Discounts, promotional offers, and flashy product features aren’t always enough to influence buying behaviour. Sometimes, you need to introduce a decoy or a third product or service option with less attractive features. By doing so, you can influence your customers’ decisions to buy a higher-priced option, increasing your profit margins. This marketing strategy is known as decoy pricing.
This blog will explore how decoy pricing works, why it’s effective, and how you can use it ethically to boost conversions and average order value.
What is Decoy Pricing?
Decoy pricing is a strategic pricing technique in which businesses introduce a third product or service option, known as the decoy, with products or services they actually want to sell. Sellers intentionally offer a less attractive and appealing option than the other options available as a decoy.
They introduce a decoy to guide customers toward buying a specific product by making it appear to offer better value in comparison. This is known as the target product, which is often a higher-priced or more profitable one.
How does Decoy Pricing Works?
Here’s how decoy pricing works:
Setup
Businesses offer three product options: a basic, low-priced product, the target product (the one they aim to sell most), and a decoy. The price for the decoy is set very close to the target product. The decoy offers less value and makes the target product seem like a better deal.
Reference Dependence
Consumers rarely evaluate products in isolation. Instead, they often compare options. By introducing the decoy, businesses provide a reference point, making the target product appear significantly more appealing. This process is what drives consumers toward the target product.
Consumer Comparison
When customers compare options, the decoy shifts perception by making the target product seem like the best choice, even if it costs more than the basic one. This plays on cognitive biases like the decoy effect, where the target looks better next to a less appealing option, and the compromise effect, where people pick the middle choice to avoid extremes.
Cognitive Biases
The decoy pricing strategy plays on several cognitive biases. The compromise effect makes consumers avoid the least expensive and most expensive options, leading them to pick the middle-tier target product. Additionally, the attraction effect is triggered, where consumers prefer an option that dominates another, especially when the price difference is small. They guide customers toward making a decision they perceive as most rational.
Perceived Value
The decoy simplifies the decision-making process by making the target product appear like the most valuable choice. This helps buyers feel they have made the most logical and worthwhile purchase, alleviating any potential buyer’s guilt. As a result, businesses can drive higher sales by presenting the target product as the clear winner, creating the impression that consumers are maximising value.
Here’s an example of a fast food menu to understand how deploy pricing works:
Small drink: Rs. 50
Medium drink: Rs. 100 (decoy)
Large drink: Rs. 110
Here, the medium drink is the decoy. Most customers, seeing that the large one is only Rs. 10 more for much more volume, will opt for the large, which is the target product the business wants to sell.
Here’s another example of how software companies use decoy pricing to sell higher-priced subscription plans:
Basic: Rs. 1,000 per month (limited features)
Standard: Rs. 2,000 per month (more features, decoy)
Premium: Rs. 2,200 per month (all features)
Here, the standard plan is the decoy. It makes the premium plan seem like a comparatively better deal for only Rs. 200 more.
Decoy Pricing and Morality
The ethical implications of decoy pricing depend on how you use it and your intent.
Ethical Use of Decoy Pricing
Decoy pricing is considered ethical when all the options you present are real products with genuine value. It’s important that your pricing strategy helps customers make informed choices based on their actual needs and preferences. Transparency is essential, and customers should clearly understand the differences between the options provided.
Here’s how you can use ethical decoy pricing:
- Offer Real Value: Ensure every option is genuine and valuable to your customers.
- Be Transparent: Make features, benefits, and pricing differences clear to avoid any confusion.
- Avoid Deception: Don’t hide any important details or use decoys to simply manipulate, deceive, or mislead consumers in any way.
- Prioritise Trust: Focus on customer satisfaction and long-term loyalty rather than short-term profits.
Unethical Use of Decoy Pricing
However, the pricing strategy becomes questionable when the decoy is a fake option, designed solely to make another product seem more attractive. If the differences between options are buried in small print, or if your intention is simply to trick customers into purchasing something they don’t need, it falls into unethical practices. Manipulating consumers, especially vulnerable or less-informed ones, is never acceptable.
Here are some potential ethical risks you should be aware of:
- Manipulation of Consumer Choice: Decoy pricing uses psychological biases, potentially pushing customers to buy higher-priced items that don’t actually meet their needs.
- Transparency and Trust: If customers view your pricing strategy as manipulative, it could harm their trust in your brand and damage your reputation in the long term.
- Vulnerable Consumers: Customers who are uninformed or very price-sensitive can end up making unnecessary purchases. They may later regret these purchases, which will impact the shopping satisfaction.
Psychological Triggers Behind the Decoy Effect
Here’s how you should use decoy pricing to influence buyer behaviour and increase your average order value and sales:
Relative Comparison (Contrast Effect)
When shoppers evaluate options, they often make comparisons. By introducing a decoy, you can make your target option look better.
Asymmetric Dominance
The decoy option is designed to be inferior to the target option in every way, but still not directly comparable to the lowest-priced option. This creates a nudge toward your target choice, which feels like the best value by comparison.
Heuristics and Fast Thinking
A lot of customers make quick decisions that are not only unconscious but also intuitive. It is known as ‘system 1 thinking’. The decoy effect works by tapping into this, helping customers pick the option that feels like the best value with minimal effort.
Loss Aversion and Regret Aversion
Buyers want to avoid the regret of missing out on a good deal. You can reduce the risk of buyer’s guilt by offering a decoy and making the target product appear safer and smarter. Loss aversion also plays a role as people don’t want to miss the perceived superior value of the target option compared to the decoy.
Anchoring and Reference Points
A decoy is used to set an anchor price and reference points. This changes how customers perceive value and can make a higher-priced option seem like a bargain.
Perceived Value and Deal Perception
The decoy creates the illusion of a better deal. Even if the actual benefit is minimal, the decoy enhances the perceived value of your target option, making it feel like a great offer.
Image text: The Psychology Behind Decoy Pricing: How to Use It to Boost Sales
Step-by-Step Guide to Applying Decoy Pricing
Here’s a step-by-step guide to implement decoy pricing ethically and effectively.
Choose Your Main Product
Pick the product or service you want to sell more of. Generally, this should be your highest-margin item or one that aligns better with your business goals.
Understand Your Market and Competition
Research your market and competitors. This helps you understand what your customers value and how you can price and position your offerings effectively.
Create Your Pricing Tiers
Develop three pricing options, including the following:
- A basic and lower-priced version of the product or service you actually sell.
- A decoy product that’s priced similarly to your target products, but has fewer features and offers lower value.
- The target product you actually want your customers to buy more of..
Set Your Prices Strategically
Since the decoy offers less value or fewer features, make sure you price it slightly below your target product. The small price difference should make the target seem like the smarter choice.
Highlight the Differences
If you want to make it easy for your customers to compare and see the better value of your target item, you should highlight your target product’s benefits over the decoy in all your marketing and sales materials.
Test and Optimise
Launch your decoy pricing strategy and use A/B testing, customer feedback, and data analytics to track the sales data. See if your customers are showing more interest in the target product. Adjust pricing, features, or messaging as needed.
Review and Update Regularly
Regularly review your pricing strategy by keeping an eye on consumer preferences and market trends. Adjusting the price of the decoy or your target product accordingly can help you make your pricing strategy more effective.
Integrating Smart Checkout with Shiprocket Checkout
Shiprocket Checkout is a smart checkout solution that’s designed to help you improve your customers’ shopping experiences, achieve more conversions, speed up checkout times, and reduce cart abandonment rates. With a frictionless, one-click checkout solution, your customers can complete their purchase in just 40 seconds.
We optimise every step, from the moment a shopper clicks ‘buy’ to the final payment confirmation, with a comprehensive suite of features designed to grow your business.
- Speed up the checkout process with a lightning-fast checkout solution that not only reduces friction but also ensures a smooth and delightful shopping experience.
- Enjoy up to 60% more conversions with a 70% faster checkout, and reduce RTO cases by 30%.
- Use actionable insights from advanced analytics to analyse your customers’ purchasing behaviour, optimise your campaigns, and drive growth.
- Leverage over 10,000 unique discount configurations, manage bulk discounts, and track performance to boost conversions.
- Personalise your checkout experience with custom UI, pre-filled addresses, and multiple payment gateway options.
- Use configurable tools to reduce returns, manage COD orders, and block high-risk addresses, leading to higher revenue and more satisfied customers.
- Customise colours, buttons, banners, and settings to ensure that the checkout matches your brand and offers a seamless experience.
- Cut acquisition costs and optimise conversions by streamlining every step of the purchasing journey.
- Set transparent and reliable delivery expectations to enhance customer trust and encourage repeat purchases.
Conclusion
Decoy pricing doesn’t involve manipulating or tricking your customers into buying a pricier option. It involves guiding them ethically towards buying a higher value product or service, improving your bottom line in the long run. Adding a smartly placed decoy option can help buyers compare and justify their choices and favour the most profitable offer you want them to pick. Decoy pricing gives you subtle yet powerful control over what your consumers buy. However, you should use it carefully, test its impact, and watch your conversions increase.
