Sunday, July 08, 2012

Goldilocks and the three beers

The Atlantic has an interesting article on pricing patterns and behavior (link).

People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer. Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

In short: We are all Goldilocks.

In his book Priceless, William Poundstone explains what happened when Williams-Sonoma added a $429 breadmaker next to their $279 model: Sales of the cheaper model doubled even though practically nobody bought the $429 machine. Lesson: If you can't sell a product, try putting something nearly identical, but twice as expensive, next to it. It'll make the first product look like a gotta-have-it bargain.

I've always been fascinated by pricing. How one store might sell the exact same item for double the price of what another store might charge. It is one reason I have always had an interest in the stock market. Part the shopping behavior is likely cultural. In the case of the three beers, the results might be very different in other countries, where buying the cheapest doesn't have the same stigma, or where buying the best brings even higher status.

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