More choices doesn't always mean a better deal
A man in the bread aisle of a supermarket.
Steve Chiotakis: Question: When you're shopping, have you ever noticed when there are more choices, you're more likely to get a better deal?
Competition brings prices down. Makes sense? Or does it?
Sally Herships has more.
Sally Herships: Harshad Jadow is a computer science student from Virginia. He needs a new laptop.
Harshad Jadow: With which I can play games.
And for video games he needs a computer with a lot of processing power. So Jadow is checking out his options. We're at B & H photo in New York in an aisle full of computers. The store is enormous. It takes up an entire city block. It even has conveyer belts running along the ceiling to move merchandise between departments.
Jadow was looking at an HP laptop.
Herships: How much is the HP?
Jadow: It was around $900.
But there's a long aisle of laptops to choose from. And now he's is standing in front of another computer.
Jadow: But this one looks different because it has dual screen, so this is the first time I'm looking at a dual screen.
The laptop with the second screen would be 25 percent more than the HP he had his eye on. So Jadow says he needs to some more research. And this is where things get interesting. Normally, more options means a greater chance for a better deal.
But Columbia Professor Sheena Iyengar says this rule doesn't apply when a product is high-end like a computer. She recently published a study on how consumers make choices (PDF). When there are more choices for something expensive, Iyengar says consumers focus less on price.
Sheena Iyengar: What becomes more important to me are some other attributes that define the differences between these products.
She says, say you're shopping for a really nice bottle of wine and there are a lot of choices.
Herships: So, when I'm looking at the expensive bottle of wine, all the sudden I become hyper-aware of all the nuances. The red from Frances versus the south of France...
Iyengar: How spicy it is, how much tannin, how smooth is the finish, etc.
And the result of all this attention to detail?
Iyengar: The price of wine was going up.
Iyengar says when there are more choices for something consumers think of as a major purchase, they'll pay more. But when items are low end, normal economic rules kick in. That means more competition creates lower prices. And Iyegnar says with cheaper items, customers focus almost solely on price. So retailers selling less expensive products should offer fewer choices, right? Turns out it's not that simple. Take Walmart.
Jeff Weidauer: They cut back a little too much.
Jeff Weidauer is vice president of marketing and strategy for Vestcom International, a marketing company for the retail industry. He says companies don't want to carry lots of choices. Storage is expensive and so is carrying items that don't sell. So retailers try to decide which products to carry using a method called "SKU Rationalization."
Weidauer: Which is a big term for stores removing the size of a selection in a given category. They might go from 18 types of toothpaste, down to 12.
But Walmart had a tricky time with it.
Weidauer: And they found out that some of the products that weren't selling as well, those were bringing in customers, though, who were buying other things.
When customers couldn't find what they wanted at Walmart, they stopped coming in.
Weidauer: As a result, they had to put some of those products back on the shelf.
Columbia professor Sheena Iyengar says when it comes to how many products should be on store shelves there's a magic range of numbers -- 15-20. She says consumers can only handle that many categories.
In New York, I'm Sally Herships for Marketplace Money.