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?
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!
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?