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Pricer’s Points: Using decoy pricing to maximise profits. | Matt Burnett

Use decoy pricing to encourage your customers to trade up.

The main objective of any pricing manager is maximising revenue and profitability. It’s not easy and is in fact an endless task. One way we can try to achieve this is through trade up. If we can encourage our customers to buy our most highly priced (and presumably highest margin) product then we’re happy.

So how do we do that? One method is decoy pricing. Decoy pricing is whereby you offer three similar products of which two have a similar or equal price. The products are scaled variants.

This is best illustrated with an example…

Take a look at these two products for a subscription to a magazine.

  • One-year online subscription $59.
  • One-year online and print subscription $125.

Which would you choose? The majority of people would probably opt for the first product as at $59 it is far cheaper than the second. Now imagine if the product offerings were this…

  • One-year online subscription $59.
  • One-year print subscription $125.
  • One-year online and print subscription $125.

All of sudden the combined online and print subscription seems like incredibly good value for money.

This example comes from research conducted by Dan Ariely for The Economist. His research showed that by including the middle product (the decoy) it gave consumers an easier way of understanding the benefits of each product and lead to more purchases of the $125 online and print subscription. Without the middle option more customers chose the $59 option.

You don’t just see decoy pricing used for magazine subscriptions. It can also be deployed in the travel industry, in software, telecoms, consumer electronics and more. How could you use it in your business?

(A similar – but different – tactic you might like to read about is product sabotage, which I’ve written about before.)

* This article was originally published on the MattBurnettBusiness.com – a blog about business, pricing and technology.

Hi, I’m Matt Burnett and I’m a pricing analyst for a UK DIY retailer and a graduate of the University of Portsmouth. I’ve previously worked at, The Southern Co-operative, IBM and Waitrose.

I’ll be using this blog to share my thoughts on topical business issues (mostly pricing) and my interests in technology. I’d love to hear your thoughts on anything I write.

If you wish to get in touch you can find me on both Twitter (@Matt_Burnett) and LinkedIn, you can also find me on Google+.

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