Decoy pricing is tactic that boosts sales of high profit items by creating another version of the product solely to make the pricier versions seem economical by comparison.
Decoy pricing "forces" people to compare the pricing options, and as a result sales of the more attractive higher-priced item will increase.
Decoy Pricing can also point the customer to the medium priced option when they see the cheapest version as inferior and the highest priced version as too expensive for the likes of them.
The middle option is a compromise between the cheapest and most expensive and they feel satisfied that they have the best deal because it offers them the best value.
These are the tendencies of our brains to think in certain ways, they are “unconscious” triggers that make different connections in our brain to help us make decisions that lead to systematic deviations from a standard of rationality or good judgment.
Humans do not generally seem to know what they want and make decisions according to the context in front of them. This means that the way things are presented has a huge effect on their decision making.
A cognitive bias happens when we’re presented with more than two options which causes us to prefer one option over another option simply because it looks better or is priced better.
The decoy pricing strategy relies on two specific effects: the compromise effect and the attraction effect.
The compromise effect states that consumers give preference to “median” products, or in psychological terms, it relies on the assumption of “extremeness aversion”.
Given the choice between three different products, consumers are not likely to opt for the cheapest one because they assume that it is inferior in quality to the other two.
This theory relies on the assumption that consumers’ purchasing decisions are perfectly “rational” and take into account all the “right information”. In truth, the consumer does not often possess the “perfect” level of information about a product.
As a result, consumers’ purchasing decisions are often made without taking into account all the information about any given item.
This incites companies to wisely choose their marketing and pricing strategies, ensuring that imperfect information is sometimes deliberately provided to consumers in order to maximize both sales and margins.
Consumers are often not capable of comparing products that are very different from each other and that have very distinct usage.
However, they are usually able to compare products that are similar to each other and therefore to understand the differences that may exist in the closely-aligned items.
In other words, consumers prefer to make a rational choice vis-à-vis a limited scope of products – the very essence of decoy pricing.
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