Most people are
uncomfortable buying either the
cheapest or most expensive item available, usually preferring something in-between. Companies take advantage of this "
compromise effect" by
manipulating their
product lines to increase sales of their most
profitable items.
Lets say you sell
widgets. You have a basic model that sells for $50, and you have a
top-of-the-line model that sells for $200. People would feel the most comfortable buying a
midrange model that sells for around $100. The idea is that the basic model is seen as
cheap, while the top-of-the-line model is percieved to have only a small benefit over the midrange model (for a hefty fee).
Companies take advantage of this by inventing an arbitrarily higher-priced top-of-the-line model, thus forcing a
comfortable midrange price on their
customers. One well known example is attributed to
Williams-Sonoma; they were able to increase sales of its $275
breadmaker by introducing a second, slightly larger model at a price of just over $400.
Xerox was able to boost sales of its
high-volume copier to large corporations only because it introduced a higher-priced model with a few extra
bells and whistles. Xerox succeeded because they released a model that
purchasing managers could feel good about
rejecting.
Most
salesman operate along similar lines. When they start out by suggesting a
ridiculously high price, its not because they think they can get it, but rather to establish the highest possible
reference point in the mind of the customer. They know they will be more
successful by starting high and lowering their prices.
People who fall
victim to the
compromise effect are essentially tricked into thinking they got a good deal. This isn't to say that the product is
worthless or that the customer is
foolish for purchasing the item. Its just another way of making people feel good about spending their money.
sources:
http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A41329-2002Jan26¬Found=true
http://www.disenchanted.com/