What Is The Anchoring Effect And Why It Matters In Business

The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Understanding the anchoring effect

The anchoring effect is part of an entire field of study researching how the brain determines value. Dubbed neuroeconomics, the field is a mixture of economics, psychology, and neuroscience and how these disciplines play a role in human decision making.

Indeed, the anchoring effect is a powerful strategy that businesses can and do use to influence consumer behavior. 

When a price anchor is established, it gives the consumer a frame of reference for valuing the product. In a $100 pair of shoes that is discounted to $75, the original asking price of $100 is the anchor point. It allows the consumer to deduce that the shoes have been discounted by 25%. More importantly, it leads them to believe that they are receiving a good deal.


Within reason, the definition of a “cheap” or “expensive” product is open to interpretation. In other words, price is always relative and judged after comparison to similar products. Since consumers tend to desire the highest reward for the least amount of money or effort, marketers can use this to their advantage. 

For example, a cloud storage company could offer a premium plan of $1,000 per month with unlimited storage and a standard plan of $200 per month offering 750 gigabytes of storage. Most consumers will sign up for the standard plan because they don’t need unlimited storage. Because of the $1,000 price anchor, they’ll also believe they are saving $800 a month. The business, on the other hand, deliberately created the premium plan to make the standard plan look more attractive in comparison. In this scenario, it is a win-win for both parties.

The power of suggestion

Price anchoring is also effective when there are a large variety of products. With such variety, some consumers have difficulty making decisions on what to buy. Their decision anxiety is such that they might walk away from the purchase altogether. 

Businesses can use the bandwagon effect and price anchoring to relieve this anxiety. For example, a bookstore may feature a bestseller section with popular books and an anchor price of $20. Here, the anchor price provides a frame of reference for the consumer who may have only wanted to spend $15. But since many other consumers are buying books at this price, it must represent value for money. This in turn reduces decision-anxiety because the consumer assures themselves that the $20 price anchor is a good one.

A tendency to avoid extremes

As a general rule, consumers like to avoid extremes. Most will order a medium coffee in a cafe instead of a small or large one. This tendency to sit in the middle is something that businesses exploit through price anchoring. 

Consider the example of a hosting company that offers three levels of hosting – basic, premium, and professional. Here, the company effectively uses the price of the basic and professional level packages as an anchor to push consumers to the premium level. Regardless of industry, businesses that offer a complete range of products can take advantage of this tendency to avoid extremities. Instead, the consumer is directed to the product that the business wants them to purchase.

Key takeaways:

  • The anchoring effect is a basic human tendency to rely on initial information (the “anchor”) to make future decisions. Price anchoring is therefore the process of using an initial price to influence consumer purchasing decisions.
  • Businesses can use the anchoring effect to influence consumer buying behavior through exploiting cognitive biases and tendencies.
  • The anchoring effect allows businesses to direct consumers to a target product. This is achieved through perception, suggestion, and avoiding extremes.

Connected Business Concepts


As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Bounded Rationality

Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.


The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Dunning-Kruger Effect

The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

Read Next: Heuristics, Biases.

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