Pricing magic: the power of a “decoy”

In a classic pricing study, researchers assigned quality levels ranging from zero to 100 to unbranded beers (think wine ratings).

For the first test a  “regular” beers was scored a 50 and offered for $1.80 per bottle, and a premium beer – scored at 70 – was offered at $2.60 per bottle.

Survey respondents opted for the premium by about 2 to 1.

In a second test, a “cheap” beer– scored at 40 out of 100 and priced at $1.60 — was added to the mix.

Though no respondent picked the cheap beer, there was a mix change.  Suddenly, the regular — now the mid-priced beer – was picked by more people..

Hmmm.

In a third test, the cheap beer was replaced by a super-premium – scored at 75 and priced at $3.40.

Now, nobody picked the regular (which was the “low end” of the 3 picks) … only 10% picked the super-premium …. 90% picked the premium.

So, by adding a “decoy” – a product that isn’t ultimately bought but which sets a high-end price impression in people’s mind – the researchers were able to get respondents to “step up” from regular to premium – and increase the “price realization” of the regular and premium beers by 16%.

The theory of the case: “Aversion to extremes” … often, people conclude that the cheapest product is, well, a cheap product … and that the highest priced product may not deliver enough added benefits to justify its higher price.  So, the safe bet is to buy the mid-priced product.

That’s pricing magic, for sure.

image

One Response to “Pricing magic: the power of a “decoy””

  1. James G Says:

    Not an apples-to-apples comparison, but there is some similarity to gasoline grades and the power of “3” choices (i.e. a middle choice) — regular, premium, and super. While I’m not an expert in this industry, my understanding is that vehicles that require a minimum of super represent a small minority of the vehicles on the road. The additive in high octane gas simply enables the vehicle to burn more efficiently under certain driving conditions. However there is a perception that higher octane “cleans” the engine (wouldn’t be surprised if this rumor was started by oil companies), which is not true. In reality, my guess is that only 2 octanes are required (regular and super). However, a middle option (i.e. premium) was likely introduced to upsell the “regular” users who want the perceived benefit of a cleaner engine, but not willing to pay the top-end price (i.e. super). My guess is that the premium/middle option has the highest ROI assuming it had virtually no additives.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s