THE DECOY Effect for Pricing
THE DECOY EFFECT is a very effective and powerful psychological technique that marketing companies use to take advantage of the loopholes in our brain. The decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated.
So, Lets assume there’s a movie theatre selling popcorn.
Nearly, every person bought the small. When asked why, they said they felt $7 is tad too costly for a popcorn.
Now after employing decoy effect, a median size “medium” was introduced (its sole purpose being a tool for comparison – that is, a decoy)
and these were the revised prices.
Now, everyone bought the large because they felt large is reasonable because it is only 50 cents more than the medium.
Another example of Decoy effect-
One of the best known examples of the decoy effect is an old subscription page of The Economist. They offered 3 different types of subscription:
· Web Subscription – $59
· Print Subscription – $125
· Web and Print Subscription – $125
The first offer of $59 seemed reasonable. The second option (only print) seemed a bit expensive, but still ok. But what about the third option? Both Web and Print for the same price as the print-only subscription?
Dan Ariely, an Israeli American professor of psychology and behavioral economics and author of “Predictably Irrational“, tested this phenomenon with his MIT students where he asked them to choose a subscription. The results were:
· Web Subscription – $59 (16 students)
· Print Subscription – $125 (0 students)
· Web and Print Subscription – $125 (84 students)
Total revenue: $11,444
The majority of students selected the third option (dominating) and none of them selected the second option (the decoy). Knowing this, Ariely performed a second test and removed the decoy product. The results were:
· Web Subscription – $59 (68 students)
· Web and Print Subscription – $125 (32 students)
Total revenue: $8,012
This time, most of the students preferred the first subscription. By adding a decoy product, The Economist improved sales with 30%.
Not long ago, Apple unveiled their new iPod Touch devices. I took a screenshot of the pricing table. As you can see, for $229 you get 16GB, for $299 you get 32GB and for $399 you get 64GB.
Apple’s pricing strategy
When you want to double the storage capacity – going from 16GB to 32GB – you pay $70 extra and get more features, such as a 5MP iSight camera and iPod Touch Loop. When you want to double the capacity from 32GB to 64GB, you pay $100 more but don’t get extra features for it.
You might conclude the 32GB version is the best value for money. Only a few would buy the 16GB version and even fewer would buy the 64GB version. The 16GB and the 64GB version act as the “price decoy” to make the 32GB version as the best option.