“When it comes to prices, people don’t behave rationally. And the best companies know.” – Derek Thompson
Have you ever heard of the Goldilocks effect? There is a great possibility that this effect has played a significant part in influencing your purchasing decisions.
It stems from the famous Brothers Grimm’s story of “Goldilocks and the Three Bears”, where Goldilocks, a young girl, confronted by three bowls of porridge, picks the one which is ‘not too hot, not too cold’, but just right.
The concept of rejecting extremes for finding the right middle ground doesn’t just apply to young Goldilocks. It is also helpful in a variety of aspects – including pricing in modern-day business.
Wondering how this story resonates with business and pricing?
Let’s dive into this blog post that talks about the Goldilocks effect, how it manifests itself in the pricing strategy, and how you can leverage it.
What is the Goldilocks Effect?
Goldilocks effect is the psychological effect that people, when provided with similar choices, tend to drift towards the most feasible option. It is based on the idea of product differentiation, comparative pricing, and bracketing.
Brands can capitalize on it by offering three versions of a product or service at different price brackets like high-end, middle-end, and low-end.
They can only leverage the Goldilocks effect if they differentiate their own products from one another. This specific approach shows that businesses can offer multiple versions of a product (with different quality and price points) simultaneously.
Here’s an example of HubSpot’s comparative pricing strategy based on the Goldilocks effect.
Accordingly, they have three pricing options, Starter – one that’s too low, Professional – one that’s in the middle, and Enterprise – one that’s too high.
When executed correctly, this strategy allows brands to target users with options that are just right for them, be it premium users or the ones that seek discounts.
Decoding Real-World Examples of Businesses Using the Goldilocks Effect
One of the best examples of a company that leverages the Goldilocks effect to tailor its pricing strategy is Netflix. Here is how Netflix’s pricing model looks like.
By leveraging the Goldilocks effect, Netflix tailored its pricing to resonate with diverse buyers across the market, enabling them to pay for the subscription as per their need.
However, this specific pricing model falls under psychological pricing strategy known as bracketing – a concept that is a part of the Goldilocks effect.
Even though Netflix offers three pricing brackets, it probably wants its subscribers to go for the standard plan. It is working on “extremeness aversion”- a universal tendency people have to avoid extreme options in support of intermediate ones.
Here, Netflix is trying to make its standard option as appealing as possible for its users. In this scenario, the perks in the premium plan are not so different from the standard one, but it is provided at a significantly higher price bracket. And its basic plan falls in the lower price bracket because it fulfills the most basic needs.
Ultimately, the Goldilocks effect will work its charm and most customers will drift towards the standard option. They will find the premium option as too expensive and the basic one as too basic to fulfill their viewership needs.
Just like young Goldilocks’ choice for porridge among the one that was too hot, one too cold, and the one that was just right.
Another great example of a brand putting the Goldilocks effect into practice is Panasonic. In 1992, Panasonic launched a premium product for its range of microwave ovens at the price of $199.99. The two existing ovens in the line were valued at $179.99 and $109.99.
The outcome: Sales of the medium-priced microwave ($179.99) significantly improved, helping Panasonic expand its market share to 60%.
Pretty interesting, right?
How Can You Implement Goldilocks Effect in Your Pricing Strategy?
Implementing the Goldilocks effect has many benefits, however, it is only suitable if you offer tiered pricing options for your products and services.
To take advantage of the Goldilocks effect and implement it in your smart pricing strategy, check out the following tips:
- Think about three different levels of needs your ideal customers might have. Each pricing option of your product or service should solve those varying levels of needs.
- Figure out the right price brackets for your product or service and provide the customers with the perks and features that you feel are worth that price.
- Add a premium version that has more features and slightly better functionality at a significantly higher price.
- Add a basic product or service option in the lower price bracket with fewer appealing options that only solve the most basic needs.
- Put your product or service in the market and let customers decide what is the right option for them.
The Bottom Line
The Goldilocks effect is a crowning glory for marketing and can help deliver compelling results. If you can find that perfect spot with your smart pricing strategy, that is just right, you can expect to see exceptional results.
Want to Find the Perfect Middle-Ground for Your Pricing Strategy Using the Goldilocks Effect? Talk to Us!
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