This is what happens when you add a 3rd pricing option

You’re on the way to a friends place for dinner, so you stop off to buy a bottle of wine.

Since you’re in a rush you decide to just buy whatever they have on sale at the front counter.

You see three bottles priced $3.99, $19.99 and $54.99.

You think to yourself, “The cheapest wine is probably gross, but the $54.99 bottle seems overpriced. Better go with the middle choice.

This preference for the “middle” choice happens all the time.

And the effect isn’t confined to low-end commodities, it also happens with higher-end stuff…

Eldar Shafir, Itamar Simonsonb, and Amos Tversky from Stanford university studied this phenomenon in 1993.

They questioned 221 participants and asked them which camera they would buy.

In scenario 1, they were given two choices. $170 for the Minolta X-370 or $240 for the Minolta Maxxum 3000i.

Participants had a roughly 50% preference between each camera.

In scenario 2, they also introduced a 3rd higher priced camera, the Minolta Maxxum 7000i priced at $470.

If consumers were rational thinkers and their preference was based on the characteristics of the cameras alone then the first two cameras would still have the same ratio of sales. But this did not happen.

The middle priced camera now had a preference of 57%, and the cheapest one 22%.

This happens because buyers do not know what makes a good price.

Instead, they use contextual clues to influence their decision. The introduction of a third higher priced option sets a new benchmark and makes the other two options (particularly the middle option) more appealing.

Key takeaway: If you currently have two packages, introduce a third premium version. It doesn’t matter if no one buys the premium package. It’s purpose is to influence people into buying the “middle” package, and that middle package should have the highest profit margin.

Coaches, consultants, and service professionals – come hang out with us at the Client Science Facebook group if you like this kind of thing.

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