💡 Use Extremeness Aversion to Increase your Profits

TLDR:

By introducing a new & more expensive option to a range of products, customers will tend to choose the middle option (your target). This alternative between the cheap and new & more expensive products seems like the best deal because people don’t have to compromise on quality or price and avoid extremes.

Before: Wine A: $10 & Wine B: $15 = Difficult decision
After: Wine A: $10 & Wine B: $15 & Wine C: $30 = Easy decision

✍️ Remember the last time you booked a hotel?

Let’s say you want to go to Tulum. You find a hotel room for $100 per night.

Is this a good deal?

Well, it’s a little hard to tell since you don’t have a reference point to compare it to, right? But then you find a second room in the same hotel for only $75!

“Ok, that’s quite cheap”, you think to yourself. But what if it’s too cheap?

And here’s where our minds begin to worry about making a bad decision.

“Is the more expensive option overpriced or is the cheap option lacking in value?”

However, you find a third room for $150. All of a sudden, the $100 room seems like the best deal. You won’t have to compromise on quality or spend too much money, so this alternative seems like the best. But more importantly, the safest one.

🧠 We avoid taking risks when making choices

In an experiment* researchers used price framing by introducing a higher-end line option to an existing set of products, to see if this more expensive product would change customers’ preferences.

Participants were divided into two groups (A & B). A was asked to decide which camera they would buy between two options. One for $170 and the other for $240. Both options were chosen about 50% of the time.

B was asked to decide between three options. The first two, $170 and $240, and a third camera for $470. If consumers behave rationally and choose products based on their objective and absolute features, the distribution should not change, right? Well, that’s not what happened.

In the B group, the middle option for $240 became the most popular (57% of participants chose it), and the cheapest camera lost popularity and was only chosen by 22% of the group. What happened here?

The participant’s perception of the product’s value was shifted by introducing a third, more expensive option. If they only have two options to choose from, they worry that the expensive one will be overpriced and that the cheap one will be low-quality. However, having an option in the middle reduces the perceived uncertainty by framing the options differently.

Do you see another behavioral science principle going on here? You guessed it! Loss Aversion Bias plays a role as well because we hate feeling the possibility of losing money when the camera is overpriced or losing quality when the camera is too cheap. So to avoid this “imaginary” loss, we go for the middle option.

_{*Source: Amos Tversky and Itamar Simonson, Management Science}

💡This tactic is quite popular for SaaS companies

The AI Image generator Midjourney, uses price framing to nudge people into choosing the Standard option. They do this by doubling the price of the Pro plan but not giving much more benefits than the Standard one. And compared to the Basic one, you are paying just $20 more and getting more value on two features.

✅ How to introduce a premium tier to make your other options more appealing

• Set a higher price point: Price your premium tier above your existing “expensive” option. It should be a significant increase, so it feels like a step up.

• Keep features similar: Don't introduce a whole range of exclusive features to your premium tier. The key is to make it very similar to your now medium option.

• Highlight the value: You should make sure that the medium option is still an attractive alternative. So attractive, that it seems like the best deal compared to your now most expensive and new premium option.

The outcome: By introducing this premium tier, your target option suddenly becomes the "middle ground." Customers are more likely to choose it to avoid both the perceived lower quality of the basic alternative and the somewhat inflated price tag of the premium choice. Again, avoiding the extremes.

The best thing is, that if people end up buying your premium option, you are making extra profit without any outrageous additional costs.

📖 Further information for you to dive deeper

• Context-Dependent Preferences - Management & Science

• The Choice Factory - Richard Shotton

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Thanks so much for reading,

Juan Diego

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