What is Decoy Pricing?
Decoy pricing is a strategic pricing tactic in which businesses introduce a third product option that is purposefully less attractive compared to the others. This third option (the “decoy”) steers customers towards a higher-priced or more profitable product by making that one appear to offer better value in comparison.
To influence consumer decision-making, the business presents the decoy in such a way that it highlights the advantages of the target product. When customers make the side-by-side comparison, the choice is clear. They come to the right conclusion on their own.
A common example of decoy pricing is a fast food restaurant offering a small-size drink for $1, a medium one for $3, and a large for $3.50. A lot of customers will initially want the medium-sized drink because they don’t ‘need’ the large, but when they find out it’s only 50 cents more for significantly more volume, they tend to go with it anyway.
Synonyms
- Decoy effect
- Decoy method
How Decoy Pricing is Used in Marketing
You use decoy options to subtly guide your customers toward the decision you want them to make. In general, people have a hard time assessing the value of something without something else to compare it to (this is called “reference dependence“).
According to the anchoring and adjustment heuristic, by offering a decoy, you provide a second point of comparison for your customers to use in evaluating the value of your products.
- If your decoy is comparatively high, you can make your target option look like a great deal for what it is.
- If it’s somewhere in the middle, it can push customers to the higher or lower tier.
- If it’s on the low end, it can help your buyers see the high-priced, profitable option as the one they really need.
In any case, you’re making it inferior in some way. In doing so, you’re able to make your target product look more appealing by comparison.
This tactic can be especially effective in subscription-based businesses, where different pricing tiers offer varying levels of features or benefits.
Decoy Pricing and its Influence on Customer Behavior
Decoy pricing leverages cognitive biases to drive particular actions from your customers. As we mentioned above, when faced with multiple options, consumers tend to rely on comparative evaluation rather than absolute assessment.
The decoy effect simplifies the decision-making process by creating an artificial preference among choices. As a psychological tool, it exploits reference dependence, as consumers shift their focus from direct cost to perceived benefit.
For instance, a consumer evaluating three products, where the decoy is strategically positioned, may decide to opt for the more expensive, profitable product because it now seems more reasonable or valuable compared to the decoy.
This is particularly effective because people generally want to maximize their value when they make a purchasing decision. The presence of the decoy reduces the buyer’s likelihood of regretting their choice since they feel like they’re making the ‘right’ choice.
In the long run, it also increases customer satisfaction rates, since they feel like they’ve gotten the best value for their money. And, if you’re using it to guide customers toward the best product for them (i.e., not just as a psychological pricing tactic), it’ll be the one they genuinely get value from.
Pros and Cons of the Decoy Pricing Strategy
For both the business and its target customers, decoy pricing has significant advantages. But there are some drawbacks and long-term considerations as well, so you have to remember there’s a time and a place for it.
Advantages of decoy pricing:
- Increased profitability for businesses. Ideally, you’re pushing customers towards the more profitable product, whether that’s a cheaper product that’s easy to make or a premium one with high margins.
- Faster customer decision-making. By presenting a decoy product, consumers have an easier time choosing the right product for them. This boosts sales and, in B2B sales, speeds up the sales cycle.
- Better perceived value for customers. Customers feel like they’ve made a smart purchasing decision because they were able to compare and evaluate different options. When you eliminate buyer’s remorse, you’ll have higher satisfaction rates and repeat business.
Disadvantages of decoy pricing:
- Potential for confusion. If your decoy is too obvious, customers may get confused or feel like they’re being manipulated.
- Risk of losing customers who see through the tactic. If your approach is clearly manipulative (e.g., the decoy option is significantly inferior or overpriced), customers may go with a brand/vendor whom they feel is more honest.
- Long-term effects on brand trust and reputation. While decoy pricing can be an effective short-term strategy, overusing it or using it inappropriately can damage your brand’s credibility and trustworthiness with customers.
Use Cases and Examples of Decoy Pricing
Retail and ecommerce
Retailers often present multiple versions of a product, such as smartphones or televisions, with varying features and prices. For instance, when Apple introduces a higher-priced iPhone model with a few advanced features (that most people won’t care about), it can make the standard model appear more affordable, thereby boosting its sales.
There are tons of other variations of this:
- Product bundles, where you can purchase multiple items as a set
- Placing sale items next to more expensive ones
- Offering free shipping on purchases over a certain amount
In these instances, the consumer’s reference point is no longer the absolute cost of the product, but instead its relative value when compared to other options. Often, it gets them to spend more money than they normally would by consciously or subconsciously feeling like they’re getting a good deal.
Food and beverage
Menus often include decoy items to steer customers toward more profitable choices. The most common example of this is with a medium size vs. a small or large.
Of course, when you see a small drink or food item for $5 and a large one for $12, you’re going to think you don’t want the large one and the small is a better deal. But, when there’s also a medium size for $10, it suddenly makes the large seem more reasonable.
This works best when the small size isn’t fully satisfying. Maybe it’s just a few ounces of coffee or a couple handfuls of popcorn. Had they just seen the large, the price feels too high to justify it. But, if they see the medium is only slightly less expensive, all of a sudden it looks like a great deal.
Subscription services
Streaming platforms and news outlets frequently use decoy pricing by offering multiple subscription tiers. One tier is significantly better than the decoy for around the same price.
The Economist magazine implemented a decoy pricing strategy by offering three subscription options:
- A web-only subscription
- A print-only subscription
- A combined print and web subscription
The combined option was priced the same as the print-only subscription, making it appear as a better value. They were trying to get more users to subscribe online as they phased out print copies, and it worked.
In the SaaS industry, this is also common practice, but it’s a little different. While decoys are normally for upselling, SaaS vendors normally approach it differently.
They present several pricing plans:
- A bare-bones, entry-level plan
- A mid-tier plan with core features
- An expensive, enterprise-level plan with advanced features and support
The middle tier is the one most people need, so the goal is to make the enterprise-level plan so expensive that most users would never consider it, while the low-tier plan doesn’t have enough features to make it worthwhile for serious users. In the end, the mid-tier plan appears to be the best value.
Travel and tourism
The travel and tourism industries use a similar approach to SaaS platforms, where they add a ‘luxury’ tier that’s significantly more pricey, but is also only for a select few customers with lots of money.
Consider the following:
- A car rental company renting compact cars for $45/day, sedans for $60/day, and luxury models for $150/day.
- A basic vacation package for $1,500 (standard room, buffet meals), a mid-level package for $2,200 (suite, buffet + a la carte meals, airport transfer), and a VIP package for $6,000 (luxury suite, all meals and drinks included, private helicopter transfer).
- A tour operator selling a basic tour for $500 (standard transport, meals, and entry fees), a deluxe tour for $750 (better transportation, upgraded meals, premium entry), and a luxury tour for $1,800 (private transport, gourmet meals, exclusive access).
In these instances, the decoy is so obviously out of reach for most consumers that it immediately makes the middle option seem more reasonable. Lots of people want something better than just ‘standard,’ but they rarely need, or can afford, the best possible option.
The decoy pricing approach makes them spend more than they otherwise would have, while being happy with their purchase of the middle tier.
Consumer goods
In the consumer goods industry, decoy pricing is commonly used through package sizing. For example, a grocery store might offer a 16 oz jar of peanut butter for $3 and a 32 oz jar for $4.50.
Plenty of consumers will opt for the larger size because it appears to be a better deal in terms of price per ounce. However, if they only needed 16 ounces of peanut butter, they end up spending more than necessary due to the decoy pricing strategy.
Another common tactic is loss leader pricing, where a product is sold below cost to lure customers in, with the hopes that they will purchase other items at regular price. This is commonly seen in sales flyers or advertisements, as well as during holiday shopping events like Black Friday.
For high-cost cosumer goods like appliances and automobiles, stores frequently place expensive models with fewer features at the forefront. That way, when the customer discovers more affordable, feature-packed options, they look the like that much better of a deal.
Info products
In the context of info products (e.g., online courses, eBooks, webinars, and memberships), the highest-end product or service is often a decoy.
Most often, you’ll see this in coaching programs or online courses, where, say, a $1,000 course becomes $3,500 with 1-on-1 sessions included. The idea is to make the course seem like a bargain rather than an expensive investment.
Effective Use of Decoy Pricing
There is a right way and a wrong way to use decoy pricing as a sales tactic. It can be deceptive and even turn customers off if not executed thoughtfully. But it is a fantastic way to drive sales and facilitate decision-making.
Here are our best practices for proper implementation:
Align price tiers with different members of your ICP.
You’ll have customers who are a great fit for your lowest-tier product because they (a) don’t need more than the bare minimum and/or (b) don’t want to spend the extra money. And you’ll have customers who are willing to pay for your higher-tier product.
Make sure you’re not just creating decoy pricing to trick people, but also because it offers a real advantage or feature for that particular type of customer.
Add extra features that correspond with product value.
When you’re creating your choice architecture, think about what’s in each tier and why a customer might pick it. Every tier needs the core features, but you have to determine what additional features are essential for the more expensive plans.
In general, the middle tier should contain the full version of your product or service, while the high-end tier should only add on non-essential features that “everyone would have if they could afford them.”
Examples include a dedicated account manager, a room with a view, or a custom design. These are elements of product value that only become relevant once you’re already in a high-end tier.
Make sure you can actually deliver the decoy product.
If, for instance, you have a high-value offer for an astronomical price, make sure you can actually add proportioal value for that high-ticket offer. Don’t be surprised when there are a few customers who decide they want to take it.
Use bundles to group products frequently bought together.
If you notice a lot of customers buying a particular product with another, it’s natural to offer them as a bundle. The same goes for complementary products or solutions that work well together. Doing so helps customers make decisions faster, without having to deliberate between multiple choices.
You can also use the bundle option to push a product you don’t sell much of or want to introduce into your product catalog. For example, if you’re a smartphone manufacturer who wants to start selling chargers or cases, the easiest way to enter that market is by bundling it with the complementary product (smartphone) that already sells well.
Learn about your customers’ preferences and behaviors.
Gain insights into your customers’ preferences, behaviors, and price sensitivities. This information is crucial for designing decoy options that influence purchasing decisions.
There are a few ways to do this:
- Ask them. Use surveys or polls to learn about your customers’ behaviors and preferences.
- Look at purchase histories. If you have historical data on customer purchases, analyze it to identify buying pattern and preferences.
- Analyze competitor pricing and offerings. Keep an eye on your competitors’ prices and product offerings to understand what they are doing right (or wrong) with their decoy pricing strategies.
- A/B test. Use A/B testing to gather real-time data on how customers respond to different pricing options, and use that information to optimize your decoy strategies.
Highlight the value of your target product.
Both through the decoy itself and your sales/marketing collateral, focus on the advantages and additional features of the premium option compared to the decoy and low-priced alternatives.And for bundled/sale items, display the original prices alongside discounted rates to accentuate the perceived value (i.e., price anchoring).
People Also Ask
How is the decoy pricing method used in subscription business models?
In subscription models, decoy pricing can be used to influence customers to choose the middle-tier plan. For example, a $10/month basic plan and a $60/month premium plan can make the $20 middle-tier plan look more attractive by comparison.
Is decoy pricing ethical?
Decoy pricing is ethical if you aren’t using it solely to trick customers into buying something they won’t benefit from. As long as the decoy option still offers real value, and it helps customers make informed decisions based on their needs and preferences, it’s a fair sales tactic.
How do decoys help customers see value?
Decoy pricing presents customers with more options and features to choose from, which helps them understand the value of your product or service. By highlighting the unique selling points and benefits of each tier, you can justify the prices now that they know what their other options are.