The Consequences of Amazon’s Pricing Power

When you're thinking about buying something, what is the first thing you do? For over half of the U.S population (52%) the first step is a visit to Amazon. I like to think of Amazon as the “Target” of the internet- you go in for one thing but, somehow, at checkout, you have $347 worth of stuff in your cart.

Meme courtesy of agnostic.com

The reality is, consumers are not just using Amazon to buy products- they are also using the website to conduct product research. Instead of turning to Google or (gasp!) going to a local retail store to compare products and look at the difference in prices, consumers are heading directly to Amazon to do this.

Because they dominate product search Amazon has incredible price-setting power. This is true in a literal sense (as in the website can literally list the price of a product) but, more interestingly, it is also true in a figurative sense.

Amazon has the power to set pricing values in our minds.

This concept is what psychologists called “price anchoring” and it can be very, very dangerous if it is used to manipulate consumers.

How Price Anchoring Works

Whenever we are presented with a buying opportunity, whether at the grocery store, a restaurant, or shopping for jeans online- our brains have to estimate whether the price of the product (or service) is good or bad. If you’re going out for coffee, for example, and you see that a latte costs $50- your brain will tell you: “Walk out and go somewhere else, coffee does not cost $50.”

How does your brain know to do this? At some point in your life, you learned that the average cup of coffee in the United States costs between $2 and $8. When you see that the coffee is $50 your brain knows that the price is way off.

The price you expect to see is your anchor- anything below this value range seems suspicious and anything above it seems ridiculous.

We humans have a pretty good sense of what most things should cost because we shop regularly and are exposed to prices constantly. However, there is an exception to this condition- and marketers exploit it regularly.

Manipulating Price Anchoring

Essentially, price anchoring is the concept that we compare all prices to the first value that is given to us. This is why you see the “Suggested Retail Price” on clothing item tags when the actual price of the garment is significantly less. The retailer is trying to set a price anchor in your mind. They are basically saying, “Look! This should be $100- that’s what the designer suggested we sell it for. But we’ll give it to you for only $85- trust us, you’re getting a great deal.”

Most people would say that they can’t be fooled by the arbitrary value assigned by the MSRP (Manufacturers Suggested Retail Price) and that it has no bearing on their decision of whether or not to buy the piece of clothing, but numerous researchers would argue that it does.

In one experiment, performed by legendary behavioral economics researcher Dan Ariely, it was proven that just giving people a random number to assign to a variety of random objects and then asking if they would pay that amount for each object swayed their decision either higher or lower.

For the experiment, he gave each student a list of several random items (a bottle of wine, a computer keyboard, a book…) and had them write the last two numbers of their Social Security Number (SSN) next to each item in the form of a price. So, if you SSN ended in 09, you would write $9 next to each item and if your SSN ended in 77, you would write $77 next to each item. He then asked the students to write down how much they would be willing to pay for each item. Guess what happened to the people with the high SSN…

They way overpaid. The student who had written $77 (from the example above) was willing to pay a lot more for the items than the student who had written $9 next to each item. Why? Because when he was writing down how much he would be willing to pay for each item, he saw $77 written there and that made him think “maybe this is worth $77, I would pay about $50 for it” — whereas the student who had $9 written down thought “this is worth $9, I would pay about $7 for it.” The prices were totally made up- it was just the last digits of their SSN- but it was enough to influence their subconscious mind.

Amazon and Price Anchoring

How does Amazon play into all of this? Well, if Amazon is the first place most people check for pricing when they are doing their product search- Amazon sets the price anchor. They could set fair values (if something is worth $19.99 it is listed at $19.99) or they could manipulate the value (the $19.99 value object is listed at $49.99). Even if you don’t buy the item from Amazon, you have the price they gave you in your mind. Now, when you go shop elsewhere- maybe Google search or head to a physical retail store- you’ll be comparing every item’s price to that first one you saw on Amazon.com.

As I stated earlier, this can be very dangerous if used in a manipulative way. The good news is that price anchoring of this nature won’t work for everything. There are products and services you buy often enough that no new price anchor will alter your thinking (like coffee, the newspaper, or gas). But- for anything that you don’t buy on a regular basis, be cautious.

How to Avoid Price Anchor Traps

There is a simple solution to this problem. All that is necessary to avoid price anchor pitfalls is to determine, on your own and before doing any research, how much you would be willing to pay for the product or service. The best tactic is to make this a realistic range and write it down on a piece of paper.

Now, when you turn to a website or walk into a physical store you are armed with a price anchor that you have set for yourself. This, along with the knowledge of how price anchoring works, should help you make better purchasing decisions.