How To Increase Revenue By 12% A Year, Without Spending Any Money
Psychology

How To Increase Revenue By 12% A Year, Without Spending Any Money

It’s early in the morning, and you have just arrived at an airport for an 11am flight. Tomorrow morning, you’ll be delivering a presentation to an important group of clients who live in a city several hours plane-ride away.

Whilst you check-in your bag, you’re looking forward to the prospect of getting to your hotel early enough to go over your presentation, have some dinner and then maybe even a drink or two at the bar.

As you prepare to head through airport security, you hear an announcement over the loud-speaker: your flight has been cancelled.

In a blind panic, you call up your airline and demand to know what’s going on. ‘I’m sorry’ grovels the airline representative, ‘the next flights are all fully booked’.

Starting to lose your cool, you explain that you have an extremely important meeting to attend which you simply cannot afford to miss. ‘Let me check if we have any space on later flights’ stutters the bumbling rep, and promptly puts you on hold.

After what seems like hours, the rep reappears: ‘the earliest we can do is 9:00pm’.

‘9:00pm?!’ you splutter; the dreams of dinner, drinks and an early night evaporating in front of your eyes. Realising you have no choice but to accept, you begrudgingly reserve your place on the flight, and spend the rest of the day seething – vowing never to use that particular airline ever again.

This situation is all too familiar for millions of people worldwide and, unfortunately, is part and parcel of travelling. Whether the airline is responsible or not, they inevitably carry the blame – especially when you can see dozens of other planes coming and going without a hitch.

Now imagine if that situation had gone differently.

Calling up your airline to demand to know why the flight is cancelled, the rep tells you that whilst they’re sorry, the next available flight is at 07:00am the next morning.

The next morning?!

Now you totally lose your temper. Missing out on a relaxing evening is one thing, but you’re now in danger of missing your important presentation altogether.

‘Hang on,’ says the airline rep, ‘let me see what I can do’.

Several nail-biting minutes later, the rep takes you off hold.

‘Hello sir?’

‘Yes, yes!’ you snap.

‘We’ve managed to find space for you on a flight at 09:00pm this evening’.

Relief floods through you. You’re not going to miss the presentation after all!

Gratefully, you thank the rep and confirm that 09:00pm would be perfect.

Notice the difference? On the surface, nothing has changed. In both examples, your flight has still been cancelled and the earliest next flight is still at 09:00pm. The only difference is the way that this information was presented to you. In the first scenario, 11:00am is your anchor for when you should be flying. From this starting point, any delay at all seems like a negative outcome, and 09:00pm seems like a total disaster. After all, its ten hours later than the flight you were supposed to be catching and you’ve lost the opportunity to have a relaxing evening! So what makes the second scenario any different? Here, the airline rep does something rather clever. By initially informing you that the next available flight is at 07:00am, that sneaky rep has dramatically shifted your point of reference. In comparison to this new anchor, a 09:00pm flight doesn’t seem so bad after all. It’s certainly a lot better than catching a flight the next morning, and at least you won’t miss the meeting! To add insult to injury, you might even find yourself grateful to your rep for managing to get you on the ‘earlier’ flight.

In behavioural science, an anchor is anything that serves as an initial reference point for future comparisons. When making decisions, we use anchors to determine the value of one option compared to another. For example, let’s say you were in the market to buy a new cell phone, and your previous phone cost around £300, as did the one before that. When deciding how much is reasonable to spend, the chances are that £300 will be your anchor for what constitutes a fair price. Much higher than this seems like a rip off, and any lower seems like a steal. But of course, this anchor is totally arbitrary. If your previous phone had cost, say, £100, then to pay £300 for a phone would seem totally extortionate. Humans seem to have a tendency to rely heavily on anchors as a ‘rule of thumb’. Anchors make us biased when making decisions because we subconsciously use an initial and often irrelevant piece of information to make subsequent judgments.

The ‘anchoring heuristic’, as they called it, was first observed by behavioural economists Daniel Kahneman and Amos Tversky. In a 1974 experiment, participants were given a spin on a ‘Wheel of Fortune’ type device, which would land on a random number between 1 and 100.

Having had their spin, participants were then asked to estimate, for example, whether the percentage of African countries in the United Nations was higher or lower than the number the wheel had landed on. They were then asked to estimate the exact answer by moving upwards or downwards from the number arbitrarily generated by the wheel.

It was here that Kahneman and Tversky noticed something peculiar.

Subjects who had landed on a higher number, such as 65, showed a marked tendency to guess that there were a higher percentage of African countries in the UN, compared to those who landed on a lower number, such as 10. In the first instance, the subjects guessed forty-five percent with the latter guessing just twenty-five percent. The different subjects had different anchors, and were subconsciously reluctant to stray too far from these anchors. The ones with lower anchors guessed lower, the ones with higher anchors guessed higher.

Stranger still, research has found that almost any number can become an anchor, dramatically skewing our ability to make logical decisions. For example, take a 2006 experiment conducted by Dan Ariely, Drazen Prelec and George Loewenstein at MIT’s Sloan School of Management.

Holding up an array of random objects, such as a bottle of wine, a textbook and a cordless trackball, the trio instructed the fifty-five students present to scribble down the final two digits of their Social Security numbers. Having obligingly jotted their numbers down on forms listing all the items, the students were asked whether they would hypothetically pay that amount for the objects that had been displayed. If your social security number ended in 12, then the price of the textbook was $12. Equally, if it ended in 99, then the price of the cordless trackball would be $99.

The bewildered students were then asked to actually ‘bid’ on the items in an auction, by flipping the forms over and writing down the maximum amount they would be willing to pay for each of the products listed. Was it possible that something as random as their social security numbers could become the student’s anchor for what each item was worth? No chance, they laughed, that would be ludicrous. Later, as he looked over the data, it was Ariely’s turn to laugh.

Sure enough, students with higher social security numbers paid up to 346% more than those with lower numbers. As Ariely later remarked in an article for the Washington Post, ‘social security numbers were the anchor in this experiment only because we requested them. We could have just as well asked for the current temperature or the manufacturer’s suggested retail price. Any question, in fact, would have created the anchor’.

Anchoring has real and practical value to businesspeople seeking to subtly influence customer decisions. Unsurprisingly, anchoring is particularly valuable when it comes to price setting. Merchants in bazaars place ludicrously high price tags on cheap merchandise for exactly this reason. The initial price becomes your anchor for how much the item is actually worth; and you haggle down from this number. After knocking ten, twenty or even fifty percent off the price, you hand over your money and leave feeling extremely pleased with yourself for being such a shrewd negotiator. Unbeknownst to you, even with this discount, you are still paying three times the real value of the product.

Clearly, ripping off customers isn’t a sustainable (or ethical) way of running a business. All the same, many brands have found ways to use anchoring effectively without jeopardising their integrity. Most of us experienced the phenomenon of walking into a clothes shop and seeing, say, a jacket we like. Picking it out and checking the price tag, you see it’s priced at £200. Yeeeeeesh. As you go to return it to the hanger, you notice it has been reduced from a regular retail price of £800. An £800 jacket for £200? What seemed expensive five seconds ago suddenly seems like a bargain! The RRP has become your anchor for how much the jacket ‘should’ cost, and any less constitutes a discount. But who sets the RRP? Chances are, it’s the store itself. A distinction exists between what products are worth and what they cost. Whilst their cost will usually be fixed, their worth is totally subjective. When it comes to pricing, businesspeople would do well to present a product’s worth as the regular retail price, and its actual cost as a ‘discount’, ensuring both prices are prominently displayed.

‘A distinction exists between what products are worth and what they cost. Whilst their cost will usually be fixed, their worth is totally subjective.’

Of the businesses that have employed anchoring, none have used it as effectively, and perhaps as inadvertently, as the taxicab drivers of New York City. In the past, cabbies accepted payment exclusively in cash, with tipping governed by informal norms. Under this system, the average tip was a rather measly ten percent. From a European perspective, ten percent probably seems rather generous, but one must remember that this is in America – the country where one is expected to tip a dollar or two for every beer you order in a bar.

In recent years, the cabs of New York have been kitted out with touchscreens, allowing for payment by credit card. When opting to pay in this manner, you are confronted with the question of how much you want to tip. You can choose to enter an amount manually, or choose a preset amount: 20, 25 or 30 percent. Predictably, these percentages had a marked effect on passenger’s reference points as to what constituted a reasonable tip, with the average gratuity jumping from 10 to 22 percent. That’s the equivalent of a $144,146,165 increase in tips, per year.

Arguably, the most attractive benefit of using anchoring to predictably influence customer behaviour is that it comes with little to no cost, yet can be worth thousands, if not millions, in additional revenue. Anchors are so potent as even once we are aware of their existence, we are still reluctant to believe that they affect us. To be influenced by such nonsense is surely a defect found only in others, right?

And yet, our susceptibility to anchoring is as much a part of what it means to be human as our propensity to laugh or cry.

It is there, whether we know it or not.
By Callum Woodcock (@CDWoodcock)

IMAGE: Bigger Pockets

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