“Anchoring is defined in simple terms as the usage of some primary or first impression information that the consumer views which serves as a bias to influencing subsequent buyer decisions or assumptions.”

For example, if you first see a pair of jeans that costs $1,000 and a second pair that costs only $100, you're more likely to see the second shirt as cheap. Whereas, if you'd' merely seen the second shirt, priced at $100, you'd' probably not view it as cheap.

The anchor – the first price you saw – unduly influenced your opinion. The number ‘1000’ was an anchor to bias your subsequent action of viewing the second pair of jeans as ‘relatively cheap.’

PARIS VS ROME:

In Dan Ariely's book, “Predictably Irrational,” he gives a great example of an anchor with a subtle twist. Let's say a vacation/travel agency allows potential customers to go on a five-day holiday of their choosing. The two destinations are Rome and Paris. These holidays are free, including everything – flights, hotels, travels, etc.

For most unbiased people, this would be quite a difficult decision. Both cities have interesting cultural backgrounds, great food, age-old and world-renowned monuments, etc. and from a customer's perspective, choosing between the two is a tedious task.

However, if you add in a third choice in addition to the first two – Rome with all the features of the other two options but without free coffee in the morning.

The actual value of a coffee in comparison to the entire value of the trip is minuscule. But this tiny difference causes customers to anchor their final decision against this third, less appealing option. The idea of going to Rome, and having free coffee, is superior to going to Rome and paying for coffee in the morning.

Moreover, perhaps most importantly, Rome with free coffee also becomes superior to Paris with free coffee. Rome without free coffee became an anchor against which the customer based his actions and was relative to the decision made.

NEWSPAPER SUBSCRIPTION:

This is a famous example taken from the pricing structure of the popular newspaper “The Economist” by a few researchers. They surveyed 100 MIT students about those pricing options and got these results:

You might ask: Why did the Economist even bother with that $125 “print only” option? They conducted a second survey that shows why. In the second survey, the researchers removed the $125 “print only” option and asked a separate set of 100 MIT students what they would choose.

Here's what happened:

The conclusion: The mere presence of the “print-only” option--even though no one chose it-prompted a much higher percentage of people to choose the more expensive ($125) “print and web” option.

When all the $125 and $59 sums are added up, the difference would have amounted to 42.8% more hypothetical revenues for the Economist. “Print and web” for $125 seem like a much better value when it's' anchored by a $125 “print only” option and a $59 “web only” option.