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Decoy Pricing: How to Use This Strategy

By Priceva
on July 22, 2022
Many visitors of online stores do not have a clear idea of what exactly they want to buy. They make a choice after analyzing the available options and comparing their quality, features, customer reviews, and, of course, prices. The latter is of utmost importance: the cost of items influences perception of quality and impacts the final decision. So why not use this fact in your pricing strategy and introduce a decoy product?

This guide will help you find out what decoy pricing is and how it impacts consumer psychology. We will review real-life examples, observe the pros and cons of this strategy, and discuss how to flawlessly integrate it into your business.

What is Decoy Pricing?

Decoy pricing is a strategy that is aimed at encouraging potential customers to select a specific product or service by posing an alternative choice. As a rule, decoys are products with a slightly lower price and considerably inferior quality. When customers choose between several products, the decoy one forces them to gravitate towards a superior option.

The target product is the most optimal in terms of price/quality ratio. Sometimes, this is a medium-priced item, but most often, decoy pricing serves to sell the costliest option. Initially, customers think they do not want to overpay for some non-essential features. However, when they see a middle item (decoy) with a slightly lower price and significantly less value than the top-notch product, they opt for the costliest option – it starts looking like the best deal. Sometimes decoys are not middle-priced items, but they always deliver seemingly less value for the money.

In other words, a decoy pricing strategy creates an impression of an extra option that is used to promote other goods. When choosing between particular products, an inferior third variant (a decoy) changes the perception so that a customer would prefer one of the initial two. Hence, this pricing strategy serves to change the consumers’ perception of the available prices – it introduces the attraction effect and the compromise effect, which we will discuss below.

Examples of Decoy Pricing

Let us see how decoy pricing is used by businesses – here are a few examples.

  • Customers come to a cafe where a small cup of coffee costs $2.99 and a large one is $7.99. The difference is big, so the majority of customers prefer a small cup, and it leads to a decrease in sales of the large cup. To solve this problem, the cafe introduces a medium size for $6.99 – customers see that the difference between the large and medium sizes is only $1, which motivates them to purchase a large size. Here, a medium-sized cup is used as the decoy.
  • An online retailer offers TV sets: the one with basic features is worth $180, and a more advanced one sells for $260. Buyers prefer the cheapest option because the first TV seems to be expensive, and then the seller introduces a decoy – a TV for $500 with a bunch of non-essential features. Due to a high pricing contrast between the $180 and the $500 TV sets, customers strive to avoid extremes and start choosing the medium-priced option ($260).

How Does Decoy Pricing Work?

Decoy pricing proves to be efficient because it impacts the psychological and cognitive perception of a product’s worth and value. Here are a few processes that are triggered in consumers’ minds when they face this pricing method – you will see how complex this strategy is.

Cognitive Bias

Many consumers do not know what they want and make purchasing decisions based on the context. Positioning of goods can have a serious impact on buyers’ behavior. A cognitive bias takes place when a customer is offered more than two options: it seems to them that they start distinguishing items’ drawbacks and advantages more clearly.

A business practicing decoy pricing introduces:

  1. A cheap and low-quality product.
  2. An expensive and top-notch product.
  3. A product with medium quality and somewhat lower price than the expensive one.

A buyer is encouraged to make a purchase because one product is priced better or has better quality in regard to other items on the shelf. A decoy product helps to make these conclusions by creating more context for comparison.

Compromise Effect

The compromise effect is based on the fact that consumers often prefer ‘medium-sized’ products, psychologically avoiding ‘extremes’. When they face a choice between three products, they would rather not choose the cheapest one because they will assume it is of worse quality than the two others. At the same time, the most expensive product might seem to be unreasonably overpriced or possess some features that consumers do not really need.

Therefore, they will select the third, median product, which seems to be the best in terms of price/quality ratio. In this case, decoy pricing works when one item is very cheap and another item is very expensive, making the third one more attractive. Sometimes, the target product is the most expensive one but unites the features of the other ones, which is also a great trade-off for customers – they get the full stack of benefits.

Attraction Effect

Also referred to as ‘asymmetric dominance’, the attraction effect aims at making one particular product option more preferable than another. It works because everyone wants to enjoy a good bargain. When there are two products – cheap and expensive – many customers would select the cheap one. But once the third option appears, it will push customers to buy the most expensive product because it seems to deliver much more value than the rest.

One explanation for such behavior is ‘loss aversion’, which is hardwired in our psychology. According to this theory, people are twice as afraid of losing money than they enjoy winning it. Hence, when a decoy item is introduced, it makes people gravitate towards the best product in terms of price\quality ratio.

The attraction effect becomes possible thanks to an ‘irrelevant alternative’, which is well illustrated by magazine subscription schemes. For instance, customers are offered a digital subscription for $9.99 per month, or they can buy the monthly printed edition for $24.99. In this case, the majority will choose the cheapest option. However, once the company introduces a Printed + Digital bundle for $24.99, customers will be more likely to choose it because it is less expensive than buying two products separately, and a bundle option allows them to get the digital edition for free. The printed-only version of the product becomes an irrelevant option.

Pros and Cons of Decoy Pricing

Decoy pricing is one of the most debated approaches because, on one hand, it forces people to choose certain products and, on the other hand, its positive impact is not clearly observable. Here are the major advantages and drawbacks of this strategy.

Advantages

  1. It captures attention and draws interest to your products. With three items on a shelf, customers have enough choice and are encouraged to study your assortment. Once you attract visitors to your webstore, you just need to highlight the product’s features in order to generate sales.
  2. It may shorten the decision-making process. A decoy item helps customers clearly see the difference between products, so they can pick the one that suits their preferences and budget.
  3. It drives sales and improves profit margin. When you understand how to motivate customers to purchase from your brand, you can achieve higher conversions and more sales as a result. Besides that, selling more expensive products by introducing useless options allows the seller to increase average checks and margin profit.

Disadvantages

  1. No success guaranteed. Since decoy pricing is a psychological approach, it requires a profound understanding of your customer profile and their shopping behavior. The results of this tactic depend not only on prices but also brand positioning, properties and quality of products, specifics of your target audience, and so on.
  2. Overusing this strategy can affect your brand reputation and customer-perceived value. Besides that, decoy products may end up being completely unwanted.

How to Integrate Decoy Pricing Into Your Business

In order to introduce a decoy item into your assortment and get the maximum benefit out of it, you need to leverage the strategy gradually, step by step.

  1. Select the product you want to promote. Most often, businesses take the customers’ favorites as target products. However, a decoy strategy can also be used to improve the sales of unpopular options (for example, large cups of coffee).
  2. Structure the product. For a decoy strategy to be successful and the item to sell well, you need to make sure that it brings more benefits than other products in your lineup. Also, you should have a good reason to price it higher by adding extra features and advantages.
  3. Create a decoy. This option should be introduced in a way that does not drive customers away from the target product. The latter should dominate over the decoy item in terms of delivered value, which increases the likeliness of the audience choosing the target item.
  4. Make sure there are at least three options. This is the golden rule of the decoy strategy because customers need enough context to make a comparison. However, do not overload them with too much choice – there should be no more than five options.
  5. Figure out the price of the decoy. The cost should be closely aligned with the target item: as a rule, decoys are slightly less expensive products but have a lower value (enough to motivate customers to choose the better option).
  6. Keep an eye on decoy pricing. Once you introduce the strategy, you need to evaluate its efficiency. Gather data on sales and customer behavior. Based on your findings, you can correct your tactics down the road.

By the way, if you run a multi-brand retail store and the manufacturers do not provide options to be used as a decoy, you can display products in a manner that creates a decoy effect. This is often done with electronics or clothes.

Finally, do not forget to keep tabs on the market. Use price monitoring and price optimization software by Priceva. They will help you make sure you maintain attractive prices and can adjust your pricing as often as you need in order to stay competitive. No manual analysis required – these price intelligence solutions will automate the process and provide you with actionable insights.

Final Thoughts

Although decoy pricing is not equally effective for all industries and customer segments, it can be a very useful strategy when you need to promote a particular product. By following the steps mentioned above, you can craft a strategy that makes webstore visitors comprehend your product’s value and complete orders without hesitation. Large retailers like Amazon have been using this approach for decades, so it may work well for your business too.


FAQ

What is decoy pricing in marketing?

This is a psychological pricing approach that is aimed at making customers prefer one product over another. The effect is achieved by offering them a choice of at least three items, where one is cheap and has a low value, another (the key product) is expensive and highly valuable, and the third one (the decoy) is only slightly cheaper than the promoted item but has discernibly fewer benefits, so customers see no point in buying it. They would rather pay a little bit extra and enjoy the most valuable product – it seems like a rational choice.

What is a decoy product?

A decoy is an item that makes the promoted product look more attractive for customers. Decoys are usually inferior in terms of price/quality ratio: they deliver considerably fewer benefits, so customers don’t think their price is justified.

Where is the decoy effect used?

This is a common strategy for the retail industry where many products are offered. However, decoys can also be introduced in other situations when people can be forced to make a choice, for example, during voting campaigns.

How does Apple use the decoy effect?

Apple favors this strategy and often introduces decoy models of MacBooks and iPhones in its product lineups. As a rule, decoys have a limited storage capacity, and customers can get double the storage space by adding a little bit extra. For example, you can get a 128GB iPhone instead of a 64GB model if you add only $100.

How can the decoy effect be avoided?

Typically, decoy pricing does not impact customers who research the market and make thought-through purchasing decisions. They do not hurry when shopping and clearly understand what they want in terms of product features and capacities.

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