Monday, September 24, 2007

The Compromise Effect

The Compromise Effect states that a consumer is more likely to choose the middle option of a selection set rather than the extreme options. For example, a car-shopper who is given three options: the low-priced basic model with no extras, a high-priced fully loaded model with all the extras, and a mid-priced model with some extras, will most likely choose the middle option.

Retailers often take advantage of this effect to increase sales by adding a more expensive model. However according to the study Extremeness Seeking: When and Why Consumers Prefer the Extremes (Gourville and Soman), as the number of options increases and the trade-offs become less obvious, consumers become more likely to choose the low or high extreme.

Previous studies have demonstrated the compromise effect using alignable assortments, where number of features between options are clearly discernible like number of functions of calculators. But this study looked at non-alignable assortments like college majors, where trade-offs are more complex, making the decision more difficult. The uncertainty and perceived risk of purchase regret results in the consumer deferring to one of the extremes.

The study counters Compromise Effect that has been called the "among the most important and robust phenomena documented in behavior research in marketing". Knowledge of this research can help brand managers set optimal product assortments to maximize profits. By increasing options in an alignable assortment a manager can encourage demand for the middle choice, while by increasing options of a non-alignable assortment he/she can increase demand for the extremes.

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