The “Decoy” Pricing Model

pi-cover.jpgAccording 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).

Comments

comments

Powered by Facebook Comments

About Alex Mandossian

Trackbacks

  1. [...] 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! [...]

  2. hawaii credit repair…

    A novel idea: a place where different opinions can be expressed….

0: