Marketing Application of the Compromise effect 41659

1. Introduction Consumer research has identified a series of departures from the choice patterns predicted by the standard models of consumer choice.

(Wernerfelt 1995: 627). Consequently, situations often occur where the choice between two substitute products depends on the presence of a third substitute. (Wernerfelt 1995: 627). According to Wernerfelt (1995), Simsoni??s (1989) experimental observations of the i??compromise effectsi?? represents one of the most important and striking departures from the rational choice patterns predicted by the standard models of consumer choice.

The compromise effect makes the consumer choose the product in the middle i?? this paper is aimed at looking at the compromise effect in detail and why consumers tend to choose the product in the middle. The rest of the paper is organized as follows: section 2 provides a description of the compromise effect; section 3 provides some marketing applications of the compromise effect; section 4 provides empirical evidence on the compromise effect; while section 5 presents a conclusion of the paper. 2. Description of the Compromise Effect The compromise effect refers to a phenomenon whereby brands gain market share when they become intermediate options in a choice set.

Kivetz et al (2004: 237). It was first demonstrated by Simonson (1989) through the use of experiments. (Kivetz et al 2004: 237; Wernerfelt 1995: 627). Simonson (1989: 158) asserts that consumers face two types of uncertainty when making purchase decisions, which include: (i) uncertainty about the true values of alternatives on the different attributes; and (ii) uncertainty about the weights of attributes as well as their preferences for different combinations of attribute values. The compromise effect reflects a situation whereby the attractiveness of an option is greater in the context of a triplet in which it is an extreme.

Figure 1 below shows a graphical presentation of the compromise effect based on a number of five products A, B, C, D and E. By looking at figure 1, the compromise effect implies that the market share of option B relative to that of option C should be greater in the set { A, B, C}than in the set {B, C, D}. Also, the choice of option C should be greater in the set { B, C, D} than in the set { C, D, E}. (Kivertz et al 2004: 238). Figure 1.: A Schematic Illustration Of The Compromise Effect.

Source: Adapted from Kivertz (2004: 238). N.B: both attributes x and y are such that preference increases with an increase in the value of one of the attributes while holding the other constant. (Kivertz 2004 : 238).

This implies that holding attribute x constant while increasing y increases the preference for brand A while holding y constant and increasing x increases the preference for brand E. According to Tallman (2002), many consumers are not comfortable buying either the cheapest or most expensive product available. They usually prefer something in the middle. For example, consider a company that sells widgets. A basic model is available for 50SEK as well as a top-of-the-line model selling for 300SEK.

Assume that a third model is introduced that sells for 150SEK, people would feel the most comfortable buying the midrange model that sells for 150SEK. The idea is that the basic model is seen as cheap and may be perceived to be of low quality than the midrange model, while the top-of-the-line model is regarded to have only a small benefit over the midrange model. (Tallman 2002). Empirical evidence on decision (e.

g., Montgomery 1983; Slovac 1975; Slovac et al 1983; Tversky 1988) cited in Simonson (1989: 158) suggest that individual choice behaviour under preference uncertainty can be better understood when seen as based on the available reasons or justifications for or against each alternative. Accordingly, decision makers having difficulty determining which alternative would provide the highest satisfaction or utility tend to make the choice favoured by the best overall reason. (Simonson 1989: 158). Consumers often find reasons to justify their decisions either to themselves or to others. (Simonson 1989: 159).

Consumers find it necessary to justify decisions to themselves as a result of their desire to enhance their self-esteem, anticipation of regret or cognitive dissonance and the perception of themselves as rational beings with reasons for preferring one option over others. (Simonson 1989: 159). Justification to others is based on the assumption that consumers choose alternatives that are perceived as most justifiable to those other who will evaluate their choices, such as superiors, spouses, or groups to which the decision makers belong. (Simonson 1989: 159). Anticipated evaluation by others is either explicit or implicit: explicit evaluation occurs in a situation where the decision maker is responsible to someone else whereas implicit evaluation is based on the assumption that others will be evaluating the decision maker as well as his/her decision. (Simonson 1989: 159).

The compromise effect reduces the consumeri??s choice problem and provides a reason for the consumer to easily justify his/her decision to both others as well as to his/herself. 3. Marketing Application of the Compromise effect The compromise effect has significant implications for positioning, branding, and competitive strategies. (Kivetz et al 2004: 238). For example, the compromise effect suggests that the introduction of a top-of-the-line product draws disproportionately more share away from a lower-end product than from a more similar, intermediate product option.

Thus, marketers who wish to promote high-margin products (typically higher-priced alternatives) may be able to do so by introducing another alternative that is even more expensive. In addition product assortments presented according to the underlying structure of the compromise effect appear to be pervasive, if not ubiquitous, in the marketplace. Anecdotal evidence suggests that the basic design of three options defined on two attributes is present in many categories, including choices among insurance plans, soft drinks, audio speakers, cellular telephone subscriptions, and so on. Also, customers often face market choices among triplets with a trade-off between price and several quality-related dimensions that are highly correlated environmentally (e.g.

, different options such as Toyota Camry SE, LE, and XLE). Consumers are likely to simplify such choices by construing the (correlated) quality dimensions as one i??meta attributei?? and by making their decision on the basis of price versus overall product quality. (Kivetz et al 2004: 238). Although customers often face larger choice options, these market choices can produce compromise effects because they often contain sets of pareto-optimal alternatives that require customers to make attribute trade-offs. (Kivetz et al 2004: 238). Marketers take advantage of the compromise effect by inventing an arbitrarily higher-priced top-of-the-line model thus forcing a comfortable midrange price on their customers.

An example of the application of the compromise effect to marketing can be attributed to William-Sonoma who were able to increase sales of their $275 breadmaker by introducing a second, slightly larger model at a price just over $400. (Tallman 2002). Xerox was also able to boost sales of its high-volume copier to large corporations only because it introduced a higher-priced model with a few extra bells and whistles. Xerox succeeded because the released a model that purchasing managers could feel good about rejecting. The compromise effect can also be applied to a single product.

In this case, the salesman begins by suggesting a ridiculously high price, not because he/she thinks the product can sell for that price but rather because he/she wants to establish the highest possible reference point in the mind of the customer. The salesman is more likely to succeed by starting out with a high price and then lowering it gradually. Victims of the compromise effect are essentially tricked into thinking that they got a good deal. This does not amount to saying that the product does not provide them with value or that the customer is foolish for purchasing the product. It simply reflects an alternative way of making people feel good about spending their money. (Tallman 2002).

4. Empirical Evidence on the Compromise Effect The compromise effect has been documented in many studies across a wide range of domains and product categories including apartments, investment portfolios, and mouthwashes and found to be highly robust and of substantial magnitude. (Kivertz et al 2004: 238). Simonson (1989) provides evidence that across five product categories, alternatives gained an average market share of 17.5% when they became the compromise option in a choice set. Kivertz (2004) also report strong compromise effects using empirical applications.

5. Conclusions This paper was aimed at studying the compromise effect and why consumers behave the way the do. The study finds that consumers tend to behave in this manner because they are concerned about the outcome of their decisions and want to provide the best justification for their choice of a particular product with respect to alternatives. The paper also finds that marketers use the compromise effect to increase the market share of their most profitable brand by introducing the latter as a compromise option. BIBLIOGRAPHY Kivetz R.

, Netzer O., Srinivasan V. (2004). Alternative Models for Capturing the Compromise Effect. Journal of Marketing Research, vol. XLI, pp.

237-257. Wernerfelt, Birger (1995). A Rational Reconstruction of the Compromise Effect: Using Market Data to Infer Utilities. The Journal of Consumer Research, Vol. 21, No.

4, pp. 627-633 Simonson I. (1989). Choice Based on Reasons: The Case of Attraction and Compromise Effects.

Journal of Consumer Research, vol. 16, pp. 158-174. Tallman (2002). Compromise effect.

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