Decoy Pricing Article

Use Decoy Pricing to Boost Your Sales

Decoy pricing, one of many pricing strategies, allows businesses to increase sales while also influencing the customer’s purchasing decision. The concept is simple — instead of offering one or two product options — offer three! Providing multiple product options allows a business to leverage different price points and product options, while also subconsciously telling the customer which option is the “best value.” The business decides where to position each product option at what price, which cues the customer as to which option is the “best value.” How about an example:

A business sells lattes, where size and price are the two product factors. The “Large Latte” is more expensive, at a larger size, while the “Small Latte” is smaller and less expensive. The large latte is more profitable for the business, so this business wants to increase sales of this size.

Which latte will be purchased? Some consumers may prefer more quantity, while others may prefer the less expensive choice. There isn’t a clear choice with only two options. But, what if a third option is included?

ThreeCoffees

Enter the Medium sized latte, the “decoy” latte. The Medium is larger than the small, but smaller than the large. Naturally, the medium is more expensive than the small but less expensive than the large. What makes the medium an effective decoy is where price and quantity were set. The relative difference between the sizes and prices make the decision clear to the customer. At $4.05 for 350ml, the medium is only $.30 cheaper than the large, yet the large has 60ml more of latte. Clearly the large seems like a much better deal than the medium: for only $.30 you get an extra 60ml of Latte, what a bargain!

The decoy serves as a measuring stick for the preferred size. By pricing the decoy at an uncompetitive price, the decoy champions the preferred option into looking like the best deal, thereby boosting sales of the preferred option. Don’t believe me? Check out this video!

Benefits:

First, decoy pricing improves the influence a business has in their customer’s purchasing decision. Second, through effective price positioning, the business can lead customers towards the preferred option/size. Third, greater sales in the preferred option increases business profitability. Not bad? You may be asking yourself: How can I apply this to my business?

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AppleMark

Student finishing M.A. in Economics at SUNY Albany. Originally from Liverpool, NY. Hobbies include volleyball and crew.

Posted in Articles, Learn Pricing, Pricing, Strategy Tagged with: , ,
14 comments on “Decoy Pricing Article
  1. We need an anchor point when we perceive price and make a purchase decision. This decoy is designed to serve this point and guide us comfortably choose large coffee.

  2. Yangyang Yu says:

    Setting a medium point is a great strategy. It offers us more information and gives us some hint of our purchase choice.
    By set closer price to large one but obviously smaller size. It will inspire people choose large size and expensive.

    • Thank you for your comment, Yangyang. You’re right, the decoy provides more context and information for the purchasing decision between A and B, allowing the customer to realize A as the better value.

  3. Rui says:

    It’s a smart way to lead customers towards the business preferred option.

  4. Ken Nicholson says:

    Great article…
    The word Decoy sounds subversive. It is a great word for describing why to use the three options.

    I like the word anchor better as it explains the need to set a price to direct the consumer to the best value or preferred item.

    Either way a perfectly spot on article.

    • Thanks for your comment, Ken. You make an excellent point, the term “decoy” has a very negative connotation, and companies may be hesitant to use something that sounds more like a ‘scheme’ than a ‘strategy.’ I wonder, if decoy pricing was renamed to something less negative like “anchor pricing,” would more companies be willing to use it?

  5. Jialu Sun says:

    It kind of looks likes price discrimination. Sell different sizes with different prices to attract different customers. Very smart!

    • Thank you for your feedback, Jialu. While price discrimination and decoy pricing are both commonly used pricing strategies, they are quite different from each other. Here’s why:

      Under price discrimination, the business varies the price charged for the product based on the customer, so customer A pays $5.00 for the latte while customer B pays $4.00 for the latte. The concept is that under price discrimination, the company charges the highest price each consumer is willing to pay, maximizing profit. Essentially, the business sells one product, and varies the price by customer to maximize profit.

      But under decoy pricing, every customer pays the same price for the product. Instead of varying price by customer (like with price discrimination), decoy pricing varies price by product size, funneling customers towards the most profitable size.

      Hopefully this helps distinguish the difference.

  6. Ben Song says:

    That’s exactly what Starbucks is now doing – while the venti is $0.5 more than grande, the grande charges $0.7 more than tall – which always makes the venti a more inviting choice. Great idea and great article! Just one thing: there could be some kind of the visual aid to help present a clearer idea of the example in the article, say the graphic icons to depict how much different sizes would charge. In that way I think readers would find the article more interesting and vivid.

  7. Nicolás Castaño says:

    Andrew also very important to notice that Decoy can allow you to introduce your products to very different segments at very low additional cost. Very important is to have a differentiate communication strategy to each.

  8. Thank you for your comments Nicolás!

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