Customers usually make purchases by comparing the item with others. If a store only has one TV available, it’s difficult to tell if the price is reasonable. It just increases the likelihood that a customer will postpone their purchase to compare prices in another shop. Skilfully creating options for customers will make them focus their attention and choose the option that stands out against the others, but isn’t necessarily be attractive in itself.
Dan Ariely - a researcher in behavioural economics, tested how the relativity of choice affects purchasing decisions based on subscriptions to the Economist magazine. Customers had three options:
- An online subscription for $ 59 (Option A),
- A paper subscription for $ 125 (Option B),
- A paper and online subscription - also $ 125 dollars (option C).
Option A was chosen by 16% of potential customers, Option B was chosen by none, and Option C was chosen by 84% of customers. As you can see, no one chose one of the options, so Ariely removed it from the pool and asked customers about their preferences again. This time, Option A was chosen by 68% of respondents, and Option C only 32%. Thus, Option B (which nobody wanted anyway) was a kind of reference point, a lure introduced into the offer only to draw customers’ attention to Option C.
An expensive reference point
Many offers - both B2B and B2C - are constructed based on the bait principle. One or several very expensive products are placed in the price list - products which usually don’t find buyers. Their job is to change the relative perception of prices of other products, to make them seem much more attractively priced. An example of such an approach may be an expensive, luxury car sitting in a showroom otherwise full of cheap city cars, or a luxuriously-finished apartment offered by a property developer, even though they generally sell unfinished units.
The same applies to services. Imagine that you offer a wall painting service for 6 euro per square metre. If the customer has no other options to choose from, they’ll have to compare your price with the prices offered by competing companies. That’s why you should add a different option to your offer - wall painting with additional benefits for the customer, e.g. shorter waiting time and thorough cleanup after painting. The price of such a “VIP service” may then be 12 euro per square square meter. Then, your company's offer will have an advantage in two aspects. First of all, the price of the basic service (with normal delivery time and without cleaning) will be half the price of the VIP service. Secondly, there’s a significant chance that there will be customers willing to pay a lot more for the time savings and comfort offered by the VIP service. By adding a second service to the offer, the company can increase sales of the basic service and at the same time earn more on the more expensive option.