The effects of price anchoring on decision-making have been documented in many studies and are used extensively in pricing strategy for dozens of sectors (just Google “pricing anchors HBR” to find dozens of examples). Can anchoring price when buying or selling professional services have the same effect?
The basic idea is that buyers are irrationally influenced by the first number they hear immediately before making a decision.
For example in one famous study by Tversky and Kahneman (1974) they employed a roulette wheel to generate a number used as the anchor when asking participants to estimate the percentage of African countries in the United Nations, and another experiment by Ariely, Loewenstein, and Prelec (2003) used the last two numbers of a participants social security number to create an anchor when valuing the price of a product.
In both cases the participants that had their perceptions anchored with higher numbers chose higher values for the decisions they had been asked to make – a higher percentage of African countries in the UN as well as higher prices for a product – and vice versa.
So how can we apply this to the professional services sector? Let’s look at the strategy from two perspectives.
One of the suggestions I get the most push-back on when I am speaking to buyers that use RFPs to hire professional services firms is the idea of including their budget in the RFP document.
By considering the inclusion of a budget number as a price anchor, we can conclude that the advantage to the buyer including a price is that vendors considering a higher bid will discount their price down toward the anchor number.
Conversely vendors considering a lower price may work their way up toward the anchor by increasing the value they offer for that anchor number.
If the buyer does not include a budget number in their RFP then it is the vendors that are in control of setting the anchors that the buyers are then negotiating against.
I have long argued that including a budget in an RFP increases (i) the quality of the proposals submitted as well as (ii) increases the process efficiency and thereby (iii) decreases the overall process cost, but now it is obvious that including the budget in an RFP is a better price negotiation strategy as well.
When selling professional services such as consulting, law, architecture, and IT, vendors are selling an intangible in the form of expertise. In this sector buyers rely significantly on anchors to make sense of their intangible purchase so in this regard it is to the advantage of the vendor to state an initial high but credible price.
So declaring that “our leadership training projects are typically in the $50,000 range” anchors the discussion to the $50,000 value.
This means that any price negotiation with the buyer that has been anchored to $50,000 is much more likely to yield a higher price than a negotiation with a buyer that has been anchored with the statement “our leadership training projects begin at $25,000”.
One way to anchor high without committing too early to a project price is to quote an initial hourly rate that is very high but still credible. For example I know one management consultant that charges $600/hour (billed by the minute) for any hourly consultation in an industry and market that would usually top out at $450/hour. This anchors his project pricing at (i) the high end of his profession and (ii) just over $25,000 a week, helping him to set his project pricing close to this level.
The lesson here for anyone in professional services is that how you anchor your price can have significant impact on the final price that buyers pay, and that consultants receive.
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"This should be required reading for consultants AND their clients - especially the part about RFPs." - Blair Enns, Win Without Pitching