As consumers we typically avoid extremes, gravitating instead towards the compromise or middle alternative.
An excellent demonstration of this effect from William Poundstone’s book “Priceless”:
Researchers first offered customers two choices of beer; a “standard” beer for $1.80 and a “premium” beer for $2.50. 20% chose the $1.80 beer and 80% chose the $2.50 beer.
They then introduced a third option, a “bargain” beer for $1.60. Nobody bought this bargain option. But its introduction had the effect of pushing people to pick the middle option. Now 80% bought the $1.80 beer and 20% bought the $2.50 beer. This would have resulted in a 20% decrease in revenue.
Finally, they removed the $1.60 beer and replaced it with an “extra premium” $3.40 beer. Now 5% chose the $1.80 beer, 85% chose the $2.50 beer, this time the middle option and around 10% opted for the most expensive $3.40 beer. This would have meant a 10% increase in revenue over offering only two options.
So what’s happening here?
Customers may not know which of the three options provides the best value. But they do know this:
- The most expensive option is higher priced (negative) but is likely to be higher quality (positive).
- The cheapest option is lower priced (positive) but is likely to be lower quality (negative).
So both options offer potential losses, one in terms of cost, the other in terms of quality.
But the middle option has a smaller potential for loss on both attributes. In other words it’s the least risky option. And because we humans value avoiding losses more than we value making gains, the least risky option is the most attractive.
Customers are likely to be influenced by compromise effect when they have low product knowledge and are selecting from a small, align-able assortment (different products with the same attributes).
By introducing a premium product above an alternative, you can make that alternative the middle option, thereby increasing the likelihood of purchase and maximizing profit.
It may also be useful to examine your product range to identify and possibly remove poor selling, lower priced products that may be dragging down sales of higher priced alternatives.
According to data from ConsumerIntelligence Research Partners (CIRP), published on AllThingsD, the middle 32GB model makes up 51% of all iPhone 5 sales.