Paying $16.40 rather than $50 is a good deal, right? That’s what I thought when I caught the train instead of a taxi from Sydney airport to the city. So I was surprised to hear how many Sydneysiders have been outraged by the cost of this fare. What’s going on?
It’s all about context
As an out-of-towner, my expectation of the cost to get to the city was set by the first experience I had doing so – via taxi. Taxi fares can vary depending on traffic and tolls but the typical range cited is $45-$55 one-way.
After noticing their billboards, on a more recent trip I decided to take the plunge and catch the train instead. “15 minutes to city” is what really appealed, but the cost-saving was another factor that swayed my behaviour.
In my world, the cost of getting to the city had been set by the taxi fare $40+. Contrast my experience with a local who is used to catching the metropolitan train, say from Mascot (next to the airport) to the city for only $3.80. They had been used to $3.80, making $16.80 look outrageous.
Now I’m not here to argue the case for what the fare should be, but rather use this as an illustration of how important context is when you are trying to convince your customers that your pricing is reasonable.
Price anchoring is one of the fundamentals of behavioural economics and tells us that customers are most influenced by the number they first see – the anchor. Once anchored, it is difficult for the customer to move away from using this number in their judgment of value. This can work for you or against you.
You can make anchoring work for you by communicating a higher price before introducing yours. We see this all the time in retail when RRP is marked down to the sale price.
Anchoring can work against you if you haven’t re-contextualised the value for the customer and so you seem overpriced relative to an alternative. How can you re-contextualise your value? Sadly it takes more than a fancy brochure.
For instance, to enter the market and charge what they do for coffee, Starbucks had to re-contextualise what consumers were used to paying for coffee by overhauling the entire coffee experience. No more filtered black ‘cup of Joe’, now it was a full sensory experience with the smell of roasting beans, music playing, homely furnishings and lavish flavours. To re-anchor consumers they had to make them forget what coffee had been.
What is your customer comparing you to?
When it comes to communicating your pricing, remember that your customer will base their assessment on relative rather absolute value – in other words, how expensive or reasonable you are relative to something else. As Starbucks has shown, it is the ‘something else’ that you as a business have to take charge of because in the absence of the anchor being set by you, you are at the mercy of the market.
Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.