Decoy Pricing: Help Your Customers Make The Right Choice

decoy pricing

Having a small advantage over your competitors can make a big difference in a busy marketplace.

For that reason, advanced pricing strategies can bring you bigger returns with minimal effort. One of the most important — yet least understood — pricing strategies is the use of decoys.

 

A Calculated Rip-Off

Imagine you’re shopping for a laptop and you see 3 models:

  • Laptop A is $499. It has a 12″ screen and 128 GB hard drive.
  • Laptop B is $599. It has a 14″ screen and 128 GB hard drive.
  • Laptop C is $489. It has a 12″ screen and 32 GB hard drive. It’s otherwise identical to laptop A.

Laptop C is laughably bad, right? Why not pay the extra ten bucks for another hundred gigs of space?

That third option is a decoy. The manufacturer created it not because they wanted to sell it, but because they wanted to make the first option look better in comparison.

If it just came down laptops A & B, you’d pick one based on whether you think the larger screen is worth an extra $100. But adding the decoy has made the 12 inch version seem like a better deal, subtly nudging you towards that option. (It’s safe to assume laptop A has a higher profit margin.)

 

How It Works

The decoy effect is a pricing strategy used when sellers want to persuade customers to buy one particular product among several similar ones. Few people actually buy the decoy, because it’s a lousy deal. Its true benefit is to alter the  market share of the other products.

The decoy option, which is also called the “asymmetrically dominated” option, shouldn’t logically make a difference in the customer’s choice — but psychologically, it does.

In general, the ideal setup for decoy pricing involves three products:

  • Product A is the product that the seller wants to showcase.
  • Product B is an alternative; it might be higher quality and also more expensive.
  • Product C is the decoy. It’s slightly worse than A, but can’t be compared to B.

C might be the same price or slightly cheaper than A, but offer significantly less value. C is still a viable low-cost option compared to B, but it’s obviously worse than A.

The fact that C is a bad deal means product A looks better when you compare all three. As a result, more people buy A when the decoy is present, than they would otherwise.

 

How To Use It

3729988291_0ea268957e_zDecoy pricing is simple once you understand the basic principle.

First, narrow down your offerings to two choices. Research shows that having more than 3 options makes it too hard for customers to compare them. So decide on 2 options that you want to offer.

Between those two, there is likely one that you’d prefer to sell. It might be because it’s easier to make, or because you have a higher profit margin on that option, or any other reason. The superior choice from your perspective is the one that you will target with a decoy.

Create a third option (or package) that is similar to your preferred option, yet clearly a lesser value.

This is why it is called an asymmetrically dominated choice — your preferred option is a better deal, “dominating” the decoy, but the other option (e.g., laptop B) does not dominate the decoy. In other words, laptop A ($499) dominates laptop C ($489), but to compare laptop B ($599) is apples and oranges.

Customers who compare all three options will see your preferred option as the best value. Thus, offering the decoy — which you have no intention of selling — steers customers towards your preference.

 

The Takeaway

Decoy pricing makes use of a quirk of human psychology. People place a lot of importance on what is right in front of them, even though one or more of the options might be irrelevant from a logical perspective.

By offering a decoy, you can guide customers towards the product that you would prefer them to buy — the one that is most similar to the decoy, but clearly a better value. This pricing strategy can make a big difference in your profits, as well as give you more control over the products you sell.

 


 

Appendix: The Research

The decoy effect violates the most basic assumption of economists: that humans are fundamentally rational. How can an undesirable option make people more willing to buy a desirable one? It shouldn’t make a difference, right?

However, it’s proven that the presence of a decoy can affect how much customers value the other products on their “short list.”

The largest body of research into this began with Tversky and Simonson in 1992 — but economists, psychologists, and marketing experts had documented the decoy pricing effect as early as Huber in 1982. Although decoy pricing shouldn’t work if people are perfectly rational, it does — adding a decoy really does change the proportions of people choosing the other products, and researchers in different fields have shown that it occurs in many different markets.

Photo by Cheryl Kohan / Creative Commons

 

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