In a recent YouTube video titled "Price Psychology Ep2: Anchoring" from the channel "AI, SaaS & Agentic Pricing with Monetizely," the speaker delivers a compelling overview of pricing psychology, particularly focusing on the anchoring effect and how it impacts customer perception in SaaS businesses. The video presents pricing not as a purely statistical exercise but as a psychological tool that significantly influences purchasing decisions.
Pricing Is Not Math—It's Theater
One of the most powerful insights from the video comes early when the speaker challenges conventional thinking about pricing:
"The thing that I've been very miffed for the years I've been in this profession is that people think that this is a very statistical profession, that things happen very accurately and that the product perception doesn't change. That's what most pricing consultants tend to just implement your van Westendorp for conjoint survey and call it a day. No, pricing is all about perception."
Drawing a colorful parallel to "The Wolf of Wall Street," the speaker emphasizes that pricing is essentially "fairy dust" or "pixie dust." It's not about mathematical formulas but about shaping customer perception. This perspective immediately reframes how SaaS executives should think about their pricing strategies.
The Science Behind Price Anchoring
The video explains the concept of anchoring through seminal research conducted by cognitive psychologists Amos Tversky and Daniel Kahneman in 1974. Their experiment demonstrated how an initial reference point (an anchor) significantly influences subsequent judgments, even when the anchor is completely arbitrary.
In the experiment, participants spun a wheel that was secretly rigged to stop only at 10 or 65. After seeing their number, they were asked what percentage of African countries belonged to the United Nations:
"When the participants turned the wheel and they got 10 as the answer, their average answer was about 25% of countries are in the UN. But when they moved the wheel and they got 65 as the answer, they thought that 45% of countries are in the UN. But the real result is 100% of African countries are in the UN."
This experiment clearly illustrates how an initial number, even one completely unrelated to the question at hand, can anchor our subsequent estimates and decisions.
Real-World Applications in Consumer Pricing
The video offers several compelling examples of price anchoring in action:
William Sonoma's Bread Maker Strategy
"Back in the 1990s, William Sonoma had a sandwich maker, right? And they priced it for around 270 dollars and they didn't get very good sales out of it. Then they decided to make a deluxe version for 450. And next to this deluxe version, this 270 dollar bread maker seemed much more attractive and sales skyrocketed."
This classic example shows how introducing a higher-priced option can make a previously slow-selling item suddenly appear to be a good value.
The Economist's Decoy Pricing
The speaker also highlights The Economist's famous subscription strategy, where they offered:
- Print-only subscription: $125
- Web-only subscription: $70
- Print + web subscription: $125
When presented with these options, most people chose the combination package at $125, perceiving it as the best value—even though many would have initially only wanted the web subscription. This demonstrates the power of a strategic decoy price.
Anchoring in SaaS and B2B Contexts
The principles of price anchoring aren't limited to consumer products; they're equally effective in SaaS and B2B environments:
"Companies in B2B SaaS or just SaaS are doing that as well, right? They'll show customers the annual price. Hey, it's just $17 per month. And when you come and look at the monthly plan, it's like $25 a month. Many times I have personally not bought a plan because it was much higher on the monthly fees."
The speaker shares a personal example of how price presentation affected their perception of value:
"Literally two days ago with my co-founder, I was arguing about why somebody was advertising a $79 annual fee when monthly they were charging 99. However, if they had told me the price was 99, I went there and I went to the annual plan, it was much cheaper. Then I would have a much positive opinion about this company and I might have availed their annual plan."
This illustrates how the order of price presentation can significantly impact customer satisfaction and conversion rates.
Enterprise Sales and the Expected Discount
In enterprise sales contexts, anchoring plays a crucial role in negotiations:
"People expect a discount. As pricing consultants, we know that we have to bake in 30 to 40% in our largest deals or even more. We have to pad the pricing in order to create a list pricing such that when you get the discount, you actually fall onto the price point that we originally wanted you to be at."
This strategic approach ensures that clients feel they've "won" something in negotiations while the vendor still achieves their target price point.
The Founder's Pricing Mistake: Undervaluing Your Product
The video addresses a common mistake made by SaaS founders—undervaluing their own products:
"This is also problematic when you take your best features and you put it on your free trial and then you have nothing else to put in on your premium plan. And this is very often that we find younger founders, earlier founders devaluing their product. You want to value your product highly."
Instead of expecting customers to discover value on their own, the speaker emphasizes that founders must actively establish and communicate that value:
"The idea that the end customer will find the value for the product and then pay for it is not true. First and foremost, you as the person providing the service or solution has to value your own solution before the customer will. That is a truth about pricing."
Implementing Anchoring in Your SaaS Pricing Strategy
Based on the insights from the video, SaaS executives should consider these strategies:
- Establish high anchors: Even if you plan to offer discounts later, start with pricing that establishes the premium value of your solution.
- Use tiered pricing strategically: Create strategic decoys or premium tiers that make your target plan look like an exceptional value.
- Break down the value: Itemize the value of individual features within your packages to establish clear anchors for the worth of each component.
- Control the initial price presentation: Be strategic about which price point customers see first, as it will anchor their perception of all subsequent options.
- Build in room for negotiation: For enterprise sales, establish list prices that allow for the expected discounting while still landing at your target price point.
Conclusion
Price anchoring isn't just an interesting psychological phenomenon—it's a fundamental tool that SaaS companies should intentionally employ in their pricing strategies. As the speaker concludes:
"I would suggest you first create the right pricing and then you put a layer of price anchoring and price perception control so that you maximize the value. You have to think of it more than just a statistical activity. It's a human activity. It's a perceptual activity."
By understanding and leveraging the principles of anchoring, SaaS executives can significantly influence how customers perceive their offerings' value and ultimately drive better conversion rates and revenue outcomes.