Pricing strategies (III): compromise effect

In some recent posts we discovered how decoy options work, and how they can be used in multiple situations to modify the perceived attractiveness of a certain option.

In the examples I introduced, I carefully chose product categories where the risk of failure when deciding was low. We can assume that this risk is associated to a bad purchase decision and can be understood as the consequence or the impact that a bad decision on that particular choice has in your life. For example, think about not buying the right external hard drive for your computer… The differences among them in terms of capacity were not that relevant, and moreover, you would be loosing not more than 100€ in terms of opportunity cost in the worst case.

riskMeasuring this risk is not something we do 100% consciously, but our mind is more aware of the trade-offs between options as the risks and consequences of a bad decision increase. Broadly speaking, we are not using the same decision heuristic when purchasing a 500€ air conditioner than when purchasing our new home in exchange of 6 times our yearly net income.

Under these conditions, introducing contextual effects trying to direct costumer’s attention towards extreme options could not be that useful… At this point, I present you the compromise effect, one of the most documented and robust phenomena in behavior research.

The main idea underlying this concept is quite simple: As the costumers are more aware of the trade-offs and can experience high levels of uncertainty and stress during the decision making process, why not introducing a middle option, with average values in all the attributes, so as to dilute trade-off perception?

graphBesides economic implications, compromise effect increases its performance as the complexity and the number of attributes increase and also when other external impacts enter the field, such as brands.

Think of purchasing your new car. After some considerations, you are evaluating two final options: option A: Great HP, nearly full equipped and high price; and option B: discrete HPand equipment and low price.

Maybe you can think of introducing a third option, reinforcing option A through a decoy, to modify its perceived value… but, with this solution, we are not solving costumer’s main dilemma between spending a lot money or loosing quality. Buying a car is a significant investment and in most cases our decision will be based on minimizing trade-offs.

2What some retailers would do is to present a third option, with an attractive discount for a limited period of time: option C: moderate HP, medium equipment and medium price. In this situation, option C would be the compromise option between A and B, eliminating the perception of betting too hard either for quality or price. But, what most retailers would do actually is to target their premium option adding a third extreme one, with more HP, full equipped with extra limited features at a very high price. In this context, that high price is not as high as it was… and the expensive option becomes the one with less trade-offs…

David González
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