What luxury brands can teach accountants about anchor pricing

Recently I took a vacation to Cabo San Lucas (it's awesome).

A couple of days before the trip, I got an email from Hilton Hotels asking me to check in online for my upcoming stay. 

I clicked the link in the Hilton email and was presented with the following upgrade offer:

I know what you’re thinking: Holy crap! The Presidential Suite is only an extra $2,985 per night? Sign me up!

Actually, that’s definitely not what you’re thinking, unless you happen to be Mr. Monopoly.

Now that top option—the "Ocean Front Location"—that’s something I paused to seriously consider.

Then I did the math and decided that I’d rather spend the same amount on 20 poolside pomegranate margaritas.

I’m guessing that exactly 0% of regular folks ever choose either of the more expensive upgrade options. At $1,785 and $2,985 per day, just one night in either of these luxury suites will probably cost more than most peoples' entire vacation.

So why does Hilton even bother to show the two insanely expensive options?

I was wondering about that.

Then I happened to take a listen to Jason Blumer and Greg Kyte’s episode 53 of their excellent monthly “Thrivecast” podcast.

Ron Baker is the guest in this episode, and he does a great job of helping the audience understand exactly what's going on with this insane type of pricing.

(Discussion starts at 18:35):

Jason Blumer: So we learned about a concept called "anchor pricing." You gave examples of Prada—they have handbags, and things like that. So explain just what anchor pricing is and how to do it, and how accountants can do it.
Greg Kyte: Because when I go to buy a boat I'm going to ask for it with an anchor and without an anchor, and the difference between those two is I believe anchor pricing.
Jason Blumer: ... No.
Ron Baker: Well it actually all comes out of behavior economics and how we make decisions and all decisions are contextual and that's where we get all prices are contextual.
But an anchor, my favorite example—and I don't know if I mentioned this today—is the Le Meridien Hotel in New York has got a thousand dollar omelet.
And this is really smart folks: On the menu, if you read it close enough, in parentheses it describes the omelet and it says, "We dare you to expense this one." They know they're in category three, right?
Now when I looked at this—actually they've sold dozens of these, believe it or not—a thousand dollar omelet. But they have a mini version right below it for a hundred bucks. They've sold hundreds of those.
That's great pricing. That's what an anchor does. Once you throw out a number, it seems reasonable and just anchors us, and then if something comes in below that, that's going to look like a great deal... So that's the concept of the anchor.
Ron Baker

Ron Baker

Ron then goes on to give another example of anchor pricing: Neiman Marcus. 

Each year, Neiman Marcus releases a Christmas Book.

It's a typical seasonal gift catalog, but for the inclusion of a "Fantasy Gifts" section containing some insanely expensive presents. The Fantasy Gifts for 2015 include a trip to the edge of space in a balloon ($90,000), a Neiman Marcus limited edition Mustang convertible ($95,000), and a Dream Trip to India ($400,000).

By comparison, the His & Hers Costume Trunks for $5,000 each sound quite reasonable. And the plain old vanilla gifts, such as the Stella McCartney Shark iPhone 6 Case for $80, seem like a steal.

That's the whole point of anchor pricing.

You don't actually expect anyone to purchase the most expensive options—they're only there to give context to the regular options and make them seam reasonable by comparison.

That's exactly what Hilton was trying to do with their email upgrade offer. The two insanely expensive options made me seriously contemplate paying an extra 15% per night for a slightly better view.

So what can accountants learn from Ron Baker and the strategy of anchor pricing?

Whether or not we as accountants go to the extremes of Hilton or Le Meridien is debatable, but we should certainly be employing some kind of anchor pricing in our sales process.

One easy way to employ anchor pricing is to double all your prices, then offer frequent 50% off specials to new clients. Retail clothing stores do this all the time. The "real" price of an outfit is rarely the retail price, because you can almost always find a coupon if you do a bit of hunting.

Accountants may also want to consider advertising a super premium platinum package, just like hotel brands or airlines (think first class international seats). To assemble this premium service offering, consider the following factors:

  • Timing - Perhaps a premium package includes a maximum 10-minute response time, 24 hours a day, 7 days a week, 365 days per year. Some folks are willing to pay a lot more for a guaranteed quick response.
  • Talent - Maybe premium package clients are the only ones with access to the CEO or top partner at the firm. 
  • Technology - Could be that clients on the premium plan get the latest technology as soon as it comes out, and all implementation costs are covered.
  • Training - Might want to consider offering unlimited training and support to premium clients. No more hourly bills or separate project fees for these folks.

Are you implementing anchor pricing in your firm, and if so, how's it working out for you? I'd love to hear your thoughts in the comments.