Pricing Models and Marketing the Middle Option

Never order the second-cheapest bottle of wine. 

Some restaurant-goers may recognize that advice. The theory behind it is that diners are reluctant to look cheap by ordering the lowest-priced bottle on the wine list, so they opt for the second-cheapest instead. 

The story goes that restaurants anticipate this choice and mark up that bottle, reducing its overall value. 

Researchers have investigated this claim and found it to be a myth. In their analysis, the markup on the second-cheapest wine was lower than the markups on the next four more-expensive wines. 

But the story still illustrates an important psychological element in how people make purchasing decisions. 

Psychologists and economists call it the “compromise effect.” 

Pick and Choose 

Per the Journal of Economic Behavior and Organization: “The compromise effect refers to a tendency to choose non-extreme options.” 

On a restaurant menu, that could be a mid-range bottle of wine. But the same tendency can apply to business purchasing decisions. Customers compare prices and features to assess the value of each option. 

Given a range of choices, people may gravitate toward an option in the middle. They don’t always pick it because it’s best suited to their needs, they pick it because it feels easier to justify. 

They make these comparisons both when evaluating one company’s offerings and when shopping across competing brands. 

Companies use many tactics to shape these evaluations. Many rely on “good-better-best” pricing models to distinguish their offerings. In the wine list example, a restaurant might add a $100 bottle to make a $50 bottle seem more reasonable. Even if the $100 bottle rarely sells, it does its job if it helps justify the $50 bottle for more people. 

Context informs every decision we make. Marketing plays a key role in shaping that context when buyers are ready to act.