Why a logical product lineup may not be the most profitable
When marketers plan a company’s product offerings, they usually try to do so in the most logical way possible. Several levels of product may be offered - a stripped-down, basic version, a more capable better version, and perhaps a “best” version. These would normally be priced at quite different levels, probably based in part on the relative manufacturing costs of the products.
In one of my most-read posts, Decoy Marketing, I described research that showed how a seemingly irrational pricing strategy, i.e., pricing an inferior product either the same or almost the same as a better one, could boost sales of the better product by making it look like a bargain. (In that case, the inferior product is the decoy.)
Now, let’s look at a different kind of decoy: a new high-end product that, even if it sells poorly, can boost sales of the next product in the lineup. Stanford Business describes how this can work:
Customers frequently don’t know the value of products and must rely on comparisons set up by the retailer to determine if an offer is “a good buy.” Williams-Sonoma, a San Francisco mail-order and retail business, used to offer one $275 home bread maker. Later, a second bread maker, which had similar features except for its larger size, was added. The new item was priced more than 50 percent higher than the original. Not many of the new, relatively overpriced items sold, but sales of the cheaper bread maker almost doubled. [From Stanford Business - The Limits of One-to-One Marketing by Barbara Buell.]
What was at work? Simply put, introducing the higher-priced machine “framed” the previously most costly unit as a compromise, or middle of the road choice. Buyers were no longer spending too much on the “Cadillac” of the line, but rather making a wise and practical choice. Before the higher-priced machine was introduced, customers may have compromised on a still lower-priced machine, or perhaps bought none at all. Here’s another example, also from the work of Itamar Simonson:
In another study, Simonson had a group of consumers choose between two Minolta cameras, one more elaborate than the other. A second group chose among three cameras, including an even higher-end Minolta. In the first group, buyers were evenly split between the two choices. But the addition of the third camera in the second group boosted the share of the mid-priced camera at the expense of the cheapest camera, demonstrating that a company can steer buyers to higher margin products by adding expensive products to the mix.
From a practical standpoint, this means that if you have a solid product at the top of your line, you might actually increase its sales by adding an even higher-priced product above it in the lineup. You might find, of course, that the market will support the new premium item on its own merits. If that happens, perhaps introducing an even more costly super-premium product might further boost revenue. But, even if the new high end product doesn’t generate spectacular sales, you may well find that it boosts sales of the next-best or mid-range products.
Of course, there are a few cautions. First, the customer may not be comparing your products only against each other - competitive offerings may need to be accounted for. Second, you should avoid having too many product variations - research shows that having TOO many choices reduces sales, perhaps due to a sort of “paralysis of analysis.” (See also Mega-Branding: The Purple Oreo Problem.)
To see the original research which includes other experiments testing how product selection affects decision-making, read The effect of product assortment on buyer preferences (requires Science Direct login).