Price anchoring: Strategy, examples, and how to use it

What is price anchoring?

Price anchoring is a marketing tactic where a business establishes an initial price to influence how customers perceive the value of subsequent offers. This starting figure acts as a reference point, or “anchor,” against which other prices are compared.

It's a key element of pricing psychology, affecting people's purchasing decisions by focusing on relative value rather than absolute cost.

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Why does price anchoring work?

Price anchoring works because it taps into a cognitive bias known as the anchoring bias. This bias describes our tendency to heavily rely on the first piece of information offered (the “anchor”) when making decisions.

Consequently, when buyers are presented with an initial price, even if arbitrary, it influences their perception of what constitutes a good or fair price for related options.

People naturally evaluate value by comparison. They don't typically assess a price in isolation. Instead, they look for context and compare it to other available options or a previously established anchor.

A higher initial price can make a subsequent, lower price seem like a bargain. Conversely, a lower initial price might make a slightly higher-priced option appear less appealing. Psychological studies have confirmed the power of this effect, showing that anchoring can greatly impact willingness to pay and ultimately influence conversion rates.

Remember: Strategically setting a high or low price point as an anchor helps businesses shape their offerings' perceived fairness and value.

Is anchor pricing ethical?

The ethics of price anchoring are often debated. While it is a legal and widely used marketing technique, concerns arise if the initial anchor price is misleading or artificially inflated with no genuine prior sales history.

For price anchoring to be ethical, businesses should be transparent and make sure that the anchor price is a realistic reference point. Practices that deceive customers about the actual value or history of a price are unethical.

However, when used honestly to highlight genuine discounts or different value tiers, price anchoring can be an effective and ethical way to guide customer perception and provide a clear understanding of the available choices.

Note: Understanding price anchoring is valuable when developing your pricing strategy. It connects directly to creating a pricing matrix, informing SaaS pricing best practices, and overall product and price management.

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Anchor pricing examples

We’ve put together some price anchoring examples to illustrate how businesses across various models can use this technique. Here’s a chart to make it simpler to visualize:

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How to build an anchor pricing strategy in 5 steps

Creating an effective price anchoring strategy requires careful consideration of your offerings and your customers. Here’s a step-by-step approach to building a strategy that works.

1. Identify your target plan

First, determine which of your offerings you want most customers to choose. This “target plan” should be competitively priced and offer a strong balance of features and value.

It's the sweet spot you'll guide your customers toward using price anchoring. Understanding your business goals and ideal customer profiles is key here. You need to know which plan aligns best with your revenue targets and the needs of your primary customer segment.

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2. Design adjacent tiers that make the target feel like high value

Once your target plan is identified, create pricing tiers around it. Include a higher-priced tier with more features or benefits and a lower-priced tier with fewer features. The higher tier acts as the primary anchor, making your target plan appear more reasonably priced and offering significant value in comparison.

The lower tier serves as a budget option, further emphasizing the value proposition of the target plan. The key is to make the value contrast between the tiers clear. The highest tier should seem appealing, but perhaps not necessary for the majority, while the lowest tier should feel somewhat limited.

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3. Use pricing layout and naming intentionally

The way you present your pricing can impact how customers perceive value. Highlight the target plan visually, perhaps by using a different color or placing it in the center. Use clear and benefit-driven names for each tier.

For example, instead of “Basic,” “Standard,” and “Premium,” consider names like “Starter,” “Growth,” and “Enterprise.” The layout should draw attention to your target offering, making the comparison with the anchor price direct. Confirm that the price differences are clearly visible.

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4. Test different anchors across segments

What works as an effective anchor for one segment might not work for another.It’s important to test different anchor prices and tier structures with various customer groups.

A/B testing your pricing page or offers can provide valuable insights into which anchors are most effective at driving conversions to your target plan. Pay attention to how different anchors influence perceived value and the ultimate choice of plan within each segment.

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5. Align pricing anchors to customer expectations and usage behavior

Your anchor prices should align with user expectations and their usage behavior. Researching what your competitors charge and understanding how your customers are likely to use your product or service can inform your anchor pricing strategy.

For instance, if your ideal customer is a small team, anchoring against an “unlimited users” enterprise plan might not be as effective as anchoring against a plan that limits users but offers comparable core features.

Consider how usage limits or included features in higher tiers justify the price difference and make your target plan look like a better fit for the majority.

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Price anchoring in SaaS companies and usage-based pricing

Price anchoring extends in interesting ways within the SaaS industry. When implementing usage-based pricing, you can do it more subtly. Here’s how:

1. Usage tiers as soft anchors: Higher usage tiers in a usage-based pricing model can anchor the perceived value of lower and medium tiers. Seeing the price for very high usage can make the cost for moderate usage seem reasonable. For example, pricing based on API calls or data storage illustrates this.
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2. Feature gating and entitlements: Clearly outlining advanced features in higher-priced plans anchors the core features in lower-priced plans as the “standard” offering. This contrast in features justifies price differences and encourages users to consider plans with a better feature set.
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3. Monthly vs. annual pricing: Offering a discounted annual subscription compared to the total of monthly payments anchors the perceived value of the longer-term commitment. The higher total cost of the monthly option serves as the anchor, making the annual price more attractive.
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4. Usage data for anchor refinement: Analyzing how different customer segments use your product provides insights to refine your price anchoring strategy. Adjusting tiers and anchors based on actual usage patterns can better align with customer needs and price sensitivities.

Note: To further enhance your understanding of pricing strategies in the modern SaaS landscape, we recommend exploring our guides on usage-based pricing and hybrid pricing models, which can incorporate elements of price anchoring in their design.

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Common mistakes to avoid with anchor pricing

While price anchoring can be a powerful tool, several pitfalls can undermine its effectiveness and even harm your customer relationships. Avoiding these typical mistakes is key to a correct implementation:

• Setting anchors too high or unrealistically: An anchor price that customers perceive as absurd or without basis can backfire.
  
  Instead of making your other prices look like a good deal, it can erode trust and make your entire pricing structure seem unreasonable. The initial price needs to have some perceived connection to value, even if it's for a premium tier or a limited-time offer.
• Neglecting actual customer value or behavior: Designing anchor prices in a vacuum, without considering what your customers truly value or how they typically use your product, can lead to ineffective anchoring.
  
  Your tiers and price points should reflect genuine differences in value and align with common usage patterns. Otherwise, the anchors won't resonate.
• Forgetting to adjust pricing over time: The effectiveness of your price anchoring strategy can change as your product evolves, the market shifts, or your customer base grows.
  
  Failing to review and adjust your anchors and pricing tiers periodically can lead to lost revenue or a misaligned perception of value.
• Designing anchors without billing system support: Implementing a refined price anchoring strategy, especially one involving usage-based pricing or complex tiered structures, requires a billing platform capable of handling the different pricing rules, automated invoicing, and potential upgrades or downgrades.
  
  Designing anchors that your billing system can't accurately support will lead to operational headaches and billing errors. For SaaS businesses, making sure your subscription management and billing platform can handle your intended anchors is vital.
• Not testing anchor effectiveness in the real world: Assumptions about how customers will react to your anchor prices can be wrong.
  
  Failing to A/B test different anchors and pricing structures with real customers will leave you guessing at what truly drives conversions and perceived value. Real-world testing provides helpful data to further refine your price anchoring strategy.

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How Orb enables anchor pricing

We've discussed how price anchoring is a powerful strategy, establishing a reference price to influence perceived value and guide customer decisions. Managing price anchoring, especially across tiered plans or usage-based models, requires a flexible and precise billing system.

Orb is the done-for-you billing platform that helps SaaS companies transform price anchoring and other sophisticated pricing strategies into a critical advantage. This is how Orb helps:

• Pricing agility for anchoring: Rapidly design, test, and adjust your price anchoring strategies. Orb RevGraph combines all usage and pricing data in one unified data layer, making it easy to change pricing while keeping invoices and reporting accurate. Orb SQL Editor allows you to define and modify pricing tiers without engineering bottlenecks.
  
  Experiment with different anchor prices for various customer segments using historical data and even simulate their impact with Orb Simulations before going live. Launch new plan structures and test your anchors, adapting to feedback and user behavior.
• Precise billing reflecting anchors: Provide accurate billing across all your price points and tiers with Orb RevGraph. It processes raw event data to deliver error-free, auditable invoices that clearly reflect the intended value perception created by your anchors.
  
  Get transparent usage monitoring that aligns with your tiered or usage-based anchors, building customer trust and preventing revenue leakage.
• Scalable operations: Scale with Orb's extensible API and modular platform. Manage increasing data volumes and the complexities of various pricing tiers and anchors with built-in revenue analytics and customer usage dashboards. Get enterprise-grade reliability as your business grows.
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• Expert partnership in pricing strategy: Confidently implement and refine your price anchoring strategies with Orb's expert guidance. Get dedicated implementation support to set up your tiered structures, benefit from industry expertise in pricing models, and get ongoing optimization assistance.
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• Customer insights to improve anchoring: Gain detailed insights into how users interact with your anchored pricing. Understand which anchor points are most effective at guiding plan selection and driving customer acquisition and user retention. Use Orb's data-driven insights and reports to refine your tier structures and adjust anchor prices.

Ready to start using price anchoring and other pricing strategies to unlock growth? Explore Orb's flexible platform and flexible pricing plans to discover how you can move beyond rigid billing.