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Goldilock Pricing

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 Goldilock Pricing2004-05-09 13:23
19 comments
picture by Flemming Funch

Via Seb Paquet, Goldilock Pricing by Narasimha Chari:
The traditional product segmentation is to offer two versions: a high-end version and a low-end version. However, in some circumstances, it is preferable to offer three versions: low-end, mid-range and high-end. The rationale is that people tend to exhibit 'extremeness aversion' and will tend to choose the mid-range offering. Consider the following experiment (from Hal Varian's paper on Versioning Information Goods):
Simonson and Tversky [1992] describe a marketing experiment in which two groups of consumers were asked to choose microwave ovens. One group was offered a choice between two ovens, an Emerson priced at $109.99 and a Panasonic priced at $179.99. The second group was offered these ovens plus a high-end Panasonic priced at $199.99.

By offering the high-end oven, Panasonic increased its market share from 43% to 73%. More remarkably, the sales of the mid-priced Panasonic oven increased from 43% to 60% apparently because it was now the 'compromise' choice. According to Smith and Nagle [1995], "Adding a premium product to the product line may not necessarily result in overwhelming sales of the premium product itself. It does, however, enhance buyers' perceptions of lower-priced products in the product line and influences low-end buyers to trade up to higher-priced models."
In other words, adding a 'premium' version to the product line actually boosts the sales of the mid-priced version. The newly-introduced premium version steals market share from the mid-range version, but this is more than offset by the market share that the mid-range version gains at the expense of the low-end version - this is the Goldilocks effect. Note that this is purely the result of a cognitive bias - there is no objective rationale for such trading-up.

This may explain the tall/grande/venti segmentation: even though few will order the venti, its mere presence on the menu will induce some buyers to trade up from the tall to a grande. Similarly, it makes sense to add expensive wines to the wine-list that realistically no one is going order.
Seems to be another example of a Support Theory style of human thinking fallacy. By having a set of choices presented in a certain way, we make different choices than if they were presented in a different way. The grande cup of coffee remains the same size, but we feel differently about it if it is the middle choice than if it is the top choice.


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19 comments

14 May 2004 @ 17:54 by Quirkeboy @209.92.185.196 : Pricing as a freelancer..
Again... Im glad to have found this fascinating site.. some of it seems to be a bit over my head but Im definitly willing to listen and learn..
Just an interesting note .... This article reminded me of something a professor of graphic design told me in college.. that when deciding on a price.. its sometimes wise to give the customer a bargain.. but DONT go too low or they will perceive you as amateurish.. funny isnt it?? You will produce the same quality of work no matter what they pay you.. but the client EXPECTS to pay alot if its to be considered quality work.. and you will be taken more seriously because of it!!  



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