15 Feb Decoy Pricing
Decoy Pricing – Your quick and easy secret weapon for setting higher prices that customers will actually pay. Did I mention?…. It’s also backed by science.
FiberNest has one of the best examples I’ve seen of how clever companies are getting us to upgrade to their more expensive products. They are using a fantastic little weapon called Decoy Pricing when it comes to setting their prices.
As always with our blogs, the Decoy Pricing Effect is a principle that fits nicely under the banner of behavioural economics. Decoy Pricing can be used to influence how and when we spend money.
The Decoy Effect – Have a product you’re not interested in selling
Imagine we are selling coffee. All things being equal we’re likely to be making more money from the large cup than the small or mediums cups as the incremental cost of a few millilitres of hot liquid is very small.
It stands to reason that we’ll want any customers that come through our door to choose the large cup of coffee.
So, how can we get our customers to choose the large over the small or the medium cup?
The answer is by having a decoy product. A product we’re not really interested in selling at all, its only use is making the large cup of coffee look better value.
Take a look at the pricing for FiberNests broadband packages. They’ve added a decoy product. In fact, they’ve added two decoys. The two products in the centre serve one purpose, which is to make the highest priced product look great value.
As you look at the pricing and options what is going through your mind? If you’re like the vast majority of people you’ll see that the basic package price is okay but, we live in the 21st century so that 20megabit per second speed looks pathetic compared to the other options. We’re now easily drawn to FirberNest’s more expensive packages.
This is how the decoy effect works.
But wait, I’m looking at the £45 package and I’m thinking if I can stretch to another tenner a month, I can get myself 4x the broadband speed!
So when your weighing up the speed and the amount it costs, it just doesn’t make sense to go for either of the two middle options. They are decoys. Put there just to look poor value in comparison the more expensive option.
What Tesco and Apple are getting wrong
To make this simple and illustrate how clever this is let me plot the price of milk from Tesco on a graph.
Notice how the price forms a pretty straight line. Almost all products we buy are priced like this.
Everything from iPhones, to coffee and cloud storage.
What FiberNest are getting right
Let’s compare that to Fibernest. We can see here that if follows a curve. It increases sharply and then plateaus. This causes us to weight up the choices in a way that makes these top ones look like very good value.
Experiments have proved many times that this curved shape of graph earns companies more money.
How to price your products
So back to our coffee. When it comes to setting our price, to make use of this decoy effect, we want to grab a bit of paper and draw a curved line on a graph.
We’ll put in the cost of our top and bottom products, which was £4 for the large coffee and £2 for the small coffee. Then we’ll draw a line 3/4 of the way up the price axis.
As a rule of thumb we want the price of our decoy product to be somewhere in the red hatched area in our example.
What we’re going to do, as per our curved line, is increase the price of the medium cup from £3 to £3.80
By comparison the large cup now looks much better value.
This exact trick is being adopted by many companies as they move their pricing from a straight linear looking graph to the curved one I’ve described by adding or changing the price of these decoy products.
Of course the most effective decoys taking in to consideration profit margins, product offerings and the initial top and bottom product pricing.
If you’d like to download the simple guide to decoy pricing. Including a graph that makes setting the perfect price as simple as filling in the gaps then you can use the download link below.