We like to think that we know what we like; whether it’s purchasing that new bit of kit or judging what an app is really worth, our steadfast values and judgements act as our consistent guide.
Yet a passage from Mark Twain’s novel, ‘Tom Sawyer’, famously challenged this notion. In the novel, Tom was given the unenviable task of white washing his aunt’s fence, a task he detested. To add embarrassment to his misery, he also knew that his friends would be passing by at some point. However, when his friends came round the corner they saw him throwing himself into the task with alacrity, presenting the task as though a once in a lifetime opportunity. And sure enough, they all joined in, enjoying the task and completing Tom’s task for him.
On the one hand we are clearly vulnerable to persuasion of the attractiveness of particular options, something that has been leveraged by sales people for centuries. On the other hand, we believe that the value we place on goods and services is rationally calculated and consistent over time. Both of these cannot be true. Fortunately, some explanation is provided to us by Behavioural Economists who have a term to help describe the way we estimate value: ‘coherent arbitrariness’.
Let us look first at the ‘arbitrary’ element. Significant work has demonstrated that we use ‘initial anchors’ to estimate value. So when we are given a valuation, no matter how random, this is used for estimation purposes. For example, when people are shown the last two digits of their employee payroll number and are then asked to value an item, let’s take a mobile app, their valuation is influenced by the ‘anchoring point’ of their payroll number. This is then tempered by consumers’ understanding of relative value (so a mobile app wouldn’t be valued as much as a PC tablet). Nevertheless, the random ‘anchoring point’ still consistently influences estimates of value.
Collective anchors have a huge influence on our perceptions of value, and it is apparent in many technology-related decisions. Are there really any tangible and functional differences between two PC tablets? Possibly not, but the initial choices made by early adopters can have a hugely disproportionate impact on subsequent choices of the wider market because an anchoring point has been established. The mechanisms by which these anchoring points become established is clearly defined in Malcolm Gladwell’s book ‘The Tipping Point’.
The creation of anchors is often category specific. For example, we may be willing to spend £3-4 on a coffee as we are anchored by the price of other drinks, but we don’t like spending £1 on a mobile app as within an app store the anchor price is arguably free.
Given their influence, great care needs to be taken when there is potential for setting an anchor. In the case of mobile apps, with so many offered free, a powerful anchor at a price point has been set that makes spending even £1 an agonising decision even when considering the benefits the app would bring. Dan Ariely suggests in his blog that if apps were sold at low prices (e.g. 15p) rather than completely free, getting people to spend £1 or more would be a much easier task.
And the very strength and precision by which anchor points work can set up some apparent anomalies. An interesting example is in the context of digital music. The cost of a digital album is more or less the same as a physical one, despite the differences in manufacturing / distribution costs. We speculate that people are willing to pay the relatively high costs for the digital track as their initial anchor is the price for a physical copy. This has resulted in an unusual situation in which a single digital track is priced the same as a many music apps that are packed with functionality, developer time etc.
The ‘coherent’ nature of this ‘arbitrariness’ reflects the strength of the initial anchor point. Once the anchor has been set, then evaluation of value is undertaken in a way that is coherent with this initial estimate or anchor. The studies which show consumers’ estimates of prices of say, a bottle of wine, being influenced by a random anchor such as their payroll number also goes to demonstrate how consumers’ subsequent valuations of other objects are still coherent with that original anchor. They will be adjusted to be appropriate to the category but will nevertheless still be influenced by the random number they started out with.
The strength of this coherence means that if, for example, a new PC tablet comes onto the market which is significantly cheaper than the market leader, we are more likely to question the quality of the new PC Tablet rather than question why the market leader set their price so high.
Where the connections between decisions are clear then, as you would expect, decision coherence is strong. So if you are purchasing within a well-defined category, such as PC Tablets, then the anchor point of the value proposition for the category has been set by Apple. However, if the connections are less clear, such as when a new category emerges such as ‘phablets’ (a potentially new category which merges a phone and a tablet e.g. Samsung Note) then there is less coherence.
If consumers are uncertain about their own preferences, then there can be strong coherence to these collective anchors. This is prevalent in tech markets, given the degree of change in technology, which many consumers struggle to keep up with. Categories of devices (e.g. tablets) and services (e.g. gaming apps) will typically emerge in tech markets which then provide the coherence for consumers and the market leader in each category, typically forming the collective anchors.
And coherence to anchor points can apply not only within categories (such as TVs or smartphones) but within brands themselves, making them less vulnerable to challenge. For example, Apple has a reputation for a premium positioning, a halo effect which means that when they enter a market they arguably set the anchor in a way that is coherent with the Apple value proposition and pricing in other market categories.
Of course, this can also work against a brand. Current TV manufacturers have the legacy of selling large numbers of non-connected TVs and, as such, the anchor points for a new connected TV may well be set by the historic TV’s prices. Current TV manufacturers may therefore struggle more to change collective anchor points in the minds of consumers with a premium pricing / positioning model.
The coherent arbitrariness effect is so strong that brands often need to ‘reframe’ the market in order to win market share. ‘Eating the Big Fish’ is a book devoted to this topic, a recommended read. However, the fact that it’s 368 pages long is in itself testament to the difficulties in changing anchor points in the minds of consumers!
Thanks to my fellow Behavioural Economists, Olly Robinson, Rich Preedy and Antonio Margaritelli for their input
 Twain, M. (1876) Tom Sawyer, A Public Domain Book.
 Gladwell, M. (2000) The Tipping Point, USA: Oxford University Press.
 Morgan, A. (2009) Eating the Big Fish: how challenger brands can compete against brand leaders, New Jersey: John Wiley & Sons, Inc.