What Is Decoy Pricing?
Decoy Pricing is a pricing strategy that offers consumers similar products at different prices to create a preference.
What is the decoy effect?
The decoy effect in psychology is the tendency of customers to rather choose the low-priced product over the high-priced one. They perceive it to be of better value to them because they don’t feel like their “losing money”. Obviously, this is the intended outcome of the business applying that strategy.
Interestingly enough, a small percentage will choose the higher price because they believe it offers better value to them. This is known as the high-end effect.
What is Decoy Pricing Strategy?
A decoy pricing strategy is the plan behind managing the decoy effect. The reason you need a strategy is that the effect can lead consumers to focus on one product only while ignoring all the other products you offer. Therefore, you need to select decoy products that match your target customer’s expectations and interests.
These strategies work best when consumers have limited information about a business’s products. So the first step is finding out what reputation your company has. Additionally, you should find out how consumers make decisions when buying a product like yours.
Examples of Decoy Pricing
Decoy Pricing Strategies can be applied to any industry, but they are most common in retail businesses because they have many similar products. Here are how the 2 most popular companies use decoy pricing.
Apple uses this kind of strategy on multiple levels. First of all, they use different storage levels which even makes an iPhone 8 a really expensive choice. Secondly, they sell most of their products with three options to choose from. One “cheap option” with basic functionalities, a middle option with advanced functionalities, and a high-priced option with the most value (Source: LinkedIn Article by Asmita K.)
Starbucks does the same thing as Apple with coffee. The Grande option for a coffee is selected the most because it seems like the best value for the money. Read this article about 6 psychological tactics behind the Starbucks menu to know more.