Consumers have more and more information on more and more products, especially thanks to the Internet. Conventional wisdom tells you to limit the choices you offer consumers to what you want them to buy. But advances in behavioral economics are overturning that wisdom. As it turns out, consumers rank available choices and tend to avoid extremes. So sometimes you can improve a product’s market share by showing consumers a competing product that’s higher or lower in price or quality.
In a series of experiments, Professors Ran Kivetz and Oded Netzer of Columbia and Professor V. Srinivasan of Stanford asked consumers to choose from among a variety of personal computers, speakers and magazine subscriptions. They found that changing the rank of two products among available options changes how much consumers favor one or the other.
One experiment asked consumers to pick among three speakers. The introduction of the extreme speaker C increased the market share of option B relative to option A, because B became the intermediate or compromise option. In their study, Kivetz, Netzer and Srinivasan found that a product’s relative share increased by as much as 34 percent when the product moved away from an extreme end of the price or quality spectrum.
The study illustrates the compromise effect, which results when you introduce an extreme option that increases the market share of a nearby option, and the decoy effect, which results when you introduce an intermediate option that makes a more extreme one look better. The introduction of the decoy option C increased the market share of option B relative to option A, because B became an asymmetrically dominant option.
This research can help managers make better decisions about pricing and positioning their products relative to the competition. Telling consumers you have the lowest prices, highest quality or latest design is not as useful as you might think, since consumers tend to shy away from extremes. This research method can help you figure out where to position your product and which of your own or your competitor’s products to highlight in the consumer’s ranking.
The method is especially useful for predicting the impact of new competition and how line extensions will affect the sales of your existing products. You can use this research method to help you make key decisions about your product portfolio in any line. It can also help you design product menus that favor your high-end products by getting the ranking right.
You don’t always have to avoid competition. Sometimes it’s better to bring it on — strategically — and let consumers decide in your favor.
Ran Kivetz is the Philip H. Geier, Jr. Professor of Marketing at Columbia Business School.
Oded Netzer is associate professor of marketing at Columbia Business School.