How Decoy Pricing Works
By integrating a third “decoy” product, you can raise preference for the desired product, often pushing customers who tend to buy the cheapest product towards a more expensive product.
Given only two options, choices are primarily made based on personal preferences. But when given a third option, priced a little lower than the most expensive one and with inferior benefits, people are more likely to choose the more costly of the two original options.
For example, take movie popcorn, a small popcorn is three dollars, and a large one is seven dollars. Most people will choose the small popcorn. But if you add a “decoy” medium popcorn at $6.5, a slightly lower price than the large, most people now choose the large popcorn—increasing revenue.
Influence happens by merely adding a decoy product at a slightly lower price and lower quality product, or a much higher price with a slightly higher quality product; people now spend more.
Common Decoy Pricing Tactics
- Introduce a product priced lower and different benefits
- Introduce a product priced the same and different benefits
- Introduce a product priced higher and different benefits
A decoy pricing strategy that utilizes a higher-priced product allows consumers to prefer median products, making decisions easier by avoiding extremes. With these three different products, people primarily don’t choose the cheapest, which is assumed to be inferior to the other two. And they won’t choose the most expensive either, as it’s thought to have unnecessary features. Therefore, the median product appears to be the just-right level of preference. This pricing strategy requires a superb product priced high to create the median effect and is used the least as the preferred push is towards the higher priced products.
Decoy Pricing Examples
The Economist magazine is famously cited for its implementation of decoy pricing strategy and changes its pricing structure quite often and continuously implements the decoy effect to increase revenue.
The most famous examples is the offering of three subscription options: digital, print, and print + digital.
They offered three subscriptions:
- Digital Only: $59
- Print Only: $125
- Print and Digital: $125
The print and digital edition costs the same as the printed edition alone. The “decoy” is the printed edition as it provides less benefit for the same price; influencing more people to buy the whole bundle. Introducing the decoy dropped the number of customers who purchased only the printed edition to zero. This decoy pricing maximized sales of the bundle by influencing the perception of the digital edition to be free within the bundle.
Professor of psychology and behavioral economics, Dan Ariely explores this idea in his book Predictably Irrational and his Ted Talk Are we in control of our decisions?