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Want to sell lots of $350 watches that do cool stuff but are really first generation products that will only work usefully with an associated $300 plus iPhone nearby? Put them on sale next to a $10,000 watch that does the same thing. Anchoring is a powerful sales tool and Apple are using it.
Apple have announced their new Apple Watch this week in our latest shift towards wearable technology. Their announcement was most heavily reported with headlines raving about the $10-17K gold Edition with a mixture of amazement and mockery. Who would buy such a watch? Well, maybe a few people with more money than sense of course. But they do not matter, the absurdly priced Apple Watch is not there to be sold but to anchor the $350 watch so that it looks like a reasonably priced product.
We can tell this is working - how many articles have you read that end with "....but the cheapest Apple Watch is $349."
Ridiculously priced items are an application of Anchoring. This is a cognitive phenomenon unveiled by psychologists Amos Tversky and Daniel Kahneman in the 1970s. See Tversky, A.; Kahneman, D. (1974). "Judgment under Uncertainty: Heuristics and Biases". Science 185 (4157): 1124–1131. doi:10.1126/science.185.4157.1124
Quick Question: Is the population of Bolivia greater or fewer than 42 million? Go ahead and guess without using your Apple Watch to look up the answer.... OK? Here's another question, how many people do you think live in Bolivia? Come up with a figure and keep it in your head. We’ll come back to this later (no peeking).
What Tversky and Kahneman discovered is that whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just seen or thought about. The point here is that humans are excellent at comparing things but really bad at making absolute measures. So, for instance, we are good at saying which of two sky scrapers is the highest but quite poor at guessing the height of each one in feet or metres. We can measure it, of course, but what if the thing to be compared isn't easily measurable? Like the price of a piece of new technology or even something simple like a music file. Our guess could be anything from zero to "that's so cool, I'll pay you anything". Digital is hard for us to assess pricing for because there is so little to compare against, we certainly don't have the cost of production to work from.
Apple do not care about selling the gold version. It does not exist to make much money - the only reason this exists is about public perception of what the Apple Watch is and how low cost (in comparison) the $350 version is. The gold edition has the twin tasks then of Anchoring the bottom end priced watch (i.e. the actual price of 99.99% of all Apple Watches that will be sold) and it elevates its status. Status comes from when people see something they can't have, so the gold edition conveys higher status on all the models. But the Anchoring effect matters the most.
Think you are a smart person who is unaffected by this sales trick? Well then, what's the population of Bolivia? The answer is about 11 million people.
You shouldn't necessarily expect to know the answer so you are guessing. But did your answer come in above 20 million? If so, then you were most likely affected by the anchoring effect of being asked if the population was greater or fewer than 42 million. Your answer was dragged closer to 42 million than if you were just asked to guess the population with no number mentioned. This is what anchoring does and it is so powerful that Tversky and Kahneman discovered that even if you know what is being done it is still terrifically hard to not be heavily influenced by the first number mentioned.