Imagine that a company makes two different models of digital cameras: The first model is a base model priced at Rs10,000, whereas the second model has several additional features and is priced at Rs14,000. As is often the case, the more expensive camera also happens to have higher margins and is more profitable for the company. The company would like to have more people buy the Rs14,000 camera. To sell more of the second model, one option is to discontinue the base model. This would force consumers loyal to the brand to migrate to the second model because of lack of other choices. This option is obviously quite risky as quite a few customers would have to migrate to the second model to justify the discontinuation of the first model. Research on economic psychology suggests that companies may have another, more profitable option, to increase sales of the Rs14,000 camera.
The second option is somewhat counter-intuitive: Introduce a third model into the mix. Researchers have found that when a new model is added at the higher end, a curious thing happens in how consumers judge the different models. The behaviour observed by researchers violates the basic economic principle of regularity, which dictates that the likelihood of selecting an alternative from a set cannot increase with the addition of another alternative to that set. Thus, by adding a third model, one cannot make more people buy the second model. If anything, the third model should take some customers away from the second model and not funnel more people towards it. Interestingly, this principle of regularity is often violated in real life!
So, how can the third model direct traffic towards the second model? The trick lies in how this new model is configured. If the new third model is loaded with extra features and then priced at a high level (say, Rs20,000), it can do the trick. Now, if consumers look at the company’s three models, they see the first model as a low-end base model, whereas the third model is a souped up, expensive model. The second model appears to be a compromise model that has many of the extra features while still being relatively moderately priced. This preference for the middle-of-the-road option is referred to as extremeness aversion or the compromise effect and has been shown to be a robust phenomenon by several different researchers.
In a classic study, subjects were asked to indicate their preferences for two flats that varied in general quality and their distance from the college campus. Flat A was of high quality, but 11 miles from campus, while Flat B was of medium quality and 6 miles from campus. Subjects preferred Flat B roughly 50% of the time. Next, another set of subjects were asked to indicate their preferences, but for three options—the original Flats A and B, and Flat C, which was of low quality and located 1 mile from campus. Interestingly, the presence of Flat C in the choice mix resulted in 66% of the subjects choosing Flat B!
What are some of the implications of this effect? As a consumer and a decision maker, you should be aware of the workings of this effect so that you do not fall victim to it. One of the reasons why this works is that it is easier to justify picking the middle option. Manufacturers and retailers have been known to use this effect to promote sales of a particular intermediate model. Your preference for an intermediate model should be driven by the intrinsic value of the model instead of the compromise it offers against the two extremes. Also, we have a natural tendency to believe that the variety available in a product category represents the distribution of needs and preferences of the general population. This assumption may not always be correct as some extreme models may exist largely to divert traffic to some other models. As a result, when you think you are buying a middling alternative, you may actually be buying on the extreme of a “realistic” range.
Thinking of options in a product line in terms of “realistic range” will also help you avoid feeling compelled to pick a fancier model than what you really need. Reframing the range of options by excluding the extremes can help you focus on realistic options and can make your shopping experience more enjoyable.
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Praveen Aggarwal is an associate professor of marketing at the Labovitz School of Business and Economics at the University of Minnesota Duluth, and Rajiv Vaidyanathan is a professor of marketing and director of MBA programmes at the University of Minnesota Duluth.