While most people think that increased time spent prospecting and selling will earn you more profit, the truth is, that there are numerous tactics to profit maximisation. Cost efficiency exercises and rising prices are two, easy to implement, strategies. Another two are pricing strategy analysis and using the decoy effect to encourage customers to buy one product over another.
What Is The Decoy Effect?
The decoy effect, also known as the asymmetrical dominance effect, is a scenario where a customer changes their preference between two products when presented with a third. The new product should be asymmetrically dominated; i.e. there is no consistency between the decoy price and that of the others.
The decoy effect is a great option when you have service packages or products that can be offered in different quantities. If you use product tables on your website, this pricing strategy is the perfect solution.
Examples Of The Decoy Effect
There are two ways you can design the decoy effect. Firstly, we can look at the different quantities of the same product. Assume you sell sweets and offer two sizes: small and large priced at £2 and £6 respectively.
A study found that 87% would choose the small size. Most likely because of the cost. In this model, your shop would earn (for every 100 customers):
87 X 2 + 13 X 6 = 174 + 78 = £252
Now let’s introduce a third size of sweets, medium, priced at £5. Notice how it isn’t in a linear progression as you might expect. Now in this scenario, 74% of customers will choose the large size, very few (if any) will choose the medium and the rest will choose the small size. The main influence for this is because the large size seems like such a good deal.
In this scenario, the revenue would be:
26 X 2 + 74 X 6 = 52 + 444 = £496.
This pricing strategy shows a 96.8% increase in revenue. This example was shown on the National Geographic channel (with popcorn). You can watch the video below.
The Decoy Effect In Other Examples
Another example is when you have product differential. This is where you offer different products, but want to focus your customers’ attention on one product. So, you have two MP3 players. One is sold for £100 and the other £150. The difference between them is just the number of songs they can hold, 100 and 150 respectively.
In this example, we can assume that our customers are more likely to choose the first option.
Now we add in another option, a third option where 125 songs can be stored on the same MP3 player for £150, the same price as the MP3 player that can store 150 songs. Now this grabs the attention of your audience. Why wouldn’t you buy the device with the space for an extra 25 songs?
The same tactic was used by the Economist. They had an online subscription, print subscription and one offering both. The last two of these options were the same price. Yet because of the perceived deal, most people bought the dual package and not the cheaper, digital only package (the first).
The Joel Huber Experiment
Joel Huber conducted a study to see how the decoy effect impacts on our everyday decisions. In the experiment, participants were asked to choose between two restaurants – a five-star restaurant further away or a three-star restaurant nearby. The major dilemma was quality versus convenience.
At this point, participants had a hard time deciding.
Then, Huber introduced a third choice – a four-star restaurant that was even further away. Participants then decided, with regularity, to go to the five-star restaurant.
Huber then decided to throw another restaurant into the mix. He positioned a two-star restaurant halfway between the five-star and the three-star. What happened? The three-star restaurant become more popular because of its convenience and quality out-weighed the two-star option, it was also better priced.
How To Make The Decoy Effect Work In Your Business
If you want to sell more, you can start to implement decoy effect strategies into your pricing. Here are some tips to make it easier for you to apply this pricing strategy within your business.
1. Pick Your Star Product
The first step is to pick your star product, i.e. the product you want to sell more of. It might be a large volume of a product or a specific model where you can generate a higher profit.
Whichever item you choose, you must make sure it is popular with customers. So, ensure it has good ratings. Poor reviews will make the product seem less valuable and damage the chance of success with your campaign.
2. Have Three Choices
We’ve mentioned before about the power of three. In fact, we love the power of three. Any campaign you run should have three options. Without the addition of a third option, the decoy effect will not work, nor will it work with anymore – decision fatigue can set in.
3. The Three Choices Should Not Be Balanced
Your mission is to create a decoy, to make customers think that the product they are buying is reasonably priced. The only way to do this is to intentionally imbalance your pricing strategy. You want customers to think your pricing strategy is stupid; that you are taking a hit to sell to them.
It puts the client in a perceived seat of power; when in fact, you have control. It can also mean that customers are less likely to complain because they don’t want to lose access to the special offer that has given them great benefits.
4. Price The Decoy Close To Your Key Product
The decoy product, the one you don’t want to sell, should be priced closely to the product that you do want to sell. In the National Geographic popcorn example, the medium popcorn was just 50 cents cheaper than the larger popcorn.
The Economist offer had the decoy and the chosen product at the same price.
Whether you chose the same or a slightly lower price, be sure to differentiate the pricing from the lower priced product and your decoy. They should be incomparable. For example, in the popcorn example, the price difference between the small and large was $4.50 compared to just 50 cents between the large and medium.
The greater the disparity between your low-priced products and the other two, the larger the impact you will have on their perception.
5. Limited Improvements On Lower Priced Product
It isn’t just price that contributes to the purchasing decision. In the restaurant study, price, location, and perceived quality of the eatery all contributed to the purchaser’s decision. You should factor these considerations into your decoy product.
For example, the decoy product should be only slightly better than the low-ticket product.
To be sure to get this right, make sure all decoy pricing options have these two factors:
- The decoy product is priced close to the high-ticket product.
- The decoy product’s value is close to the low-priced product.
If you do this right, you can change the behaviour of your customer’s as they are making their purchasing decision.
6. Be Warned: Middle Choice Tendency
How you display your product choices is important too. Customers tend to choose the middle option when offered three choices. This was confirmed in research conducted by Dr Paul Rodway in a study.
Therefore, don’t place your decoy product in the centre, whether vertical or horizontal display. In fact, you should be placing your preferred product in the centre to push customers a little bit more into selecting that product.
Are You Implementing The Decoy Effect?
The decoy effect is a powerful, but tricky tool for businesses to master. By utilising it in your pricing strategy you can increase the value of customers substantially without the need to upsell.
Don’t just include it on your website; implement it in your project proposals and in sales meetings.
Do you employ the decoy effect in your pricing strategy? Does it work for you?
Let us know in the comments below.