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Anchoring and Priming in Commercial Real Estate

 

He’s contemplating anchoring and priming

After reading Thinking Fast & Slow, I was struck by two interesting concepts: anchoring and priming.

Anchoring is the psychological concept of mentally attaching to an initial value. The most understandable example is retail discounts. Retailers will advertize the price of a good as steeply discounted from the original price in order to distract the buyer from the actual value of the product.

For example, Bloomingdale’s will sell you a plate for $200, but will advertize it as “Originally $300”. That way, you focus on the fact that you are getting $100 and 33% off the original price rather than trying to determine whether or not the plate is actually worth $200.

In the example, you as the consumer are anchored to the original “value” of $300 and ignore the intrinsic value of what you are buying.

Priming is the idea that someone can affect your actions by conditioning your subconscious. Put another way, your conscious self can be motivated by your subconscious self.

The classic experiment to demonstrate the phenomenon of priming is the word jumble experiment. In the experiment, people would be given 5 jumbled words and asked to make a four word sentence.

An example would be: Happy, Men, Women, Make, Bingo

Depending on your opinion, the sentence would be “Men make women happy” or Women make men happy.” The actual sentence is irrelevant. The “outlier” word is important. In this case it is “bingo” and in the experiment, all of the words were associated with old age. So they would give obvious 4-word sentences and then include words like Florida, Retire, Grey, Wrinkle, etc.

The key part of the experiment was what the subjects would do after the word jumble. They were asked to walk down the hall to another room and those running the experiment would time that walk. They found that the walk down the hall after the word jumble was twice as slow as the walk before the jumble.

The punchline is that the subjects’ subconscious had been primed to think about elderly people and the body then began behaving like an elderly person (walking much slower than normal).

Kahneman gives several other examples that ring true and drive home the point, but let’s assume that I have convinced you that priming is a real phenomenon where your subconscious will cause you to do things your conscious mind might not be fully aware of and we can manipulate that subconscious.

Big friggin’ deal, you say. What does it have to do with commercial real estate in Atlanta?

Well, curious youngster, both have profound effects on our business and will be worth millions of dollars to you over the course of your career.

I would argue that anchoring is one of the fundamental aspects of negotiation and pricing and priming might be one of the single most important considerations for developers, architects, and landscape architects.

For the anchoring argument, let’s assume you are negotiating either the sale of a property or a lease of some of its space. You do your homework, figure out a realistic value range for the property and then need to advertize your price to the market. That initial advertized number is your “anchor” and you must choose it wisely. All ensuing negotiations and price discussions will be based upon a relationship to that number.

If you advertize Midtown office space at $33 psf, then the tenant will probably want to settle at $26 or $27 psf. It doesn’t matter to them that Midtown office space is only worth $23 psf. They feel like they got a deal. Just like the Bloomingdale’s example above, they see only the discount to the original $33 psf rather than objectively analyzing the value of the space. Everyone wants to feel like they got a deal and if you wisely choose your original price anchor both parties will come out feeling like they had the better end of the deal.

(*Note* – Of course, there is a limit to this effect. If you try to anchor at $55 psf in the example above, clients will ignore you and pass you off as ridiculous. But, done well, anchoring can serve you very well in your negotiations.)

¬†For priming, I would argue that developers, architects, interior designers, landscape architects, and any other “space creators” are in the business of first impressions and must understand priming. Bob Lutz of General Motors famously said that they were in the “arts and entertainment business” because he understood the value of consumer impressions. If he could position his cars as “works of art” and mobile entertainment centers, they would transcend the mundane Point-A to-Point-B machine that cars had symbolized for many of us.

The exact same concept applies to commercial property. If you can convince tenants that this is a safe, relaxing, a beautiful place to conduct business or live (for apartments), I bet they will be interested in leasing your space. If you can convince buyers that this industrial park is well-maintained, clean, and efficient, I would be surprised if they didn’t put an offer on the table to buy the property. You can use the subtle effects of priming to make leasing and selling your buildings much smoother.

If you can use things like beautiful landscaping, water features, clean hallways, organized parking, and other small features to “prime” your investor/client/tenant to think that this is a great property, then 95% of your job is done. Because in the end, almost all of us are selling the same thing:

This is a great property and you want to be involved here.

So, if that is what we are selling, then we should all be using subtle priming methods to convince others that this is first class and well done. We can dig into more of the details of this later, but suffice it to say that everything from the way you dress to the way you shake hands to the way you smile when you talk will affect the subconscious of the buyer or renter.

So you want to “prime” people to buy what you are selling, no matter what it is. That’s why they tell telemarketers and phone sales professionals to smile when they talk on the phone. It makes them seem happy and we consumers like to buy from happy (friendly) people.

 

Hopefully you can see that the subtle effects of anchoring and priming can have profound effects over the course of a career. If you can get an extra 5% pricing on your deals because you anchor well or you can close an extra 4% of deals because you prime buyers well, and then compound that over a 40 year career, look out. You can waive at me from your Maserati.

I exaggerate a little, but please don’t miss the point. In this highly competitive business, you need to use every small psychological advantage you can over your competition.

To bring it home, when was the last time you refused a deal you wanted where the salesman warmly smiled at you and offered you an immediate 20% discount off the asking price?

See my point?

– Duke

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