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.
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.
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?
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.
Yes, she is good :) Her accomplishments included talking herself out of four speeding tickets and from going to jail in Columbia. We'll know soon how well she's doing that magic in selling our product!
To add to this, my Dad also uses this with car sales people.
1. He picks the absolute bottom price.
2. Calls up the area dealerships within 50 miles
3. Tells them the model, price and his phone number to call back when they are ready to give him at his price
He totally shuts off any attempts by the sales people to erase my Dad's first number with their own by insisting he does not care about any extra features and other bs. His number is also terribly low(ALMOST but not totally in the you're joking category) so typically he can get the car within $500 of his quoted number. What does work for him is he communicates certainty of his decision to buy a car which is a tad easier because he is a surgeon.
I agree with you that it seems like there should be an upper limit. But if this article is correct about there not being a rebounding effect, then asking for an extravagant amount seems like your best move. Although I'm guessing that things are a bit different if they haven't indicated whether they plan to hire you or not, i.e. if this is something discussed in a screening interview, asking for an exorbitant salary will likely prevent you from moving forward. I'd also guess that in a trial, the plaintiff has no continued relationship with the jury, while in a job you probably don't want to have the reputation for being the person with completely deranged views of reality.
You make good points. But I think the difference is that juries have an absolute duty to try to be just. I think a lawyer is extremely unlikely to loose a case by trying to ask for too much money. On the other hand, a job candidate can loose the entire offer.
If someone asks for a few grand more than what I was thinking, I think we can work something out and start negotiating. If someone asks for more than twice what I was thinking I may just keep looking.
While I hope to never be negotiating for a salary again, here's what I'd say when asked about a salary in a hypothetical job interview (to have my cake and eat it too):
"What kind of salary do I want? That's a hard question, especially in light of the fact that working with you guys is the most interesting opportunity I'm evaluating. I'd expect offers around [insert aggressive number], but again- let me stress that I'm really excited about the idea of working with you. So if you guys can't afford that, I'd still really be interested in hearing your best offer."
I don't know if you'd want to make it extremely clear that the employer is your first choice and you would like to negotiate your salary to a lower point. It seems like you'd want the exact opposite of that.
I think it depends on how aggressive your aggressive offer is. It seems if you make a very aggressive number, you definitely want to signal strongly that you are willing to come down so they don't just move on to someone who starts with a lower number. And according to the article making that first offer very aggressive indeed seems to be taking advantage of the anchoring effect.
Yeah, if I thought I was worth $100k (and that they were going to offer me that), my aggressive # might be $150k or $200k. It's unlikely that they'd say, "Well gosh-- he really likes us, so let's offer him $80k".
There's also a lot of powerful psychology about saying that you really want to work with them rather than playing hard to get. By saying, "you're my favorite!" (truth or not), you're establishing with them (in their minds) that you're an exceptional judge of character. :-)
That's kind of what I did for my first fulltime job, starting in a few weeks. I'm being paid about half what I would be at BigCo (and what I was, even, during my various internships), but the quality of the work and people make up for it. Oh, and the stock options, too.
Yikes -- I don't know the specifics of your situation, but it's awfully risky to give up 50% of your potential salary if you're not a founder. If you're getting a very significant equity stake maybe, but would have to be a pretty incredible opportunity for the risk/reward ratio to make sense.
The reason for this advice is that the employer and the employee often have a number in mind when they enter the room. If the employee starts with a number below what the employer had in mind, the employer accepts it. If it is too high, the employer will suggest something lower, and the employee at least can’t go higher, and will likely end up lower than the number he gave.
So you could say a better advice is to say your number first, but make it 150% of your actual number.
On a related topic, a lot of tech guys I know undersell themselves. I have two employees and I asked both of them to go first, for the first one, I gave him more than he asked for :)
Because most people want to look reasonable at a job interview.
However, one thing people miss is that the anchoring can be to any number whatsoever, so you don't even need to talk about what you want per hour. I remember a paper that asked participants to note down the last two digits of their social security, and subjects anchored themselves to that (statistically significantly- one of the authors was Dan Ariely).
So, at the job interview, I am guessing just saying "You know, at my previous company, they had 98,000 employees" could anchor the interviewer to that number. Of course, this anchoring would be weaker than "$1M", but you could cut out the embarrassment bit.
It wasn't just naming a large number: It was taking a random number (last 2 social security digits), writing it down with a $ in front, compare it as price to certain products, and THEN bidding on them. Not just naming a big number.
It's in one of his 2 TED talks, which both are great to watch.
I remember a paper that asked participants to note down the last two digits of their social security, and subjects anchored themselves to that (statistically significantly- one of the authors was Dan Ariely).
Do you have a link? I am very skeptical that merely tossing out large-sounding numbers during an interview would have any influence on your likely salary range. In situations like that, your potential employer usually has a preconceived idea of what a "reasonable" salary for the position is; intuitively, you'd need to make a fairly strong suggestion to get them to anchor on a different figure (rather than, say, the salary they are already paying to other employees in a similar job function).
Btw, note that initial anchors grossly affect the decision; subsequent anchors are less effective. So, if the interviewer already has a figure in mind (or worse, has written it down), then you really have a lower chance of swaying the number. "making a fairly strong suggestion" may not move the anchor much.
However, if neither knows a reasonable number, then any anchoring is significant (including numbers not pre-pended with a dollar sign- Kahnenann's 1974 paper).
I worked through a recruiter for my current job, so I was asked to name a salary up front to make sure it met the client's frame. I named a price some 20% higher than they wanted to pay max, but in the end, the client (now my employer) came up 10% above their max to get me to join.
I've heard this advice too and wonder the same thing.
Perhaps not naming a number early is important because it takes time to figure out what the other side would potentially pay. Asking for $10,000 when someone could only pay $100 might be a terrible strategy. But if you figure out they could pay $1,000, then asking for $10,000 might not be too bad.
The trick is to wait until you know more before you set the anchor.
I think the point there is that you need to name a number first, and be very aggressive about the number you pick. If you start with a number that you think is "agreeable", you'll end up with less than you could have gotten.
Its all about the delivery. I can say that I want $300k salary on an interview for $80k salary. However it is how I say it, to indicate that my self-worth is $300k but I can settle for 80. They might actually bump it up to 85 because they feel that I am a worthwhile person. But I won't say
"How much were you looking to get paid?"
"$300,000"
It would have to be as a joke, in some context where they know I am placing high self worth and the number is just a manifestation of it.
The anchoring is all about worth. Your brain questions "what is the value of the following item/service" to which your memory tells you "no records found". Now the brain has no context, it must make one up. The anchoring is all about creating the context. If the context already exists, anchoring won't work, or will work marginally well (needs to be proven, need some salesmen comments plz).
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.
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.
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.
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?
I don't expect those prices to stay up at $9.99 for long though. That's just an artifact of there being relatively few iPad-only apps right now. That'll change soon & competition will drive prices down.
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.
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.
On a side note, it also seems inexpensive because it's $499 and not $500! Psychological pricing is one of my larger pet peeves...
Ditto. That's why I round up when somebody asks me how much something costs. The mathematical error resulting from using $500 instead of $499 is much less than the psychological error induced by the smaller first digit.
It really drives me crazy when I'm discussing products with a salesperson and they consistently "correct" me every time I mention the rounded-up price. It goes like this:
Sales: So it looks like the $299 point-and-shoot might match the features you're looking for, moreso than this $399 video camera.
Me: OK. I'm really leaning towards the $300 one.
Sales: $299.
Me: Yeah, sure. Because I don't know if I'm really going to get my money's worth, paying an extra hundred for the $400 one.
Is that really something you experienced? That didn’t ever happen to me. If a salesperson treated me like that I would pretty much immediately lose all respect for them.
That's what they've been told to do, it's not their fault. It's like if you go into a Pepsi venue and ask for a coke, they will always say "Pepsi". Now I just want some sort of cola-flavoured beverage, I'm not that fussed, and they know that, but I don't think "this person is such a pedant" or think I'm being disrespected.
Believe it or not, I actually appreciate this, since if I ask for a Coke and I get a Pepsi, I can tell and my tastebuds are disappointed. So if they say, "Oh, we only do Pepsi," I can say, "Then, I'll have a water," or something.
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.
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.
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"?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
>>>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.
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.
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.