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What 'Versioning' and 'Goldilocks Pricing' Mean For Your Small Business
Posted on September 8th 2013
On Giving Customers The Right Choices
What kinds of choices do you give your customers? We all like to feel like we’re in control of something. After all, being in control is all about having options. Versioning and Goldilocks (“this is just right!”) pricing are just two simple, tried-and-tested ideas any entrepreneur can use to give their customers a sense of control — all while boosting sales.
The need for control is built in to us as a species. Ask a child who hates veggies to choose between carrots and broccoli, and only rarely will they answer “neither” simply because it’s not a choice they’re explicitly given. On the other hand, give them an explicit choice to opt out, and chances are they’ll choose not to eat anything.
The same principle holds true regardless of age. It doesn’t have to be explicit either. Goldilocks pricing is obviously derived from the children’s classic. Now let’s explore that story a bit. What if Goldilocks made it to the Three Bears’ house only to find one bowl of hot or cold porridge? Or two bowls – one too hot and one too cold? Or a tiny bowl of “just right” porridge and a huge bowl of cold?
The Goldilocks principle can also be used for pricing different quantities
She was starving at that point, so if she wanted to eat, she’d have to suck it up and have whatever was handy – leaving her with an unsatisfying experience. She probably wouldn’t even stick around to sleep in any of the beds either. Now imagine if there was another empty house next to the Three Bears’s. Let’s say that house actually had a few more choices of porridge that Goldilocks could have seen through the window sill. She’d probably have broken into that one instead – regardless of the range of choices in the Three Bears’ house or the tastiness of the porridge.
Remember, Goldilocks would actually have had to taste the porridge in both houses to make an informed decision. She probably wouldn’t take the time to either. She was hungry now.
Why You Need To Make Choices (For Your Customers)
In case your analogical skills need refreshing – you might not be getting sales because you’re not giving your average customers choices. It’s often necessary to introduce different versions of the same product or service . Most businesses refer to these as “budget” or “premium/custom” lines.
More often than not, they don’t intend get that many sales or even profit from these “too hot” or “too cold” options. They may in fact, be loss leaders intended to penetrate a market, or showcases to demonstrate a company’s capabilities to the market. The bread and butter of these businesses will always be the “just right” lines. These will likely be responsible for most of their sales, if not revenue.
Multiple studies support this side-effect of “versioning” and by extension – Goldilocks Pricing. Take a look at this price-based example except from 1997 UC Berkley paper on Versioning Information Goods (Varian; 1997):
Simonson and Tversky  describe a marketing experiment in which two groups of consumers were asked to choose microwave ovens. One group was offered a choice between two ovens, an Emerson priced at $109.99 and a Panasonic priced at $179.99. The second group was offered these ovens plus a high-end Panasonic priced at $199.99.
By offering the high-end oven, Panasonic increased its market share from 43% to 73%. More remarkably, the sales of the mid-priced Panasonic oven increased from 43% to 60% apparently because it was now the “compromise” choice. According to Smith and Nagle , “Adding a premium product to the product line may not necessarily result in overwhelming sales of the premium product itself. It does, however, enhance buyers’ perceptions of lower-priced products in the product line and influences low-end buyers to trade up to higher-priced models.”
You can see examples of versioning and Goldilocks pricing everywhere.
Real World Examples
Check out this typical price and feature breakdown from Avast!, a well-known antivirus and computer security software company.
It’s clear which service they want to sell. They even highlighted it. It’s also clear that the “specialized” server service here just sort of hints about the (specialized!) capabilities of the company, should you choose to go for it. There’s also an implication that the better service you get from the “premium” line somehow rubs off on the other lines. From this we can infer Avast!’s target customers are small businesses, much like PrintRunner’s customer base, and that the “Enterprise Package” is what they really want to sell more of.
And take a look at Toyota’s current crop of sedans. Even without looking at the individual features of the cars, the stylistic details and MSRP all suggest most people would try to aim for the Camry.
This idea is exceptionally prevalent in food service. For example, at any given time, McDonald’s will be offering one premium burger or another. In an actual store there are typically fewer choices offered than this in order to speed up orders, help quality control, and speed up your decision.
Imagine If you had to deal with this entire sheet every time you went to McDonald’s! In reality though, only a few of these will be prominently presented.
On the other end of the spectrum, they also have a dollar menu – on which they sometimes lose money (though they get most of it back through beverages and fries). Another thing is sure – whatever premium sandwiches they have, McDonald’s bestselling sandwiches are perennially their core items: Big Macs, and Double Cheeseburgers.
This will all tell you two things – the introduction and control of variety is a calculated way they boost sales and keep people interested, and too many choices can ruin whatever positive effect versioning gives you.
Bottom line? Always have something a little bit nicer on offer, and more customers will “settle” for your standard product or service.
Sources and Additional Reading
HalR. Varian, Versioning Information Goods; University of California, Berkeley, March 13, 1997
Goldilocks Pricing – Perfect Competitive Pricing Ploy: Customer Choice, Retailer Profit - upstreamcommerce.com
Goldilocks Story- DLTK- Teach
Understanding The Power of the Goldilocks Effect - shortboredsurfer.com
Extremeness Aversion and Goldilocks Pricing -Venchar.com
What You Need To Know About Pricing - Entrepreneur
money-quick-tips-pricing-psychology/1805555/ - USA Today
Raymond J. Deneckere and R. Preston McAfee. Damaged goods. Journal of Economics and Management Strategy, 5(2):149–174, 1996.
R. B. Ekelund. Price discrimination and product differentiation in economic theory: An early analysis. Quarterly Journal of Economics, 84:268–
Peter Huber. Two cheers for price discrimination. Forbes, xx:142, 1993.
Eric Maskin and JohnRiley. Monopolywith incomplete information. Rand Journal of Economics, 15:171–96, 1984.
Itamar Simonson and Amos Tversky. Choice in context: Tradeoff contrast and extremeness aversion. Journal of Marketing Research, 29:281–
295, 1992. Gerald E. Smith and Thomas T. Nagle. Frames of reference and buyers’
perception of price and value. California Management Review, 38(1):98–