Is Decoy Pricing a curse or a boon to the customers?

Author: Viknesh Ravichandran


Let’s first will have a clear picture about what decoy pricing is. What’s Decoy Pricing Strategy?


“Decoy pricing is a pricing method that is meant to “force” customer choice. It is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated.


How it works?


The decoy effect is defined as the phenomenon whereby consumers change their preference between two options when presented with a third option – the “decoy” – that is “asymmetrically dominated”. It is also referred to as the “attraction effect” or “asymmetric dominance effect”. If a commodity is available in small, medium and large quantities, the pricing would be pushing you to buy the larger quantity of your desirable earlier choice. Like say if you plan to buy small quantity the pricing of the small quantity and medium quality will be higher while comparing the large quantity’s price. This tends and pulsates the customer to buy the larger quantity which was initially not required by the customer. This puts the customer under the state of impulse buying and overbuying.



Example


Let me explain this with a simple example in where you would like to buy a new MP3 player. Two things are important: the storage capacity and the price. In the image below we have a pricing table for two players. In this case, some consumers will prefer A for its greater storage capacity, while others will prefer B for its lower price.

MP3 Player A has more storage capacity than MP3 Player B but is also more expensive.


Now let’s add a new MP3 player to our pricing table. MP3 Player C is more expensive than both A and B and has more storage than B but less than A.



MP3 Player C is more expensive than both A and B and has more storage than B but less than A.



The addition of MP3 Player C – which buyers probably avoid (they can pay less for a model with more storage) – causes MP3 Player A, the dominating option, to be chosen more often than when we only had two choices. Because A is better than C in both respects, while B is only partially better than C, more consumers will prefer A now than before (Wikipedia’s quote). MP3 Player C is the decoy product that will increase sales of A.



Actually, does it favour the business?


Yes, obviously it does. When customers make a purchase, they must often choose between products with different prices and attributes. And when a company decides to maximize the sales of one particular product, it often opts for what is known as a decoy pricing structure in order to influence the consumer in his purchasing decision. The decoy pricing strategy aims at increasing the sales volume to the greater extent. This can never be a loss to the business. Because the margins lost at the large quantity has been compensated on the volumes sold.


Conclusion


Price is the most delicate element of the marketing mix, and much thought goes into setting prices to nudge us towards spending more. This one particular cunning type of pricing strategy aids marketers to get you to switch your choice from one option to a more expensive or profitable one. It’s called the decoy effect. It markets one product or service by using other products or services as decoys, thus drawing attention to it. It is just a cognitive bias causing shoppers to change preferences between two options when presented with a third, inferior option.


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