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.