Always Be Anchoring

Blair sees high price anchors everywhere—from buying a suit to ordering a burger. So what factors should creative firms keep in mind as they use anchoring in selling their service options? And when is the best time to present the anchor option within the sales conversation?

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“Anchor High” by Blair Enns for winwithoutpitching.com

Transcript

David C. Baker: All right, Blair, I don't know exactly how we should start this one, but let me just say, be careful. I don't know what my role is going to be in this one because you're talking about fashion. Nobody thinks of me as the fashion guru and then you want to start to talk politics, and of course that always ends well. I'm just going to throw it to you. I know the title. It's always be anchoring. Take it away, sir. I'm going to go get some coffee. I'll be back in about 25 minutes, and I'll save the crowd from your ranting.

Blair Enns: Listener, I said to David, I want to start this topic by talking about Donald Trump. Three, four, five.

David: That sounds smart.

Blair: I don't want to hear from you, listener, about Donald Trump pros or cons, because it's not really about his politics. It's about something that he does and he does very well, and it's helpful to look at what he does through this lens of anchoring. If I said to you, David, I'm the newly elected leader of a large and prosperous country, and I said to you--

David: Wait, can we just pause there?

Blair: [laughs] Let's keep this hypothetical and abstract. No, let's get specific. Some of the first few things Donald Trump said on taking office-- again, this isn't about his politics, and I don't actually care what your view on him is, you're entitled to it, I don't want to hear whether it's pro or con. As I said before, I am completely devoid of any political ideology, so I can actually have a conversation about these things. Donald Trump takes office and one of the things he says right away is he starts calling Canada the 51st state.

David: You're from Canada, for the record.

Blair: Yes. Here I am in the 51st state. If this were a different topic, I would negotiate with him on this.

David: You are digging so deep. Keep going, sir.

Blair: We've lost half the audience. Canada, 51st state. I want to take over Canada. I want to take over Greenland, and I want to take over the Panama Canal. Everybody loses their shit. I'm not saying you don't have a right to lose your shit. These are issues of national sovereignty and they're taken very seriously and have been taken very seriously here in Canada. I, somebody who knows something a little bit about negotiating, see it for what it is. I'm not saying it's all it is. It could be a whole lot more because with this president of yours, who knows what's really going through his mind?

There's something clear that he is doing. He is anchoring. Just think of it this way. He's a guy who thinks he can negotiate anything. The lens through which he looks at almost every challenge he faces, in my estimation, is this is a negotiation and I can win any negotiation. I think that's what he thinks. He's doing what is essentially the first rule of negotiating, is he's anchoring. He's moved the Overton window. There are the unsayable things that he says. The idea with the Overton window is something starts out as unspeakable and then eventually it becomes policy as the window moves around this topic.

He starts out by throwing out an outrageous opening position, and in the end, he's going to settle for something far less than what he anchored against and he will have succeeded. Again, I don't really know what he wants, but I know he's going to get something on each of those three areas: his relationship with Canada, his relationship with Panama, his relationship with Greenland. I know some people are such political ideologues, they want to talk about their feelings about what's going on. I'm not saying your feelings are invalid. I want to open with this story because Donald Trump is always anchoring. The title of this podcast is Always Be Anchoring.

David: Always Be Anchoring. This is where the fashion comes into play. I can think of various stories. In fact, I'm really excited to talk later about a specific test we did, the two of us did one time. I can think of where it happens in our marriage and so on too.

Blair: You and I are not married. Let's just keep that--

David: Oh, yes. I don't mean you and I.

Blair: Oh, in your other marriage. Your other marriage.

David: Speaking of which, last night because of what's just happened, we decided to watch Conclave.

Blair: Isn't that a great movie?

David: Yes, it was. The way it ended surprised me. Anyway, so we're in the bathroom. We're each brushing our teeth. I rinse my mouth out and I say to Julie, "Do you think I could have ever been elected pope?" She said, "No way. Seriously?"

Blair: You're not Catholic. Go on.

David: I said, "Really? Why are you just immediately ruling out?" Then she thought for a minute. She said, "Maybe they weren't really great people."

[laughter]

Blair: Married 40 years here.

David: Here, you're talking about maybe being president and using high anchoring. You're talking about a real president that does high anchoring. I'm losing all of my elections, my supposed elections. You have a story. I've heard you touch on this before where somebody did anchoring on you and you even knew it was happening and it still worked. Right?

Blair: Yes. Let me tell that story. I've written a post about this recently called Anchor High. We'll link to it in the show notes. First, let me just explain what anchoring is. We've talked about anchoring before, but we haven't done a whole podcast on it. Anchoring, it's also known as anchoring and adjusting. The anchoring effect is the idea that the first piece of information that you're exposed to on a subject, any subject essentially, will ultimately skew your final decision on that subject. The term was coined by Kahneman and Tversky, both of whom are no longer with us. They call it anchoring and adjusting.

Kahneman's book is called Thinking, Fast and Slow. He talks about system 1 form of thinking and system 2. System 1 is heuristics, it's shortcuts. We use these heuristics, these rules of thumb, these mental shortcuts to make a quick decision on something. Then if it's a big decision, we embrace or engage system 2, which is a slow, deliberate, methodical, often uses mathematics form of thinking, that's a form of reasoning.

What Kahneman and Tversky noted is that in most decisions, we use a heuristic first. The heuristic might be just the first number we hear in price negotiating. We start there and then we adjust away. What all the research shows is that the cognitive load required for reasoning away from the initial starting point, and the starting point, if somebody else gives it to you, is known as an anchor, it's so much cognitive load that we don't do all of the work that's necessary, so we stop before we're fully reasoned away from the starting point.

If you can set the starting point in a negotiation and have your opponent, instead of having them start at the opposite end of the spectrum, they will start at your point - so, taking over Greenland, Canada, Panama - and reason away from that, and they will ultimately arrive on average at something that is more in your favor as the person who anchored high, closer to your end of the spectrum, and further from their end of the spectrum. Does that make sense?

David: Yes. Another way to think about it is somebody goes into a negotiation. I'm the buyer and I think, I know that this price, I'm not going to pay whatever the price is. In my mind I'm thinking, oh, probably I want to negotiate 20%, 25% off or whatever. Then they anchor really high. In my mind, I don't have the energy to start all over. I just say, oh, 20%, 25% off of that higher price. I still get my discount, but it's a discount off of a higher, and it may end up being way higher than I should have paid anyway. It's just a mental shortcut. I see it happening all the time when people do this to me. Even when you know what's happening, it's almost impossible to resist it really.

Blair: The fact that when I first started talking about anchoring, there were no known ways to undo the anchoring effect. The last time I checked, which is a couple years ago now, there are three known ways. We could talk about that later. Effectively, in price anchoring, it simply means when you're negotiating, if you are the seller, start with a really high number. If you're the buyer, start with a really low number. That's effectively what it means.

David: Oh, wait. Anchoring works in reverse as well. That's not something I realized.

Blair: If you don't anchor high as the seller, your client will anchor low as the buyer.

David: Oh, so first wins in a sense, sets the rules of the game.

Blair: The way I think about an anchor, specifically in price anchoring, but we're going to talk about anchoring and things that aren't also price, the anchor to me is like the moon hanging in the sky, pulling toward it the tide that is the average settled price. That's a pretty profound metaphor, I think.

David: I'm just going to go with you. I don't have the cognitive load to argue with you on that point. I'm just going to go with you that it was a great metaphor.

Blair: I was expecting more than just "right". Let me tell the story about the suit that I bought. 2018, Pricing Creativity: A Guide to Profit Beyond the Billable Hour comes out and I feel like, I wrote a book about money or pricing, I should look like money, I need a new suit. I had a very specific idea of the suit I wanted and I thought I was going to buy it at a store in London the next time I was in London. My wife and I were in a mall in Vancouver and I'm walking past the store I used to shop in when I used to be able to afford to shop in the store when I made way less money. I don't know how my income didn't keep up with the store because I hadn't been in there in years.

I thought, you know what? I've got some time to kill. I'll see if I can buy this suit here. I find a salesperson and I tell him the cut of the suit, the cloth, the color, the style. I tell him my budget and I say, "Can I get this suit for this price in this store?" He smiled. He didn't say yes, he didn't say no. He smiled and said, "Come with me." I followed him. He took me into this corner of the store and he said what I knew he was going to say.

He said, "First, let's try this on for size." I thought, I know exactly what you're doing. You're putting the most expensive suit on me because you want to anchor high. He puts it on, it fits me perfectly. I look in the mirror and I think, man, I look good. He does what they all do. He leaves for a minute so I can be alone to look at the price tag. I look at the price tag. I know this is coming and the price is so big. I just choke on it and I can't get this thing off me fast enough.

David: Did you remember what the price was?

Blair: I think it was $6,500.

David: Oh God. That's even higher than I thought.

Blair: I had a pretty big budget for this suit, but it wasn't $6,500. I hadn't bought one in years. He comes back and I've already got this thing off and I hand it to him. I said, "I know what you're doing. I've written a book about this." He just smiled and said, "Come with me." He puts a suit away and then he tries another one on. I look in the mirror and I think, damn, this looks good. I look at the price and it's only 1.8 times my budget. It's only 80% over my budget. I breathe a sigh of relief. I think, I'm buying this suit. I'm standing there looking at myself in the mirror. I'm wearing running shoes.

He said, "Do you want to see what the suit looks like with a pair of dress shoes on?" I said, "Sure." I give my size. It was a gray suit. He comes back with gray shoes. I don't own any gray shoes. I love shoes. I think shoes are the window to the soul. He puts these shoes on me and I look in the mirror. I think, damn, I look good. I said, "How much for the shoes?" He goes, "$1,100." I'm thinking, this is getting really expensive really quick. In the end, my wife texts me, "Where are you?" I say, "I'm buying a suit." She says, "I'll be right there. Don't spend money."

David: Did your heart fall when she texted you?

Blair: I ended this post saying I still think about those shoes. I didn't buy the shoes. She comes into the store. She's running towards me. She sees I haven't bought the suit yet.

David: To rescue your family budget.

Blair: I'm still wearing the suit and the shoes. She said, "Oh, you look good. How much?" I gave her the combined price with the suit and the shoes. She chokes on it. Then I say, "The shoes are $1,100. I don't think I'm going to take the shoes. Just the suit, just 80% over my budget." She sighs a sigh of relief. The salesperson anchors high with me, changes my reference frame so that 80% over my budget is acceptable. Then I almost spend a bunch more. Then I use the same effect on my wife to sell my wife the suit.

David: This is where you hope she doesn't listen.

Blair: We walk out of the store, everybody's happy. I'm 80% over my budget. My wife is happy. I'm happy. The salesperson is happy. All because he anchored high. Let me first try this on for size.

David: You don't think he had any expectation of selling that $6,500 suit to you?

Blair: That's the thing about an anchor price option. We talk about, and we've done an episode on this, the importance of offering options in your proposals. When you're anchoring high, there's more to it than this. When you are in the closing conversation with a multi-option proposal, you always start with the most expensive option. The job of that anchor price is not to sell that anchor solution. The job of that anchor price is to set the context for the decision and to make the other prices look more affordable in comparison. The job of that price tag on that suit that he put on me "for size" was not to sell me that suit. The job of that price tag was to sell me the other suit that was 80% over my budget.

David: What percentage of the time do you think a client in our industry actually chooses that higher anchor price? That's part A of the question. Part B of the question is, should you be excited about it? Do you want to ever sell that anchor thing? Are the promises so wild that you don't actually make a lot of money? Psychologically, how does the seller think of that anchor price?

Blair: Those are really good questions. The first one about percentage of the time, I don't know. I don't know what the average is. On average, your client should end up in the middle. There's the odd buyer. Just like there are price buyers who will always buy the least expensive one, there is a buyer, I don't know what you would call them, extravagant luxury buyers or extravagant value buyers, who always have a tendency towards the most expensive one. I've had clients buy from me and say, as a rule of thumb, I always buy the most expensive one. I think that's an odd thing to admit out loud, but there are people like that.

On average, people will end up in the middle if you're constructing your proposals properly. To your point, when somebody chooses the anchor option, yes, you're celebrating, but you've also-- you're on the line now. You're committing to either doing a lot or making a lot of risk go away. The way you make risk go away is you take it on. That might mean some form of performance pay.

You might think that you are happiest when your client chooses the anchor option, but that's not necessarily true. I think when you've constructed your options properly, you're happy with whatever they choose because the cheap one, you've stripped out all the value drivers and it's not a lot of money, but you don't have to do a lot for it and it's still quite profitable. On the high end, it's a big number, hopefully a really big number, but there's a lot of work that goes with it, and maybe even an increased amount of risk.

David: That's why I was asking that question, because you almost have to anticipate that every once in a while, somebody will choose that. When that happens, you have to be mildly excited, but also it better be enough money to compensate for all that risk. There's probably some data on this next thing. I've always wondered, when you go to buy something and there's all these items and you decide how to sort buy, and then there's high to low or low to high, I wonder how many people choose high to low knowing, I want to anchor this, I'm not going to spend the most expensive, I'm going to choose something else, but this will help set the-- What's another example of anchoring that you see out there besides the suit story?

Blair: I wrote something, I think it was a LinkedIn post about, it's so big, I bet you can't eat it, menu item.

David: 36-ounce steak.

Blair: Yes. 72-ounce steak. Anybody can eat a 36-ounce steak, David.

David: [laughs] Not me.

Blair: I wrote a story about a burger in the city an hour away from where I live, the city of 10,000 people. There used to be a burger joint. They had a King Kong burger. If you ate it, you got it for free and you got your name written on a record that they hung from the ceiling. I ate it, I won, it hurt. People don't realize, it's a little bit of a marketing gimmick, so it's a bit of a hook, but it really is an effective price anchor because I think the price of that burger was something like $36, a crazy amount of money for a burger.

You pull out the menu, and you can tell when a menu has been designed by a pricing expert, because there's a box and they have these high-priced items in the box and your eye is drawn to the box. Then right below the box, there's the thing that they want you to buy. In the box in these restaurants is, in this case, it's the burger for a crazy amount of money and you're so intrigued by it and you have a conversation with your table mates about it. Then one of you orders it and it's fun. Most of the time, you don't order it. Your eye moves from the $36 burger to the $19 burger and you order the $19 burger. Feels like a bargain.

David: All of this was theoretical to me, honestly, until we used to do this event together and we had a survey that would go out to people ahead of time, and you suggested, I'm going to talk about anchoring in this thing, let's illustrate this to people. You designed the survey that had a split A-B response. I was blown away at how real this became. You want to talk about that a minute?

Blair: There were 70 people coming to an event we held in Atlanta, Georgia, about 8 or 9 years ago now, maybe 10, I don't know. 70 business owners coming to this event. We emailed them all and I asked them this question, "Thinking of the firms that will be in the room on the day of the event, what's your estimate of the average blended hourly rate?" At the time, nobody knew who else would be in the room.

The control group mean response was $171 an hour. The control group was the half of the audience, 35 people, who just got this question. "What's your estimate of the average blended hourly rate of the firms that will be in the room on the day of the event?" The mean response was $171 an hour. The anchor group, I asked them the same question, but before I asked them that question, I first anchored high with another question.

I said, "Do you think the average blended hourly rate will be higher or lower than $500 an hour?" Everybody answered, I think it will be lower. Then I asked them for their estimate. The anchor group mean response was $237 an hour. It was 38% higher. By anchoring with $500 an hour, everybody said, it's going to be lower than that. By using that anchor, I caused them to think about the more sophisticated, more expensive firms that they knew or could imagine. Then when they gave their own estimate, it skewed higher.

David: One of the reasons it did that was because you started with that. You've got some ideas about how we put price anchoring to work. That's one of the keys to implementing it, is to throw that anchor out very early, including when you've got multiple prices, don't leave that to last and so on. You want to walk through some of these principles to make this work.

Blair: Large numbers first. Price anchoring is basically start with the large numbers first. What does that mean? It means when you're offering a range, it might be as much as X to Y. Actually start with Y, start with high end. It might be as much as big number, two, three, four, depending on the variables, two, three, four, and on the low end, low number. The reason you're pausing, so you're anchoring and then you're pausing and you're waiting for information to come back, that's a whole other topic. Just start with the high number. Don't go low to high, go high to low.

It also works, just throw out big numbers that have little to do with the project. Some of the initial studies on this had to do with people's social insurance numbers. They would ask them the last two digits of their social insurance number, and then they would ask them to estimate something. People who had higher numbers skewed their estimates higher.

David: Wow.

Blair: There doesn't have to be a lot of correlation. Obviously, it's helpful when there is some, but even just big numbers. To that effect, you start anchoring in the value conversation that precedes the closing conversation. You're throwing out big numbers early, even in the value conversation, about the value to be created, any other big numbers you can think. Just have a conversation about things in the millions of dollars. You're throwing out high numbers in the value conversation. It might be as much as really big number. Then in the closing conversation where you're sharing your multiple-option proposal, you would reference that conversation you had in the value conversation.

Again, throw out those big numbers. I said it might be as much as this on the high end. Then share your options beginning with the most expensive one. Generally speaking, pricing information after that should just get better. Big numbers early. Early in the value conversation that precedes the closing conversation. The first numbers you talk about in the closing conversation are big, maybe not quite as high, not quite as big as they were in the value conversation. Then you go through the cheaper options after that. The numbers, the prices should just get better and better after the anchor. Does that make sense?

David: It does. I need clarification on one thing. If I understand this correctly, you're talking about presenting the high anchor largely in the context of a conversation. When I see written proposals and I see multiple options, Actually, I can't think of an exception to this. I always see the higher one as the last of the three. Now, we did an episode before where you made it very clear that the good, better, best thing, that's not just saying, here's the price and here's a higher price, and here's it. It should be a different way of working. The higher one has more risk but more reward, and so on. Why is it that in printed proposals, the higher one is last and not first?

Blair: You're thinking left to right, low on the left, high on the right. It doesn't matter. I've experimented with both. It doesn't matter where in the document you put them. The most important thing is it's the number that you say first.

David: Conversation.

Blair: Yes. My suggestion is that you say the anchor price. I've got different ways we can do this, different ways you can engage us at different price points. Let me start with the most elaborate, most expensive option. It's priced at boom, big number. It's not until you say it's priced at boom, big number, it's not until you say the anchor price that you show anything. You don't show anything until you've said the big number.

David: That clarifies that.

Blair: There's all kinds of reasons for doing that we won't necessarily get into here.

David: This goes way beyond price too, which is really interesting thought to me. You could apply this to what sort of things you promise to do in a fulfillment setting or how much time, or whatever. It can work both ways, up and down.

Blair: Here's an example of how creative firms flirt with anchoring, how they intuit this idea. I see a common mistake. I have worked for, back in my career when I worked for agencies as an employee, I have been in multiple situations where the creative director or the creative department said, "Blair, here are two different options to present to the client. Here's the safe option that they want. Here's the risky option that we want them to take." Then we've done this other really crazy risky-- It's so risky there's no way they're going to take it. Show them that one, too.

They had this idea that they're framing the decision and moving the safe zone of the decision into the middle. There's a principle I've talked about before known as extremeness aversion, where it says when we're presented with multiple choices, we retreat from the dangers of the extremes to the safety of the middle. I've been in many situations where I'm presenting a throwaway. You might consider it an anchor option. It's the risky creative one that just moves the safe zone for the client.

The mistake that I always made was I showed it last. I would say, here's the safe one, here's a risky one, here's an even riskier one. The way to do it, if you want to anchor high here, my advice to young Blair would be to say, go in and say, we have three different creative executions. Let me start with the most out there, the riskiest one, however you want to frame it. It's the least conventional. It's the most different.

David: Stretches you the most.

Blair: Then present that one and have a conversation about that. I said prices should get better, but when it comes to presenting options, I like to go from one extreme to the other extreme and show off the contrast. I would go to the safe version after that, just like I would go to the lowest price option after the anchor one. There should be some disappointment in this safer option. It's like, it's not as exciting, it's not as risky, it's not as daring. It's a little bit boring.

When we're talking about pricing, I said there are dangers at the extremes. At the anchor option, the danger for the client is they will overpay. At the cheap end of the spectrum, the danger is that they underbuy. It's the same thing with creative concepts. Oh, this is pretty tame. Then I would say, I have this other option in the middle. It's somewhere between the crazy, out-there option and somewhere between the safe option. I've now moved the safe zone to the middle. My expectation is the client will choose that safe zone.

David: This will get you noticed, not fired.

Blair: I think a lot of people listening intuit this. You've been in situations like this before where you've presented a variety of creative options. You've had a really crazy, out-there one to frame the decision as something against which to compare the other options. If you're going to do that, it's not an anchor unless you lead with it. Anchor high.

David: Anchor high.

Blair: Start with the most expensive or the craziest out-there one.

David: If this makes you a little nervous, it should, but start stretching yourself by anchoring, thinking how this could impact you as well. What's the thing that you inject yourself with right after the snake bite? How do you counter an anchor?

Blair: What's the anti-venom? How do you counter an anchor? I said, when I first started talking about it, there were no known ways to counter an anchoring effect. There are three known. There might be more now. I haven't looked it up. You'd think I'm doing a podcast about it, I should do some research. That's just not in my nature. Three different ways to counter the anchoring effect. Your clients don't know what they are, but they can build on each other.

The first thing you do is you reject the anchor. You say, no, there's no way I would pay that price. Let's use this for when you are buying something. Somebody anchors high against you. You use it the other way too when the client anchors low. Let's say you're buying in a negotiation. The seller throws out a really high price. What you do is you reject it. Instead of countering, you get them to take it back and come back to you with a new number. You absolutely reject it. Again, these can build on each other.

The second thing that's been shown, I don't know if this has been replicated, and I forget who did the initial study, you physically shake your head "no". As you're saying, "There's no way I would pay that amount of money. You need to take that back and give me something realistic," you are physically shaking your head "no". I don't know why that's important, but apparently there's a study that says it works. Then the third one, I forget what the specific more scientific language is, but my interpretation is you throw a hissy fit. You get emotional about it. You get visibly upset over it. "Are you crazy? No, that is a ridiculous number," shaking my head. "You take that back. Let's get real. Give me a real number."

David: Let's re-frame this in human terms. Let's have a real conversation. That's not even in the ballpark. Stop that. I hope people can run with this and just experiment with it. Probably experiment in your marriage first. No, just kidding. Try it with your kids. Then try it where money's at stake with your client. This is great. Thank you, Blair.

Blair: Thanks, David.