What's Decoy Pricing & Why Businesses Need It?

Posted by Philip Huthwaite on June 6, 2023
Philip Huthwaite
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What is Decoy Pricing?

Decoy pricing is a clever strategy that guides potential customers towards a specific product by presenting an inferior alternative. This approach is achieved by creating an additional version of the product solely to make the higher-priced options appear more economically favorable. By compelling individuals to compare pricing options, the decoy effect comes into play, resulting in increased sales of the more attractive, higher-priced item.

Have you ever noticed how frequently products are offered in three different options? While part of it may be attributed to businesses wanting to provide varied choices to customers, astute marketing takes advantage of the decoy effect to steer customers towards the priciest purchase, rather than the one they might typically choose. Our brains tend to disregard the cheapest option, regardless of its suitability for our needs, as it seems inferior in comparison to the rest. This psychological bias is skillfully utilised by companies to influence consumer behavior and maximise sales.

 

Examples of Decoy Pricing

Have you ever noticed how often products come in three options? While it may be partially because businesses want to offer different options to customers, smart marketing takes advantage of the decoy effect to lead customers to the most expensive purchase rather than to the one they may ordinarily make. Think about your last visit to the cinema and the temptation to buy popcorn. If there is a small and a large size of popcorn and the small one is £3.50 and the large one is £7.50, most people will buy the small. However, if you add a medium at say £6.50, most people will buy the large because it's only £1 more than a medium. The £6.50 option is the decoy.

The easiest way to spot this decoy pricing "trick" is when the cashier at the coffeeshop says something like, "Would you prefer a large latte for just 50p more?"

Decoy Pricing can also point the customer to the medium priced option when they see the cheapest version as inferior and the highest priced version as too expensive for the likes of them – the middle option is a compromise between the cheapest and most expensive and they feel satisfied that they have the best deal because it offers them the best value.

If you want to get people to buy your service or products, you need to understand how people make purchasing decisions.

 

Why are people "fooled" by Decoy Pricing?

Are we all suckers or what?! No, it's all to do with cognitive biases. These are the tendencies of our brains to think in certain ways, they are “unconscious” triggers that make different connections in our brain to help us make decisions that lead to systematic deviations from a standard of rationality or good judgment.

 

Cognitive Bias

Humans do not generally seem to know what they want and make decisions according to the context in front of them. This means that the way things are presented has a huge effect on their decision making. A cognitive bias happens when we’re presented with more than two options which causes us to prefer one option over another option simply because it looks better or is priced better.

The decoy pricing strategy relies on two specific effects: the compromise effect and the attraction effect.

 

The Compromise Effect

The compromise effect states that consumers give preference to “median” products, or in psychological terms, it relies on the assumption of “extremeness aversion”. Given the choice between three different products, consumers are not likely to opt for the cheapest one because they assume that it is inferior in quality to the other two. They will not choose the most expensive product either as they assume that this product has unnecessary non-essential features. They will therefore choose the median product because this type of product is likely to have an acceptable level of quality and will only contain the necessary features. In this case, a pertinent pricing strategy would involve introducing a top-notch product with a very high price (and big profit margins) in order to create a median effect on other already expensive products, or to introduce a very cheap low-quality product, making the other products appear more attractive.

An example of the Compromise Effect: A firm sells two types of blenders: A and B. The price of blender A is £20 including a £5 margin. The price of blender B is £50 including a £25 margin. A third blender (let’s call it D for decoy) is launched on the market by the company and a decoy pricing method is applied to this product. The price of blender D is £100 including a £60 margin. The firm is aware of the fact that they will sell barely any D blenders due to this product’s high price. Nonetheless, the company’s decision to introduce blender D on the market is justified as this high-end product will boost the sales of blender B by creating a compromise effect between A and D.

 

Decoy_Pricing.jpg

 

The Attraction Effect

To illustrate the attraction effect, let’s take the example of The Economist in the States that implemented a decoy pricing method for its printed and digital editions. The printed edition cost $150 a year, the digital edition cost $50 while the bundle containing both the printed and the digital editions also cost $150 just like the printed edition alone. The printed edition sold on its own (without the digital version) can be viewed as a decoy pricing method aimed at encouraging customers to buy the whole bundle. If the bundle option was not available, they assumed that 80% of customers would purchase only the digital version, and the remaining 20% would opt for the paper version. Following the introduction of the bundle option, 50% of customers chose to go for the bundle, 50% went for the digital version only, meaning that 0% of customers opted for the printed edition. The 0% is not a pricing anomaly in this case. Rather, this decoy pricing method aims at maximizing the sales of the bundle. The digital edition is perceived to be “free” when included in the bundle and customers like free things.

The Economist example clearly demonstrates the “attraction effect”, an effect that can be considered as one of the main phenomena associated with decoy pricing (as outlined by Simonson).

 

6 Steps to Effectively Implementing the Decoy Effect

  1. Select your top-selling product, ensuring its popularity among customers.
  2. Structure your flagship product to offer more benefits and a higher price compared to other products.
  3. Introduce a decoy that is deliberately designed to be less attractive than your flagship product, thereby making the flagship product more appealing.
  4. Present a range of at least three offers, avoiding excessive choices that could overwhelm customers.
  5. Price the decoy similarly or slightly lower than your flagship product, emphasizing the higher value of the flagship option.
  6. Utilise comprehensive data tracking tools to help you monitor and optimise the effectiveness of your strategy, this should include capturing customer feedback and assessing your promotional campaign performance.

 

Decoy Pricing Works as Consumers Aren't Rational

According to rational choice theory, the decoy effect should not really exist in practice. However, this theory relies on the assumption that consumers’ purchasing decisions are perfectly “rational” and take into account all the “right information”. In truth, the consumer does not often possess the “perfect” level of information about a product. As a result, consumers’ purchasing decisions are often made without taking into account all the information about any given item. This incites companies to wisely choose their marketing and pricing strategies, ensuring that imperfect information is sometimes deliberately provided to consumers in order to maximize both sales and margins.

Consumers are often not capable of comparing products that are very different from each other and that have very distinct usage. However, they are usually able to compare products that are similar to each other and therefore to understand the differences that may exist in the closely-aligned items. In other words, consumers prefer to make a rational choice vis-à-vis a limited scope of products – the very essence of decoy pricing.

 

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FAQs

What is decoy pricing in psychology?

Decoy pricing taps into human psychology and triggers the brain to assume that a higher-priced product is better value when compared to a similar cheaper product. If the higher-priced product was the only product sold, in isolation it is simply seen as expensive.

 

What is decoy pricing ethics?

Decoy pricing ethics is the practice of ensuring that when decoy pricing is used, the retailer ensures that prices are not being artificially inflated either on the decoy product or the more expensive product. Even when decoy pricing is adopted, a suitable value exchange can be set for both prices to ensure it is win/win for consumer and retailer.

 

Sources

Topics: Pricing Strategy, Decoy

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