Latest / The DTC Marketing Podcast with Fexingo: Direct-to-Consumer Brands, Shopify, and E-Commerce Growth / How DTC Brands Use Price Anchoring to Boost Perceived Value
Transcript
- Lucas: Let me start with a number. If I told you a mattress costs three thousand dollars, and then I showed you the exact same mattress for one thousand dollars, you'd think it's a steal. But if I'd started at one thousand, you'd just think it's a mattress. Luna: That's the anchoring effect in a nutshell, right? The first number sets the hook. Lucas: Exactly. And DTC brands have gotten very good at this — sometimes too good. Today we're talking about price anchoring: how brands use a reference price to make their actual price look better. We'll look at who does it well, who crosses the line, and what the FTC thinks about it. Luna: Before we get into the weeds — you know, this kind of marketing conversation is exactly the reason our show can stay independent and ad-free. If you've gotten value from episodes like this, you can support us at buy me a coffee dot com slash fexingo. It's a small gesture that keeps us going. Lucas: Yeah, we really appreciate that. And it lets us keep drilling into these tactics without worrying about sponsor constraints. Luna: Alright, back to anchoring. Give me a concrete example. Lucas: Let's start with Purple, the mattress company. Go to their website and you'll see a mattress listed at, say, one thousand five hundred dollars. But right above it, in smaller text, there's a 'compare at' price of two thousand nine hundred ninety-eight dollars. That's not a price anyone actually pays — it's the MSRP of a comparable traditional mattress. But it works because your brain registers the discount before it evaluates the product. Luna: And that's the classic anchoring bias from Kahneman and Tversky. Your brain latches onto the first number and adjusts from there. Lucas: Exactly. In their famous study, they spun a wheel of fortune that landed on either ten or sixty-five, then asked participants what percentage of UN countries are African. People who saw ten guessed around twenty-five percent; people who saw sixty-five guessed around forty-five percent. The random number anchored their estimate. Same thing happens with price. Luna: So for DTC brands, the anchor isn't random — it's carefully chosen. But there's a fine line between anchoring and deception. Lucas: Right, and that's where the FTC comes in. They've gone after brands that use fake 'was' prices — prices that were never actually charged. But if the anchor is a genuine reference — like a traditional mattress's retail price — it's legal. Purple's compare-at prices are based on the typical selling price of similar innerspring mattresses, so they're on solid ground. Luna: What about brands that sell a single product with no obvious comparison? Like a supplement or a software subscription? Lucas: They use a different kind of anchor. Take Whoop, the fitness wearable. They don't sell the device — you pay a monthly subscription. But they show the annual plan at two hundred ninety-nine dollars per year, and the monthly at thirty dollars per month. The monthly price anchors you, so the annual looks like a deal. That's a decoy anchor. Luna: That's like the classic Economist subscription experiment. You remember that one? They offered a web-only subscription for fifty-nine dollars, print-only for one hundred twenty-five, and print plus web for one hundred twenty-five. The print-only was a decoy to make the combo look like a steal. Lucas: Exactly. And DTC brands use decoy pricing all the time. The Ordinary, the skincare brand, sells a one-ounce bottle of a serum for six dollars. Then they sell a larger size for ten dollars — but the larger size is actually a better value per ounce. The six-dollar bottle anchors you, so the ten-dollar bottle feels like an upgrade, even though it's still cheap. Luna: But does anchoring work for every product? I feel like for commodities, people are just looking for the lowest number. Lucas: That's a fair point. Anchoring works best when the product's value is ambiguous. If you're selling bottled water, the anchor is less effective because people already have a reference price in their head. But for something unique, like a new DTC brand that nobody has heard of, anchoring gives them a framework. Luna: So how do you choose the right anchor? Is there a formula? Lucas: There's no magic number, but there are guidelines. First, the anchor has to be believable. If you sell a t-shirt for forty dollars and list a compare-at of one hundred fifty, people will think you're lying. Second, the anchor should be based on something real — an industry average, a previous price, or a competitor's price. Third, test it. Luna: What does testing look like? A/B testing anchor points? Lucas: Yes. Run a test where half your visitors see a high anchor and half see a lower anchor, and measure conversion rate and average order value. But be careful — if the anchor is too high, you might scare people away. There's a sweet spot. Luna: I've seen some brands use a 'strike-through' price that's actually the price of a bundle. Is that fair? Lucas: It can be, as long as it's transparent. For example, a DTC coffee brand might sell a single bag for fifteen dollars, but show a 'value pack' of three bags for forty dollars with a strike-through of fifty-five. That's fine because the fifty-five is the actual sum of individual prices. But if they invent a 'retail price' that was never charged, that's a problem. Luna: The FTC has been cracking down on that. In 2021, they sent warning letters to companies using fake reference prices. And in 2024, they updated their guidance to say that any reference price must be a 'genuine, good-faith' estimate of the market price. Lucas: Right, and that guidance matters because DTC brands operate online, where it's easy to change prices instantly. The temptation to inflate an anchor is real. But if you get caught, the damage to trust is worse than any short-term gain. Luna: So what's the alternative for brands that don't have a natural anchor? Say a new DTC brand launching a completely novel product. Lucas: They can use a different kind of anchor: the 'value' anchor. Instead of comparing to a higher price, compare to the cost of not buying. For example, a productivity app could say, 'The average person wastes two hours per day. Our app saves you one hour per day. At your hourly rate, that's worth twenty-five dollars per day. Our subscription is ten dollars per month.' That's an anchor of value, not price. Luna: That's clever. It reframes the conversation from 'how much does this cost' to 'how much do I gain.' Lucas: Exactly. And it's harder for the FTC to challenge because it's based on the customer's own situation. But you have to be careful not to exaggerate the claimed savings. Luna: I want to go back to the decoy pricing idea. Can you give me another example beyond subscriptions? Lucas: Sure. Think about DTC luggage brand Away. They sell a carry-on for two hundred seventy-five dollars, a bigger carry-on for three hundred twenty-five, and a set for five hundred fifty. The two prices anchor you, and the set looks like a good deal compared to buying separately. But if you only want one bag, the anchor still works because the higher-priced bag makes the lower one feel more reasonable. Luna: So the decoy doesn't have to be a decoy product — it can be a price tier. Lucas: Exactly. And this ties into something called the 'Goldilocks effect.' If you offer three options — cheap, medium, expensive — most people pick the middle. But if you set the cheap option very low and the expensive option very high, the middle looks even more reasonable. That's why DTC brands often have three-tier pricing. Luna: Is there any data on how much anchoring actually lifts conversion? I've seen numbers ranging from ten percent to fifty percent. Lucas: It depends on the product and the anchor. For a high-consideration purchase like a mattress, a strong anchor can lift conversion by twenty to thirty percent. For an impulse buy, it's smaller. But the effect is real. One study by MIT found that anchoring can shift willingness to pay by up to fifty percent depending on the context. Luna: That's massive. But it also means you can easily over-anchor and lose trust. How do you know when you've gone too far? Lucas: Watch return rates and customer service complaints. If people feel tricked after purchase, they'll return the product or leave bad reviews. Also, monitor your brand sentiment on social media. If customers are calling out your pricing as deceptive, you've crossed the line. Luna: Let's talk about a brand that does anchoring really well without being deceptive. Who comes to mind? Lucas: I'd say Allbirds, the shoe company. They don't use a compare-at price. Instead, they anchor by showing the material cost breakdown — 'This shoe costs forty dollars in materials and labor, we sell it for ninety-five.' That transparent anchor actually makes the price seem fair because you see the value chain. They're anchoring on authenticity. Luna: That's a great example because the anchor isn't a higher price — it's a story. And stories are harder to dispute. Lucas: Right. And it aligns with the DTC ethos of transparency. The irony is that many DTC brands started by disrupting traditional retail's opaque pricing, but now some are using the same anchor tricks they once criticized. The best brands use anchoring to inform, not to deceive. Luna: So if a brand wants to implement anchoring tomorrow, what's the first step? Lucas: Identify your most comparable competitor and list their price. That's your anchor. Then set your price at a meaningful discount — not so low that it seems unbelievable, but enough to signal value. Test it with a simple A/B test on your product page. And be prepared to defend that anchor with data if a customer asks. Luna: And if you're a brand with no direct competitor? Say you invented a new category. Lucas: Then anchor against the closest substitute. If you're selling a plant-based leather wallet, compare to a genuine leather wallet. Or anchor against the cost of not buying — like we discussed earlier. The key is to give the brain a reference point. Without it, people default to whatever they last paid for something similar, which you can't control. Luna: Alright, final question: Is there any DTC brand that you think is using anchoring poorly right now? Lucas: I'll avoid naming names, but I've seen several supplement brands that use a 'retail price' of eighty dollars for a bottle that's always been thirty. That's not anchoring — it's lying. And customers are savvier than ever. With price comparison tools and social media, fake anchors get called out fast. So the smart play is to anchor honestly, because trust is the only real long-term asset. Luna: And that's a good note to end on. Anchoring is powerful, but it's a tool, not a trick. Use it wisely. Lucas: Absolutely. Thanks for listening, and we'll see you next time.