What Do $7,000 Handbags and The Price of Your Home Have in Common?

David Bates / July 15, 2011-12:01 pm

A fascinating concept which may have many uses in real estate buying and selling is described in the book Priceless: The Myth of Fair Value (and How to Take Advantage of It). According to the book, “anchoring” happens when a person is given a number and then asked to estimate the value of something else. Simply put, studies discovered that the higher the first number was, the higher the subsequent estimate would be. Incredibly, it apparently didn’t seem to make a difference if the first number had nothing to do with the second number.

After recounting several experiments that attested to the validity of anchors, author William Poundstone provides examples of how retailers have used price anchors to create premium sales for products influenced by the anchor. According to Poundstone, Prada, Coach and other high-end retailers might prominently display an exquisite item at a phenomenally high price. Although shelf space is expensive in retail, consumers weren’t expected to buy, say, a $7,000 handbag — however, believing that they were in a location that often sells $7,000 handbags, the consumers began to overestimate the value of other items in the store. The exceptionally-high-priced anchor allows consumers to feel better about paying a lot for another expensive item— say, $2,000 for a different handbag. As a result, many more $2,000 handbags are sold than would have been without the $7,000 anchor. As well, consumers might find similar items in the store at 1/10 as much as the anchor. Imagine their excitement in purchasing those items that without the anchor would have seemed terribly expensive.

This interesting book recounts effective anchor strategies in everything from Broadway ticket sales to restaurant menus to jury trials. And because anchoring works when prices aren’t immediately understood by the consumer, real estate buying and selling is a great area of promise to use anchors effectively. Poundstone recounts the successful use of an anchor in the sale of Andy Warhol’s beach house. Although a fair ask was said to be $25 million, Warhol’s heirs created an anchor of a $50 million list price. A few years later, the home sold for $27.5 million, a price compared to the anchor that must have seemed like an incredible value to the buyer, and in reality was a $2.5 million windfall for the seller.

The writer of this blog thinks that among the many areas of real estate that anchors could be used powerfully, one is by buyers who want to make offers on properties that have been on the market for long periods of time without offers. A low, low offer may lead to a great deal. At minimum, the low, low offer would counter a savvy seller’s use of an anchor.