Price Perceptions, Consumer Choices and the Compromise Effect
- António Damásio, in his book “Descartes' Error,” states that emotions both guide and bias behavior and decision-making. One of the examples he uses is called the Compromise Effect, a behavioral phenomenon by which customers often choose the mid-priced option to protect themselves from making a bad choice.
- According to Catherine Tucker, MIT Sloan Professor of Management Science and Marketing, this effect should not just be employed as a decoy, but also as an opportunity to target high value customers.
- In addition, many decisions are driven by the consumers’ lack of pricing knowledge. An MIT study interviewed people waiting in line at a store. They found that while 80% of customers thought they knew the price of the products in their basket, only 50% did, in fact, know. At Prisma, we conducted a similar survey. While the consumer was picking a product from the shelf, we asked her if the price she was paying was fair, and if it was a product that she usually bought. The survey showed that 45% of respondents that answered that the price was cheaper with another competitor were wrong.
- In a classic experiment by Kivetz, Netzer, and Srinivasan (2004), MBA students were given the choice of subscribing to the Economist in print ($125), web ($59), or print & web ($125). The result, hypothetical subscriptions to print & web increased from 43% without the web-only option to 72% when the web-only option was included.
- The implication here is that a firm can increase profits by adding a high-priced option or a bundle to an existing product line.
- At Prisma, we advocate for the use of a combination of business rules, machine learning and A/B tests, among other techniques, to deliberately design your pricing and assortment strategy, and, therefore, increase your margins.
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