Decoy Pricing

Business / By Gennaro Cuofano / November 4, 2023 November 5, 2023

Decoy Pricing involves strategically introducing a decoy option to influence customers’ purchasing decisions. By presenting a third option that enhances the perceived value of the main product, businesses can increase conversion rates, generate revenue growth, and shape consumer choices. However, managing the complexity of pricing strategies and avoiding negative consumer perceptions are important challenges to consider.

Table of Contents

Strategy:

Decoy Effect: Ensuring the decoy option effectively influences decision-making.
Pricing Strategy Complexity: Managing the complexity of multiple pricing options.
Consumer Perception: Avoiding negative perceptions of deceptive pricing practices.

Benefits:

Influenced Purchasing Decisions: Shaping customer decisions towards the main product.
Increased Conversion Rates: Higher percentage of customers making a purchase.
Revenue Growth: Generating increased revenue and sales.
Enhanced Perceived Value: Creating a sense of higher value for the main product.

Challenges:

Decoy Effect: Ensuring the decoy option effectively influences decision-making.
Pricing Strategy Complexity: Managing the complexity of multiple pricing options.
Consumer Perception: Avoiding negative perceptions of deceptive pricing practices.

Key Highlights

Decoy Pricing Strategy: Decoy pricing involves introducing a third, strategically designed option to influence customers’ purchasing decisions, enhancing the perceived value of the main product.
Decoy Effect: Implementing the decoy option to effectively steer customers towards choosing the main product.
Pricing Strategy Complexity: Successfully managing the intricacies of offering multiple pricing options, including the decoy.
Consumer Perception: Ensuring that customers do not perceive the pricing strategy as deceptive or manipulative.
Influenced Purchasing Decisions: Decoy pricing directs customers’ choices towards the preferred main product by leveraging the decoy option.
Increased Conversion Rates: The introduction of a decoy option tends to lead to a higher percentage of customers making a purchase.
Revenue Growth: By encouraging customers to opt for the main product, decoy pricing can result in increased revenue and sales.
Enhanced Perceived Value: The presence of a decoy option creates a perception of higher value for the main product.
Decoy Effect Management: Careful consideration must be given to ensure that the decoy option has the desired influence on customer decision-making.
Pricing Strategy Complexity: Managing the complexity of offering multiple pricing options, including the decoy.
Consumer Perception: Avoiding any negative perceptions from customers that may arise due to deceptive or manipulative pricing practices.

Pricing Related Visual Resources

Premium Pricing

premium-pricing-strategy — The premium pricing strategy involves a company setting a price for its products that exceeds similar products offered by competitors.

Price Skimming

price-skimming — Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a product pricing strategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.

Productized Services

productized-services — Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.

menu-costs — Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.

Price Floor

price-floor — A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.

Predatory Pricing

predatory-pricing — Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.

Price Ceiling

price-ceiling — A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.

Bye-Now Effect

bye-now-effect — The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

Anchoring Effect

anchoring-effect — The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Pricing Setter

price-setter — A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.

Read Next: Pricing Strategy.

Connected Business Concepts

Revenue Modeling

revenue-model-patterns — Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Dynamic Pricing

static-vs-dynamic-pricing

Geographical Pricing

geographical-pricing — Geographical pricing is the process of adjusting the sale price of a product or service according to the location of the buyer. Therefore, geographical pricing is a strategy where the business adjusts the sale price of an item according to the geographic region where the item is sold. The strategy helps the business maximize revenue by reducing the cost of transporting goods to different markets. However, geographical pricing can also be used to create an impression of regional scarcity, novelty, or prestige.

Price Sensitivity

price-sensitivity — Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling — A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.

Price Elasticity

price-elasticity — Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale — In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale — In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects — A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects — In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.

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About The Author

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.