People tend to averse extremeness. In our daily lives, we work hard to strike a happy medium.
You might assume, people have such a tendency just because they don’t want to be overwhelmed with disagreement.
But even in cases where there is no possibility of conflict between two people, we still refrain from going for the extremes. This fact was brought to marketers’ knowledge back in 1982 by Joel Huber, John W. Payne, and Christopher Puto in their article published in the Journal of Consumer Research.
How does this cognitive bias affect our purchasing behavior?
Well, when we’re presented with three options, we tend to choose the middle option (in terms of the aspect we’re evaluating at the time, such as price, quality, or both), and to avoid the two extremes.
Marketers call it ‘the decoy effect’ and they developed ‘decoy pricing’ to make the most out of it.
What is decoy pricing
Decoy pricing is a type of e-commerce pricing strategy that aims to guide a potential customer towards a specific product by presenting bad choices as well.
We can’t assume that all the shoppers would choose the middle way, but the majority of shoppers tend to do so. What’s the reason for our disposition towards the middle way option?
Our brains are inclined to believe that the cheapest option is inferior to the remaining ones, and the expensive one feels like the extra features come at a high cost.
Basically, our brain eliminates the cheapest option regardless of whether it actually meets our needs or not. We evaluate it within a context and cannot focus on the price/performance of this particular option or the other.
When it comes to the most expensive of the three, once again, our subconscious mind steps in and tells us that the extra features are unnecessary, or not worth the extra money.
As an online retailer, you can drastically improve your sales by adding this tactic into your marketing strategy.
Integrate this tactic into your store
Several methods of decoy pricing work well for online retailers.
First of all, even though you don’t have a say in whether manufacturers produce decoy options or not, you decide how to display the products on your website. In other words, you can select products with similar use from different suppliers/manufacturers, and present them together in a manner that’ll create a decoy effect.
Moreover, you can also create several bundles that are priced differently, and make sure that the middle option is more attractive than the others.
In the example below, we see three bundled gift options from a chocolate store.
Although the largest bundle looks charming, it costs twice the mid-way option. What about the cheapest one? It seems a little too plain, and it’s only $10 cheaper than the fancier option.
Don’t exaggerate its effect
While there is growing literature on the use of decoy as a useful marketing tactic, some scholars argue that the decoy effect is significantly reduced with meaningful qualitative descriptions of the products.
So, if customers are presented with detailed product descriptions, the decoy option loses efficiency to some extent.
But you can’t give up on detailed product descriptions for two reasons.
In the short run, they significantly reduce return rates. If your customers know in detail what to expect from your product, they are much less likely to return their purchase.
In a longer time period, realistic product descriptions help you build a trust relationship with customers.
If you were to choose a TV from these two options, you’d be evaluating whether the $80 difference worth the extra features of the expensive one. But Amazon presents you with an additional option next to these two.
Considering the fact that you were choosing between TVs for under $300, the decoy option is much above your budget.
Why does Amazon display these three products next to each other?
Because the decoy option is far more expensive and has advanced features comparing to the other two, it creates negative feelings toward the third option. It prompts us to choose the middle-priced option.
So you’re much more likely to opt for the expensive option as it provides you with better value for money.
Apple’s pricing strategy is another great example of decoy pricing.
If you were to buy an iPhone, you get to decide what capacity you want the phone to have. 64GB is 1,099, 256Gb is 1249 and 512GB is 1449.
If you look at the numbers, you can get eight times the amount of GB but it doesn’t mean you have to pay eight times the price.
This car retailer displays nearly all of its cars in accordance with the decoy pricing strategy.
We frequently come across deals like the one above, and as pizza lovers, we can’t stop ourselves from going for one of the bigger options.
Now you have a clearer idea of what decoy pricing is and how to implement it.
While some scholars are certain of its impact on consumer behavior, others claim that the decoy effect loses its impact if the consumers make well-informed decisions.
Retail giants like Amazon make use of this strategy, and there is no reason why you shouldn’t do so.