I have a theory on consumer behavior and product pricing. It is basically that the second cheapest item in the market will sell the most. Well, I have not done comprehensive research on the topic but I think its generally true.
It comes from my own behavior when it comes to buying any item, be it something of daily use or a one off purchase. I look at the cheapest option first, for obvious reasons, and then somehow settle down on the next best in terms of price. Reasoning being that the cheapest item would definitely be prone to defects, and also because no good item of some considerable value can be priced so low, so the item must be dodgy. Of course, discounting the cases where its a regular purchase, and I know the product well.
Consider the Tata Nano. Do read the story - http://www.technologyreview.com/business/39215/?mod=related - suggesting that its not selling as a hot cake Ratan Tata hoped it would (70000 units a year against 250000 odd projected), atleast not yet.
Apart from the various reasons suggested for the for the failure (or limited success !) of the Nano, I would say it did not sell because of the fact that it was the cheapest. And if I know the psyche of the Indian consumer (atleast of them who can spend INR 100000 on a car), I know that one would think twenty times before buying a 'cheap' item from the market, especially when its not 'imported' and looks like an autorickshaw (tuk-tuk).
The Alto, best selling small car by Maruti Suzuki, which comes in a 800 cc, outsells the erstwhile Maruti Suzuki 800 and now the Nano, precisely because of the same reason. Although, the Alto is a far better car, and apart from being economical, is very agile and smart-looking for a small city car. However, it sells well not only because its cheap, but because its costlier than the earlier Maruti 800.
For many Indian families, a car purchase is a moment of pride for a family, especially when it is something which your neighbors can not match. Purchasing the cheapest Nano wont give you that satisfaction, but buying the next costlier item in the list (without disturbing your budget) might.
