

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