How To Create Decoy Pricing Options

Companies can use decoy pricing to make certain products more desirable. Decoy pricing exploits the decoy effect in humans. The decoy effect is a phenomenon where we change preference for one of two items when a third is introduced.

By employing a decoy product, companies can direct customers towards a certain product. A psychological affect of decoy pricing is by introducing a decoy, more people purchase the product than if no decoy was available.

The effect, asymmetrical domination, occurs when the decoy being offered is inferior in every regard to one product (“The dominating option”), but to the other product (“partially dominated”) it is inferior in some regards and better in others.

Real World Example

In Predictably Irrational, Dan Ariely describes coming across subscriptions for the economist on the Internet.

The first offer-the Internet subscription for $59 seemed reasonable. The second option-the $125 print subscription-seemed a bit expensive, but still reasonable.

But then I read the third option: a print and Internet subscription for $125. I read it twice before my eye ran back to the previous options. Who would want to buy the print option alone, I wondered, when both the Internet and the print subscriptions were offered for the same price?

This led him to test the options on MIT Students. The results were:

• Web subscription - US $59 (16 students)
• Print subscription - US $125 (0 students)
• Print & web subscription - US $125 (84 students)

Revenue: $11,444

As Ariely suspected the majority of students selected option 3 (“Dominating Option”) and none of them selected option 2 (“The Decoy”). Ariely then ran the options on another 100 students with the decoy removed. This time, the students preferred the other subscription.

• Web subscription - US $59 (68 students)
• Print & web subscription - US $125 (32 students)

Revenue: $8,012

What’s interesting about this example is that by introducing a decoy the company makes 30% more revenue.

How To Do It

Two attributes are needed to utilize the decoy effect. Identify a quantifiable feature to highlight. The second attribute will be price. Two options are then created.

Option 1:

• Price: $400
• Feature: 50 Widgets

Option 2:

• Price: $300
• Feature: 40 Widgets

Now determine where you want to steer your potential customers. To steer them towards option 1, you offer a third option which is more expensive than option 1 but with less or the same features. The final product offerings would look like this:

Option 1: Dominated Option

• Price: $400
• 50 Widgets

Option 2: Partially Dominated Option

• Price: $300
• 40 Widgets

Option 3: Asymmetric Dominated Option - Decoy

• Price: $450
• 45 Widgets

With this option, customers get 5 more widgets by paying $50 less. No one will select option 3. Option 3 is only presented to steer people to Option 1.

We can also steer them towards Option 2. To do that, the decoy would be more expensive than option 2, but with less features.

Option 1: Partially Dominated Option

• Price: $400
• 50 Widgets

Option 2: Dominated Option

• Price: $300
• 40 Widgets

Option 3: Asymmetric Dominated Option - Decoy

• Price: $350
• 35 Widgets

By offering this as option three, customers will identify option 2 as the deal and will select it.

Examples To Watch For

• Popcorn at the movie theaters.
• Gym memberships
• Restaurant items