The subject of pricing is an interesting one for me because often time entrepreneurs take it lightly. You can come up with witty business strategies just by tweaking your pricing structure. Some people in business do not even know that there are different types of pricing one can use. Anyways, in this article, I want to discuss a subject that appeals both to the business and the customer as well. Ironically, psychological tricks are mostly used in business. Well, they do work after all; in this article, I am looking at what is termed the decoy effect.
Breaking Down The Decoy Effect – A Relatable Example
Let us suppose that I have a business publication that I produce every month. Let us also suppose I decide to sell it using two options from which people can choose. Option one will be the digital copy and I will be charging it maybe US$2. Then option two will be the physical copy which maybe I will be charging US$5. Ordinarily many would operate using this framework of two options.
Let us then suppose I add option three where customers can buy both. Thus I will say that option three will be a combo (the electronic copy and the physical copy). I will peg that option at US$5. The effect this third option brings about is what in principle denotes the decoy effect. This is something that has had studies done on and shown some interesting results.
Further Explanation…
When I am offering the US$2 and US$5, it is literally a no brainer for most people. They will quickly settle for the cheaper option, in this case, the US$2 digital copy. However, when I throw in the third option, more than half of my customers will most probably go for the US$5 combo. What would have happened? Nothing really special would have happened but only that my third option will be a decoy. (Interestingly, studies have shown that men are more likely to take the third route). So you could employ this technique especially when your target market is predominantly male.
I am sure you get the drift; this is a technique you can use in your pricing to get customers to spend more. It is at best using cognitive conditioning whereby you are influencing people to make purchase decisions that seem win-win but benefit you more. In the same vein, if customers are aware of this decoy effect they can better assess their purchase decisions before making them.
More Applications Of The Decoy Effect In Pricing
From the example I used you can tell the secret is in the options you make available. This means you can go further to play around with more options. Let me summarize what happens depending on the number of choices you avail to your customers:
Number Of Choices Versus Effect (Intended Effect)
| Number Of Choices | Effect (Intended Effect) |
| Two | Affinity is towards settling for the cheapest one |
| Three | People gravitate towards the choice that seems like the median of the available choices. That is compounded by the fact that people will avoid the cheapest thinking it is low value and the most expensive thinking it is overly priced |
| Four | There is a high likelihood that most people will settle for the second-placed choice in terms of being costly. For instance, from US$1, US$2, US$3, US$4 – the high likelihood will be to choose US$3. |
As much as you can put all this to work you must not compromise on quality. For the most part, people still value quality a lot more so make sure that is in check. At the end of the day, you would want a scenario where both you and the customer benefit to a greater extent. Another thing, this decoy effect can work in many ways more than just pricing. You could even employ the trick in business negotiations too. Overall, entrepreneurs need to get to know how behavioural elements have a bearing on business operations. This will enable you to come up with witty business strategies that are based on empirical research. Most businesses already use the decoy effect; some know it, whereas some do not even realize it.
