Let’s imagine there’s a guy named Bob, and Bob owns an electronics store and he sells DVD players. Bob realizes there are a lot of people who don’t want to spend quite as much. And so in addition to his regular line, Bob decides to offer a very low-priced option, a Coby.
He thinks he will reach people who want to pay less. He also hopes he can lower his price image by doing this. People will see that he’s carrying some low-priced options, and they’ll assume he’s low priced overall. Bob is not dumb in thinking that. Many experts call this an attractive price point.
To test it out, we compared what happens at Bob’s store to what happens at John’s store. John offers the same three major DVD player brands at the same prices. But instead of the low-priced Coby, he offers a super-premium Panasonic.
I took people and randomly assigned them to these two stores. I asked them to hypothetically buy a DVD player. I asked, “If you really did want to
buy a DVD player, which one would you choose?” Interestingly enough, no one chose the Coby and nobody chose the Panasonic. Everybody chose one of the other three options.
Then I told them to buy a new DVD, too. I gave them two options: buy a new release for $16.99 now or go look for a better price somewhere else. About half of those who shopped at the store with the Panasonic decided to look somewhere else for a better price. At the Coby store, 75 percent did so.
Why? What’s driving that response? Say you want to buy a Sylvania for $100. How expensive does that $100 feel next to the Coby? You might not know the price of a Sylvania at other stores, but it’s a lot more expensive than the least expensive model on the floor.
Now imagine you bought the $100 Sylvania, and it was right next to a $280 Panasonic. It feels a lot better.
Bob hoped to create an image of a lower-priced store while still getting people to buy his usual products. And they did buy those products.But ironically, by lowering prices on certain items to bargain-basement level, he created a reputation for himself of having higher prices.