How to Use Decoy Pricing to Drive Sales in Your Business

Summary:

• Decoy Price Definition: Decoy pricing is a pricing strategy that introduces an additional option with the goal of influencing customers to choose a specific, more profitable option. It's not designed to be the most popular option, but to make another option seem more appealing in comparison.
• How the decoy effect works: This effect, also known as "asymmetrical attraction", occurs when an additional, less attractive option modifies the perception of the main options, favoring the choice that the business wants to highlight.
• Comparison with anchor prices: While decoy pricing focuses on influencing between several similar options, anchor pricing sets a high starting price that serves as a reference to make the other options appear more reasonable or affordable.
• Practical example – sale of crispettes in the cinema: Adding a medium option in the offer of crispettes, whose price difference with the large one is small, makes the latter seem more valuable. The medium option works as a decoy, inclining customers to choose the large size, more profitable for the business.
• Impact on sales: This strategy increases sales of the most profitable product and the average value of each transaction, as consumers tend to choose the option they perceive as the best deal thanks to the decoy effect.

Introduction

For any entrepreneur or businessman, understanding and applying effective pricing strategies can make the difference between a successful business and stagnation. One of the most underrated yet powerful techniques is the use of decoy pricing. This strategy can significantly influence customers' purchasing decisions and increase your revenue. In this blog post, we'll explore what decoy pricing is, how it differs from anchor pricing, practical examples, and tips for implementing it in your business.

Decoy Price Definition

Decoy pricing is a pricing strategy that involves introducing a third option into your product or service offering. This additional option is not designed to be the best seller, but to act as a comparison and guide customers towards the option you really want them to choose. The decoy makes the preferred option seem more attractive by offering more value for a minimal price difference.

Decoy pricing is a pricing strategy that involves introducing a third option into your product or service offering.

For example, if you sell two sizes of popcorn in a movie theater, adding a third size with a strategically placed price can influence the customer to choose the most cost-effective size for you.

How does the Decoy Effect work?

The decoy effect, also known as the "asymmetric attraction", has been widely documented in the consumer behavior literature since its identification more than 40 years ago. This strategy, in which an additional option is introduced that is not necessarily the most attractive but that modifies the perception of the other options, has proven to have a significant impact on consumer decision-making. The decoy effect occurs when the inclusion of a "decoy" option changes the distribution of preferences between two main options, usually tilting the decision towards the option that was originally intended to be highlighted.

There are several models that try to explain why the decoy effect is effective. One of the most cited is the value-shift model, which postulates that the introduction of the decoy alters the perceived value of the available options, favoring the choice of the target option. In addition, the "compromise effect" theory suggests that consumers prefer intermediate options between extremes, which makes the decoy option, being less attractive in comparison, enhance the value of the target option.

Comparison with Anchor Prices

While decoy pricing focuses on influencing the choice between similar options, anchor pricing is a technique that sets an initial benchmark for the perceived value of a product or service. The anchor price is usually a higher price presented first, which makes subsequent prices seem more reasonable or attractive in comparison.

Examples

Here are some examples that allow us to better illustrate how decoy pricing works in practice:

Example 1 - Popcorn in the Cinema:

The following image shows three sizes of crisps with their selling price, quantity of product offered and the differences between the different offers.

In this example, the decoy price is manifested through the Median option.

The perception of value between the medium and large sizes is fundamental in this analysis. The price difference between the medium and large options is $1.50, while the difference in quantity is 70 grams. Although the additional cost per gram is higher when moving from Medium to Large ($0.021 per gram) than from Small to Medium ($0.005 per gram), customers generally do not perform this detailed calculation. What they perceive is that, for a relatively small increase in price, they get a lot more product by choosing the large option instead of the medium.

The medium option acts as a decoy designed to be less attractive compared to the large. Its price is close enough to that of the large, but it offers less quantity, which makes the large option seem like a much more valuable offering. The medium is not as economical as the Small or offers as much value as the Large, placing it in the middle that subtly drives the customer to opt for the larger option.

Because of this pricing structure, customers who are undecided between the small and large options are influenced by the presence of the medium option as a decoy. Without the medium option, they could lean towards the small one due to its lower price. However, by introducing the medium, the large option becomes the most logical and attractive choice. This effect leads most customers to end up choosing the large option, which is likely to offer greater profitability for the business. In this way, the strategy not only increases sales of the most profitable product but also increases the average value of each transaction, significantly benefiting the cinema's revenue.

Example 2 – Subscription to "The Economist"

In the mid-2000s, Dan Ariely noticed a particular offer to subscribe to The Economist (see image) and decided to do an experiment that revealed the power of decoy prices.

The Economist offered three subscription options:

• Digital only for $59.
• Print only for $125.
• Digital + printed also for $125.

On the surface, the print-only option and the combined digital+printed option were the same price, but the combination offered more value for the same amount of money. This structure was designed so that the print-only option would work as a decoy.

When Ariely showed these three options to 100 MIT students, 84% chose the combined option (digital+printed), while only 16% chose the digital-only option. Interestingly, no one chose the print-only option for $125.

To test the effect of the decoy price, Ariely removed the print-only option and ran the experiment again. On this occasion, 68% of students chose the digital-only option, and only 32% chose the combination. This change clearly showed how the decoy option (the print-only subscription) influenced the choice towards the combined option.

Tips for Implementing this Strategy

• Know your target audience: Understand your customers' needs and preferences to design options that really appeal to them.
• Design clear and attractive options: The options should be easily comparable. Highlight the features and benefits of each to make the decision easier.
• Use price strategically: The price of the decoy should be close to the option you want to promote but offer less value. This makes the preferred option seem more appealing.
• Limit the number of options: Don't overwhelm the customer with too many choices. Three options are usually ideal for applying the decoy effect.
• Communicate added value: Make sure customers understand the extra value they get by choosing the option you want to highlight.
• Test and adjust: Monitor sales and customer behavior. Adjust prices and options based on the results obtained.
• Monitor the cost: Make sure that the cost of introducing a decoy option is not greater than the expected benefit.
• Be ethical: Avoid manipulating in a dishonest way. The strategy should benefit both the customer and your business.

Conclusions

Decoy pricing is a powerful tool that can influence purchasing decisions and increase your revenue. By understanding how this strategy works and applying it ethically and effectively, you can guide your customers to the most profitable options for your business, while they feel like they're getting the best value possible.

As a entrepreneur or marketing professional, it's essential to always be looking for innovative ways to improve your pricing strategies. Decoy pricing not only increases sales, but it also improves the customer experience by offering options that meet their needs and budget.

Decoy pricing not only increases sales, but it also improves the customer experience by offering options that meet their needs and budget.

Remember, success in implementing this strategy lies in knowing your customers and offering them options that really add value to them. Experiment, learn, and adjust until you find the perfect combination that propels your business to the next level. In addition, scientific evidence supports the effectiveness of this technique, providing a competitive advantage based on knowledge of consumer behavior.

This article was originally published on IntelligentPrices.com