The “Decoy” Pricing Model
By Alex Mandossian on October 3, 2008
According to Wikipedia, the “decoy effect” (also known as the ”asymmetric dominance effect”) is the phenomenon whereby consumers change their preference between two options when also presented with a third option that is asymmetrically dominated.”
In plainer language, here’s the way decoys are utilized daily during consumer experiences.
Scenario 1: You order a medium-size Pepsi at the movies for $2.75 and the person behind the counter asks, “Would you like a large for just 25 cents more?” You say, “Yes”… that’s the decoy effect.
Scenario 2: You’re sitting at the bar in an airport terminal waiting for your plane to board. As soon as you order your $7 cocktail, the bartender smiles and says, “Want a double-shot for just $2 more?” You say, “Yes”… that’s the decoy effect.
I have no idea what your consumer response would be in similar circumstances, but I do know from my own experience that I will choose the asymmetrically dominated option nearly 100% of the time!
In the traditional “Good-Better-Best” pricing model, the single best utilization of a decoy was revealed to me by Dan Ariely, author of the New York Times best-seller, Predictably Irrational - The Hidden Forces That Shape Our Decisions.
Turn to Page 5 of Dan’s fascinating book and you’ll find an interesting study he conducted with 100 students at MITs Sloan School of Management. (He set out to test the predictability of choices they made from an Economist magazine subscription offer he stumbled on the Internet sometime earlier).
Economist Subscription Offer Revisited: In Dan’s Ariely’s words, “I read these (three) offers one at a time. 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,” he writes.
At this point, Dan asked himself the same question thousands of my students have asked themselves when presented with the same purchasing predicament:
“Who would want to choose the ‘Better’ option (print only - Offer B) when both the ‘Good’ (Internet only - Offer A) and Better” (print only - Offer B) could be purchased at the same $125 price (’Best’ - Offer C)?”
Good question.
Here’s the Economist’s sleight-of-hand pricing model in a nutshell:
Offer A: Internet-only subscription for $59
Offer B: Print-only subscription for $125
Offer C: Print-and-Internet subscription for $125
(If you read with a Visual bias, click here to see the actual excerpt - courtesy of Dan Ariely - from Chapter 1: The Truth About Relativity).
Economist Subscription Offer: When Dan gave these same three options to 100 students at MIT’s Sloans School of Management, here’s how the results played-out:
Offer A: Internet-only subscription for $59 ~ 16 students
Offer B: Print-only subscription for $125 ~ 0 students
Offer C: Print-and-Internet subscription for $125 ~ 84 students
Fascinating, isn’t it?
In my own marketing experience, I’ve found that the decoy pricing model influences my prospects to have a strong bias toward Offer C or “Best” Option in the Good-Better-Best pricing model.
Dan Ariely discovered the same phenomenon.
Economist Subscription Offer (decoy removed): When Dan removed the decoy (Offer B or “Better” Option in the Good-Better-Best model), he wondered if the 100 MIT students would react the same way. After all, the option he removed was Offer B (the one that no one selected), so it shouldn’t have made any difference, right?
Not exactly…
Under the removed decoy condition, Dan found that 68 of the students chose Offer A (Internet-only) for $59. That’s up 425% and represents a less profits.
But wait, it gets even better … only 32 students chose Offer C (Internet-Print combo) for $125. That’s a 262% decrease and represents a lot less profits!
Here are Dan’s actual results for similar offer without the decoy (Print-only option):
Offer A: Internet-only subscription for $59 ~ 68 students
Offer B: Print-and-Internet subscription for $125 ~ 32 students
Final Analysis: As consumers, it seems as though ”the more we get, the more we want.”
As marketers, utilizing a decoy when price-testing may prove to be an irrationally predictable excuse for your prospects to choose the “Best” option that’s proabably the most mutually beneficial anyway.
Because you’ve read this far, you’re probably interested in how decoy pricing can add more sales and profits to your bottom line, right?
If that’s true for you, then please share your own marketing Case Studies on this topic in the Reply Box I’ve provided you below.
Personal Request: Please forward this blog post to your marketing friends, colleagues and mentors because I want their comments and feedback as much as I want yours (Reply Box below).
Okay, Alex….Case study: (Best/Better/Good)
Offer A: Deluxe Oceanview w/Balcony $1,199 pp
Offer B: Standard Oceanview $999 pp
Offer C: Inside Windowless Cabin $899 pp
Out of 100, 48 took Offer B @ $999 19 took Offer C and 33 took Offer A
When Offer A was priced at $1099 (instead of $1199) 57% took A.
Now watch this: We went back to $1199, $999 & $899 and added 2 new elements…another choice and an asterisk suggesting “best value”.
Offer AA: VIP Penthouse Suite $2399 pp
Offer A: *Deluxe Oceanview w/Balcony $1,199 pp
Offer B: Standard Oceanview $999 pp
Offer C: Inside Windowless Cabin $899 pp
Out of 100, a whopping 68 went for Offer A, 19 took Offer B, 7 took Offer C and 6 took the added Offer AA. :-)
When comparing all the others to AA, A seems like the best choice.
I also tested taking away the asterisk and got less A sales, so quickly put back the asterisk!
BTW, in this case (and others) best/better/good worked better than the traditional good/better/best.
So, my lessons learned are:
#1) Present an availability of a price point WAY HIGHER than your closest OTHER offers, to position for comparison and value contrast.
#2) Coax the descision process with an * asterisk or “best value” next to 2nd highest price point, resulting in highest (more than 2/3rds) selection of that choice!
Captain Lou
http://MarketersGoneWild.com
Fascinating stuff. I looked at the study and thought, why would you read it the subscription twice? I’d be looking for the internet only option, but knowing how most react makes me want to find a way to apply it to my business model.
Thank you so much for sharing this!
Brilliant, Alex.
Thank you again for responding to my request
and for making something so powerful easy to
digest and understand for your readers.
I am honored that you acknowledged the request
in your email to your subscribers about this
revealing post.
If I may, I’d like to point out one of my
“secrets” that was used in my brief request
you so kindly quoted in today’s broadcast.
This tip can be used in conversation and in
copy to raise the frequency of compliance
whenever you want to get a “yes” answer.
It’s very simple and yet could well be the
most powerful five word phrase in the English
language for getting compliance to your requests.
Preface any request you’re making with this:
“Would you be willing to…”
Would you be willing to give it a try? I
believe you’ll be surprised at how effective
it is.
Respectfully submitted,
Michael Millman
The Copy Polisher
Follow Me On Twitter - @MichaelMillman
Hi Alex!
I think that the system at your Audio Generator is always have to pay the $ 1 when I use it for speaking? When I get there than there is no money on my account or I am exhousted from beeing without money, but never mind once I will arrive the right place with the right time. Until than please contact me and have a nice Weekend: Much Greetings: Irén
I’m not sure that it is quite the same, but is this basically the same psychology as offering
1. Teleseminar, MP3 $20
2. Teleseminar, Transcripts $20
3. Teleseminar, MP3 and Transcripts $30
Any better suggestions?
Thanks for your help.
Carolyn Perry
Michael,
Would you be willing to write some sales copy for my upcoming TSS campaign? If you read this and your response is Yes, please connect with me through http://www.AlexHelpDesk.com
Megs, my HelpDesk Manager, will forward your info and Abby, my EA, will set a phone appt.
Many thanks,
Alex
Carolyn,
Try this:
1. Live Teleseminar: $20 (Good)
2. MP3 Recording: $30 (Better)
3. Live + Recording: $30 (Best)
Or, this one:
1. Live Teleseminar: $29 (Good)
2. Audio Transcripts: $10 more -> $39
It’s a two-part “decoy” but the $10 more seems to be perceived as the Audio Transcripts are $10 when they’re really $39 … the Teleseminar is included in the offer.
I’ve utilized the $10 more model with Brian Tracy, Bob Proctor, James Ray, Chris Howard, Mark Victor Hansen, Les Brown, Jack Canfield and many other “fee-based” Tele-Interviews.
Good Sales,
Alex
Hi Alex,
My friend Scott Tousignant learned of the Economist experiment a while back and changed his sales letter at http://MindsetSecrets.com. He has a year of fitness workouts for men at price A, a year of fitness workouts for women at price A, and the combo of both men and women at price B (about 50% higher).
It’s slightly different, but the results similar - most of his buyers choose the combo pack so they can give the other workout set to their spouse or a friend.
For teleseminars, I’ve used the model:
A Transcripts Only $20
B MP3 Only $30
C Transcripts and MP3 $30
and C wins out every time. But somehow, I did have people select B, and for the life of me I can’t understand why unless they didn’t read further. :)
Thanks for answering Michael’s question!
Bob Jenkins
After I wrote the last post, I looked at Scott’s offer again, and he did change it to reflect the model.
It’s a set of 21 motivational fitness & goal setting interviews called “Unstoppable Fat Loss” for price A, the same interviews plus another 21 shorter interviews for price B (about 50% higher), and all 42 interviews plus the year of workouts for men and women for price B.
Almost everybody goes for the 42 interviews, plus workouts. http://MindsetSecrets.com
Bob Jenkins
Fascinating in deed!
I purchase thousands of product in lifetime.
Always thought I was making a better choice.
Now, I’m not so sure.
Alex,
I’m in the real estate and mortgage business.
I know for personal experience that “Decoy effect” is being in the New construction and Condo sale business.
I wonder how else I can use it on my business.
Thanks for such great info.
Very, very cool! Thank you!
I wonder what would happen if the Economist’s pricing model was this, instead:
Offer A: Internet-only subscription for $59
Offer B: Print-only subscription for $150
Offer C: Print-and-Internet subscription for $125
I’m sure the only way to find out would be to test it.
Does anyone have a similar example to share?
Aloha,
Eleanore
Hi Alex,
Wow man, we’ve been crossing paths for years and never met yet. I was just talking about you with Shawn Phillips about this very topic last week.
We really need to grab a beer. ; )
Two case study elements to share:
Last week I opened up some floodgates on my affiliate “team” approach. We had teams of affiliates, tracked with our own proprietary system, and the teams promoted my latest book “7 Minute Muscle.”
While there were some things to correct for the next go-around in December, it was a pretty rousing success. The book shot to number 4 on Clickbank (health/fitness) with ‘zero’ PPC and has stayed in the top 5 since.
Part of the reason for this was using this decoy effect with a slight twist: We made the second of the third up sell offers slightly lower BUT with a monthly recurring billing. The higher-priced item was the same thing with extra coaching time and ‘no’ RB. Only one person took the middle offer.
The real big surprise was somewhat accidental. I used this same approach on another book of mine and the up sell has literally not sold ‘once’. Hmm. The difference?
My 7 Minute Muscle up sell is (a) on a second page, which contains (b) only the up sell pricing. To get the book only, there’s a “no thanks, just the book please” button underneath.
We has 65% up sells to the $99 product, which in fitness is really damn good. And, when combined with a teleseminar, we had 11% up sell to the most expensive $249 offer (3x higher than without teleseminars), which pays out $150 in commission.
The other book had the same process but with the order box (a) on the sales page; and (b) containing the “basic” price.
I believe this falls under the “most people do not read” category. By the time people got to the up sell page for 7MM, they were sold (and should be… great book… heh) but may have forgotten the price from the sales page copy, or not noticed. The up sell being labeled “Basic Upgrade”, “Deluxe Upgrade” and “Deluxe Upgrade LIFETIME BONUS” may have been a profitable accident.
We’re tweaking more as we go — and thanks for the tips everyone. Love the asterisk and the “Would you be willing to …” Good stuff.
Jon Benson
Alex this article was enjoyable and is in line with my 25 plus years experience in selling big ticket item like flooring and the consumers reaction is similar.
The missing ingredient in our case would be the explanation as to why the third choice is positioned as a better value.
As an example : An entry level carpet would be presented for $2.00 per square foot installed, the next grade up would be $3.50 per square foot and the third and heavier grade would also be priced at $3.50 per square foot and it comes with an explanation as to why. Such as we have made a special purchase of this quality and that is why we can sell it for the same price.
While by my experience I knew that this reaction is normal when confronted with a presentation like this, I had not come across the name of it.
After reading the article other ideas were racing in mind in terms of formalising or making this presentation method more systematic to the client when advertising or when the salesperson is giving a quote at the client’s home.
I just got this book off amazon a few days ago and have started reading it. Wow, you can’t put this book down once you start!
Every few pages you will find your mind wandering and thinking about all the ways you can use this methodology your own products. It really is a fascinating read, and the great thing is that the author tested everything, i.e. no fluff or theory here. Get this book, you won’t be able to put it down.
I have a question for Alex’s response to Carolyn. Does the extra $1 REALLY make a big difference? I am launching a audio coaching program in two weeks for the cost of $30. And I’m taking your advice, Alex, on upselling it by $10 for the written transcripts. I’m selling it as an “e-book that’s yours to keep” (collection of transcripts). Should I be pricing it at $29 instead of $30?
Interesting read. Thanks to Alex for sharing this. And I’d like to thank Captain Lou for your results too. It’s one thing you think about trying…
Apart from the 3-option decoy, what I can take away from this is that you may want to hightlight the best value, or best-seller options to customers.
I see this a lot in Dell’s flyers which comes in the papers. And I think it must be working for them. They always feature four of their laptops, where one is the higher-end model, and another one is a best-seller or top choice model. The other two are good entry models… And somehow, I am most tempted for their best-seller…
Hi Alex,
great article and concept. I’ve been using something similar for a few years. I am about to make some changes, so this info is very timely.
I have my book ‘How to Be Wildly Wealthy FAST’ being sold at my site http://www.WildlyWealthy.com
I currently offer the book and then instead of customers going directly to the shoppingcart, they get taken to an upsell page. These are 5 months of upsell stats stats:
1. Book
2398 x $27.95 = $67,000
2. Book, Companion Workbook and mp3
275 x $67 = $18,000
3. Same as 2 but with audio book and 12 additional homestudy course audios
77 x $795 = $61,200
While this has worked wonderfully for a few years, I’m going to discount the 2nd option to make it more appealing as I think I’ll have more people upgrade, which means more $ profit per person.
Thanks so much for the great info.
Sandy
Hi Alex,
Your Decoy article is great. Here is what I am doing now that the product is done and launching. Did you get the download from Abby that I sent to you?
The Key To Happiness for Mastering Your Emotions my 6 1/2 hour audio plus 91 page workbook $397.00
HeartWisdom Wheel of Self-Empowerment, love and Enlightenment.. $66.00
Downloadable Interviews with the co-trainers and Launch Calls with transcript: 19.95
I am also experimenting with giving the first 90 minutes as Free Chapters…but none have converted to sales of the product as yet..out of about 60 inquires, and many downloads. It is only 4 days old since launch so I don’t know how much time people need to make that conversion to order decision?
How do I best set this Decoy up with these elements?
We have a bonus offer of $331.00 for both using the 66 as a discount price. But we don’ thave a third option. We are basically discounting the amount of the second course and tossing it is for free. I know I am missing somthing here am on a month-long promotion with another marketer, so I would like to get this done properly.
Thanks Alex…as always great content and heart!
Jeannie
http://www.MasteringYourEmotionsCourse.com
Alex,
You’ve convinced me I need to implement the decoy option on several of my sales pages.
I currently offer resell rights with several products on the original page, and have considered offering MRR on a decoy page for an additional $10. A third decoy will be in the works after reading this. Possibly some kind of relative viral PDF for the same price as Option A + B without RR or rebranding.
Gives me lots to think about.
Thanks. I appreciate your posts.
Jane
Alex,
This will cause me to re-think some of the things I’m doing online in terms of the offers I’m testing and teaching others to test.
Thanks for expanding this out in this way. Very helpful and interesting reading!
Jonathan
http://www.themagicoftesting.com
Hey Sandy…
Don’t know if you’ll come back to the blog to see this, but I think your offer will perform a lot better if you’ll actually display the three offers in boxes side by side, instead of going down the page.
I don’t know if that makes sense… Here’s a quick graphic I put together to show you what I mean…
http://www.themagicoftesting.com/side-by-side.jpg
It’s worth testing anyway, but I’d bet you’ll see even better results if you can simplify the offer and show it side-by-side like this.
Jonathan
Hey Jonathan,
thanks so much for the input. As soon as my VA gets back to work after the long weekend I’ll have her start working on the website.
I think it will make a big difference when I implement all these small changes.
By the way, do you have a url of an actual sample of the side-by-side products?
Thanks so much!
Sandy
Also Jonathan,
just wanted to say I thought that was supersonically lovely of you to take the time to do up the graphic. THANK YOU so much!
Sandy
I just experienced this concept over the weekend while celebrating my anniversary.
Amy and I went to Toronto for the weekend and when we checked into the hotel, we were presented with some options…
1) Regular room - queen size bed ($179/night)
2) Deluxe room - brand new wing of the hotel, king size bed, balcony, and breakfast ($199/night)
3) Deluxe bedroom suite - king bed, bunk bed for kids, balcony, breakfast, free movies, kitchen, bla bla bla ($349/night)
We already had a regular room reserved so for $20 more, it was a no brainer for us to upgrade to the Deluxe room.
The thing that got me thinking about this from a marketing perspective was not only did it use the principles you discussed in this article but it also had a few “Cialdini” principles kicking in as well.
Since we had already committed to $179/night when we reserved the room online, all I heard when the offer was presented to me was…
“get a bigger bed, better room, balcony and breakfast for $20″
Hmmm… ok.
Then throughout our stay Amy and I kept convincing each other what a great deal we got - especially because breakfast by itself was worth more than $20!
Damn we were smart consumers…
Hahahaha. I love marketing :)
I’ve been thinking alot about decoy pricing over the weekend.
I tried it on my coaching services but I’m pretty sure I missed:
http://fundraisingcoach.com/executive-coaching/
But I think I’ve got the right idea about a webinar series I want to sell. I have three 90-minute seminars on effective fundraising for nonprofits.
Would this be an example of decoy pricing:
===============
1. Any individual 90-minute webinar: $327
2. Webinar sessions 2 “Engage” and 3 “Ask” (perfect for boards and volunteers): $597
3. *All three sessions: $597
===============
Does that make sense?
Marc
Great post, Alex! Love this kind of stuff.
Seems like in some of the examples above, the case study group HAD to make some selection from the given choices, which didn’t include making NO choice.
I am wondering about the overall effect on conversion when presented with multiple offers.
I think familiarity with the products offered ( everyone knows what internet and print subscriptions are) will certainly not confuse anyone, products or services that require long descriptions may confuse buyers when presented with multiple offers. Would have to test.
Particularly enjoyed Capt. Lou’s case study, as well as Jim Martin’s Big Band arrangements!
Thanks!
Howard “OutSourcerer” Tiano
Hey Alex,
Do you ever make it to CJU Commission Junction Unioversity in Santa Barbara, California? :-)
Shawn
Glad you liked “Predictably Irrational,” Alex.
Marketers often forget that their linear marketing campaigns do not usually address the phenomenon known as “behavioral economics.”
Marketing campaigns are created with the left-side of the brain, but purchase decisions are made with the right-side of the brain.
Roger Sperry officially brought the world’s attention to the left-brain/right-brain concept when he won a Nobel Prize in 1981 for what was termed “brain dominance theory”
Thanks to decoy pricing, the right-brain of a Sam’s Club shopper buys 100 rolls of toilet paper even though the family only uses 50 six months. After all, the shopper’s getting a good deal!
Keep up the great work! See you at your Los Angeles event next week. -Michael Angelo Caruso, http://www.EdisonHouse.com
Very enlightening. So I have some questions. I always say no to additional offers (cause I just know what I want, but I might find myself teetering on the 2 shots deal…hey we all want to be happy).
I liked the idea presented here, the logic and explanation. Good marketing stuff.
What is the science and logic behind the $29.99, $39.99, $49.99?
[…] Well, today I decided to roam the world wide web and what do you know, I stumbled upon the venerable Alex Mandosian, The GodFather Of Internet Marketing Success! […]
Hi Alex,
I found this concept very interesting although I am not in marketing, I figure I may try it in my talking cure service.
1. Consulting for the fist time $20
2. First session $15
3. Consulting plus 1st session $30
I am not so sure this is how it goes (good -better- best. Kindly assist.
Agnes L.