Many small business owners recognize the importance of pricing decisions and may have struggled with their pricing from time to time. Most settle into a pricing system that seems to work for them and never look much deeper into this topic.
Lately I have been looking a little deeper at pricing strategies and I have started to realize that there is much more to it then most entrepreneurs first realize. There is so much to gain by focusing on improving the way you price your products and services. You may find that you can end up charging considerably more for essentially the same goods or services if you just go about doing things in a slightly different way.
There are many pricing strategies that you can study and many examples of how these have been put into action by successful businesses. In this post I’m going to focus on one that has intrigued me lately; decoy pricing.
What is Decoy Pricing?
When you think about the products and services that your business offers you usually have one or a few items or packages that you hope the customer goes for. With decoy pricing you add one or several other options to your selection that are basically only there to help steer the customer towards the desired purchase outcome. The decoys act in a way that makes your main product or service more desirable.
The most common strategy is for a business to add a premium option to their product range that is priced a lot higher than the standard product yet has minimal advantages. In the customer’s eyes, the standard product item suddenly becomes a lot more desirable now that they have something to compare it with. Making a choice seems like a no brainer and they feel comfortable knowing that they are going for what clearly is the best option.
In other cases businesses can strongly encourage customers to go for more expensive options by offering one product that is cheap but undesirable or inferior. Customers will see that paying a little more for a slightly more expensive option is a logical choice if this option is desirable with lots of features and extras.
Other times businesses will bundle goods and services into packages. They will also offer the items within the package separately but price them at rates that appear to be expensive so as to push the customer towards the desired package that offers the best value.
One Famous Example
This decoy effect in pricing has been brought to the public attention in recent years by Dan Ariely in his 2008 book ‘Predictably Irrational: The Hidden Forces That Shape Our Decisions’.
He offers one great example of the decoy pricing strategy in action when it was employed by ‘The Economist’ magazine.
They made the following offer –
Option A – A subscription to the online version of their magazine for $59 a year.
Option B – A subscription to the print version of their magazine for $125 a year (without access to the online version).
Option C – A subscription to both the online version and the print version for $125 a year.
When this was tested on 100 students 84% went for Option C and 16% went for option A. Option C just seems to offer such great value when contrasted with option B at the same price. Naturally nobody chose the decoy which was option B.
When option B was removed and only options A and C were offered a surprising 68% went for option A and 32% went for option B.
The existence of the decoy option pushed more people into making the decision to purchase option C which was the most profitable outcome for ‘The Economist’. It helped them to lure customers away from option A and towards option B.
You can see the decoy effect in action if you go to sign up for a membership at certain clubs like fitness centers. I often notice that gyms offer an annual fee that works out to be really cheap on a monthly basis. Yet if you sign up for only a month or just want to go for a week while you’re in town the fees are ridiculous.
Whether they know it or not many gyms use expensive short term membership pricing to steer customers into taking the much more fairly priced annual memberships. Of course the value is only there if you actually go to the gym consistently throughout the year but a lot of customers don’t think about this at the time.
Restaurant and Catering Examples
I was recently thinking about ways that a catering business could use decoy pricing and came across some examples in the restaurant industry. Many restaurants will put expensive offerings at the top of the menu to make other dishes further down the page seem to be better value. Often they will try to lure customers away from low margin dishes and more towards dishes with a high profit margin and pricing is one great way to do this.
Restaurants are also famous for their set menus. Set menus offers a customer considerably more value than if they had ordered the menu items individually. In this way, the higher priced regular menu items act as decoys that push the customer towards the desired option which is the set menu. This often maximizes the customer spend anyway as they end up ordering more via the set menu than if they had ordered items separately.
The great thing about decoy pricing is that you can appear to be giving consumers a wider variety of options. At the same time you are taking some control over their purchase decision and driving them towards the purchase that is most profitable for your business. This concept can work in just about any industry if you put your mind into coming up with the right strategy.