Clear thinking - Presentations - Sales

Why Does Hooters Sell Dom Perignon?

I promise I will answer this question in this post, but first I would like you to do something. On a scratch sheet of paper, write down the last two digits of your cell phone number. Now, write down your estimate of what percentage of countries in the UN are in Africa______.

Without realizing it, your first answer probably affected your second, through a phenomenon called anchoring. Psychologists Daniel Kahneman and Amos Tversky first discovered anchoring in 1974 in experiments using a roulette wheel. Participants were asked the same question, but first were asked to roll a roulette wheel, which was secretly rigged to land on either 10 or 65. Participants who landed on 10 on average estimated the number of countries at 25%, and those who landed on 65 estimated an average of 45%. (The answer is 23%)

Anchoring also affects our choices. In an experiment described by Dan Ariely in his book, Predictably Irrational, an audience is first asked to write the last 2 digits of their social security number, and, second, to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent more. The simple act of thinking of the first number strongly influences the second, even though there is no logical connection between them.

The anchoring effect means that the first information we receive has a disproportionate influence on our thinking.

One of the most surprising things about anchoring is how powerful it is even when we’re on guard against it. Even when we know the initial number is totally arbitrary, or way beyond anything reasonable, it still has an effect. If we’re given a high number to begin with, we adjust our own estimate downward, but we don’t adjust it enough.

Even well-informed professionals such as real estate agents are not immune to the effect themselves. In one experiment, four different groups of agents were given 10-page packages describing a specific property. The only difference was in the listed price. When asked to appraise the property, the median value correlated to the listed price, even though each denied that it had any effect on their decision.

Surely professional economic forecasters with serious quantitative training are protected from anchoring? Wrong again–the Federal Reserve studied professional economic forecasters and found that they exhibit anchoring bias toward previous forecasts. In another study, bank loan examiners who know the previous rating given to a loan end up closer to that rating on average than those who begin with no prior knowledge.

What does anchoring mean for persuasive communication?

In personal communication, first impressions set the initial anchor. Interestingly, bad first impressions tend to be longer lasting than good first impressions. The reason is that when we have a good first impression, we are more likely to spend more time with that person, and thus have more opportunities to gather information that can correct our initial impression. When we have a bad first impression, we will spend less time with that person and thus have fewer opportunities for correction.

First impressions are of course also important in presentations. Just as starting high and coming down leads to higher estimates of the product in the number exercise, a strong beginning in a presentation anchors the audience’s perception of you as a confident speaker with a relevant message.

In addition, the order in which you present information sets anchors that influence how choices are perceived. Suppose you are proposing a solution to a problem, which will require a $500k investment. In your presentation, it’s helpful to show that you looked at several options, but be sure to list the most expensive option first. $500k will seem less if you first tell them you considered an option that would cost $700k.

This tactic is commonly used in sales, especially by retailers. Williams-Sonoma once offered a breadmaker at $279, which sold OK. They introduced a bigger model at $429, and few sold…but sales of the $279 model nearly doubled. List price is another form of anchor that makes the sale price look good by comparison. At the supermarket, they post a sign offering 20 yogurts for $10. There’s no unit savings from just buying one, but they’re counting on you buying more as a result of the high anchor.

It works with larger purchase decisions as well. A friend of mine once told me that when he moved to Las Vegas, he specified to the real estate agent the price range of homes he wanted to look at, but complained that she took him to several houses way above the price range first. I told him that she was just setting the anchor.

Successful negotiators use anchoring all the time. People who ask for more initially tend to get more. They stake out extreme positions initially, and even though they may have to retreat a significant distance from the opening position they will usually end up higher. Don’t be afraid to ask for more.

If you’re on the receiving end of anchoring, what can you do about it?

The easy answer is that being aware of its influence should make you less susceptible to it, but unfortunately studies have shown that anchoring exerts its mysterious influence even when you know about it. The problem is that when we adjust from the initial anchor, we don’t adjust enough. It’s like an invisible bungee cord that limits how far we adjust.

There are really only two approaches that work. The first is to arm yourself with as much information as possible so that you have a realistic idea of what something is worth, before you come to the meeting or sales call. The second is “consider the opposite”. Before you make a decision, list the reasons that your estimate could be wrong.

So, have you figured out yet why Hooter’s sells Dom Perignon? The $110 price (at the time I saw it; honestly, dear– it was just for research) is the anchor which makes every other menu item seem cheap by comparison.

If you want to know more about anchoring, or are interested in the psychology of pricing, I highly recommend Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone.

For more about how anchoring is used in negotiations, I recommend Negotiating Rationally by Max H. Bazerman and Margaret A. Neale.

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