Where Brain Science and Marketing Meet

More Decoys: Compromise Marketing

7

Why a logical product lineup may not be the most profitable

 

When marketers plan a company’s product offerings, they usually try to do so in the most logical way possible. Several levels of product may be offered – a stripped-down, basic version, a more capable better version, and perhaps a “best” version. These would normally be priced at quite different levels, probably based in part on the relative manufacturing costs of the products. In one of my most-read posts, Decoy Marketing, I described research that showed how a seemingly irrational pricing strategy, i.e., pricing an inferior product either the same or almost the same as a better one, could boost sales of the better product by making it look like a bargain. (In that case, the inferior product is the decoy.)

Now, let’s look at a different kind of decoy: a new high-end product that, even if it sells poorly, can boost sales of the next product in the lineup. Stanford Business describes how this can work:

Customers frequently don’t know the value of products and must rely on comparisons set up by the retailer to determine if an offer is “a good buy.” Williams-Sonoma, a San Francisco mail-order and retail business, used to offer one $275 home bread maker. Later, a second bread maker, which had similar features except for its larger size, was added. The new item was priced more than 50 percent higher than the original. Not many of the new, relatively overpriced items sold, but sales of the cheaper bread maker almost doubled. [From Stanford BusinessThe Limits of One-to-One Marketing by Barbara Buell.]

What was at work? Simply put, introducing the higher-priced machine “framed” the previously most costly unit as a compromise, or middle of the road choice. Buyers were no longer spending too much on the “Cadillac” of the line, but rather making a wise and practical choice. Before the higher-priced machine was introduced, customers may have compromised on a still lower-priced machine, or perhaps bought none at all. Here’s another example, also from the work of Itamar Simonson:

In another study, Simonson had a group of consumers choose between two Minolta cameras, one more elaborate than the other. A second group chose among three cameras, including an even higher-end Minolta. In the first group, buyers were evenly split between the two choices. But the addition of the third camera in the second group boosted the share of the mid-priced camera at the expense of the cheapest camera, demonstrating that a company can steer buyers to higher margin products by adding expensive products to the mix.

From a practical standpoint, this means that if you have a solid product at the top of your line, you might actually increase its sales by adding an even higher-priced product above it in the lineup. You might find, of course, that the market will support the new premium item on its own merits. If that happens, perhaps introducing an even more costly super-premium product might further boost revenue. But, even if the new high end product doesn’t generate spectacular sales, you may well find that it boosts sales of the next-best or mid-range products.

Of course, there are a few cautions. First, the customer may not be comparing your products only against each other – competitive offerings may need to be accounted for. Second, you should avoid having too many product variations – research shows that having TOO many choices reduces sales, perhaps due to a sort of “paralysis of analysis.” (See also Mega-Branding: The Purple Oreo Problem.)

To see the original research which includes other experiments testing how product selection affects decision-making, read The effect of product assortment on buyer preferences (requires Science Direct login).

7 Comments
  1. Phil Sumner says

    This sounds roughly the same as “The Mystery of the Short Cappuccino” (http://www.slate.com/id/2133754/), would you agree?

  2. Roger Dooley
    Twitter: rogerdooley
    says

    Thanks for the link, Phil. Starbucks seems to be pursuing a slightly different strategy as described in that article, but concealing a still-lower price is probably sound revenue maximization. Adding a lower-priced product might cause the “tall” or “grande” to become a compromise choice.

    Overall, though, I’d say they are closer to using a strategy like I described in the original Decoy Marketing post. By pricing the venti size only a tiny bit more expensive than the grande, they can push volume toward the seeming bargain of the larger size. It’s a good trade – the consumer gets a bigger product for barely any more money, and Starbucks earns more profit because of the trivial cost difference.

    I’ll have to try ordering a short cappuccino next time I’m at Starbucks!

    Roger

  3. Alexander Kintis says

    There’s a chapter in the book “Yes!: 50 scientifically Proven Ways To Be Persuasive”, found at:

    http://www.amazon.com/Yes-Scientifically-Proven-Ways-Persuasive/dp/1416570969

    that talks exactly about this.

    After Guy Kawasaki recommended it, I bought the book. I’ve had the book for some time now but since I’ve been so busy, I’ve only gotten through a third, or so, of it.

  4. Ryan says

    Roger,

    You’re very well read. I too have read many of the studies and articles that you write about. It’s good to see that someone is as active as yourself on this wonderful topic. Please share with us if you can what you’ve discovered from Nuero-Linguistic Programming (NLP) and conversational change hypnosis.

    I would love to share if the space permits some of my experience marketing and using NLP. If not, that’s fine too. The content here is great…Ryan

  5. Bill says

    Hi Roger,
    I am in the middle of pricing a product and came across this goldmine of a website. I am having a blast reading and have almost forgot about my deadline.

    I would love to see more on the syllabic concept and if sevens are good, better or best to use.

    Bill

    1. Roger Dooley
      Twitter: rogerdooley
      says

      Hi, Bill, glad you are enjoying the site! There are a lot of psychological tricks in pricing. I cover some in my book Brainfluence. Sometimes these concepts conflict. For example, precise prices like $498.37 suggest higher value than a round price like $500. But, it has many more syllables. Testing is the only way to determine what will work best with your products and customers.

      For a more thorough look at the topic, my friend Leigh Caldwell wrote a whole book on the topic: The Psychology of Price: How to use price to increase demand, profit and customer satisfaction.

  6. Bill says

    Roger,
    I will be looking into these books tonight. It’s all about making high conversions or you might as well pack up and go home.

    Again, I appreciate all that you do to help educate others.

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