Does your pricing strategy suffer from logical thinking?

Have you looked at a pricing plan and wondered what the hell is going on?

A. $50 – Internet Only Subscription
B. $100 – Print Only Subscription
C. $100 – Internet and Print Subscription

When pricing products I had often argued logically i.e. if I offer more features I should price higher. Therefore, I price option C higher than option B. If I wanted to nudge people to buy option C, I advertise a limited-time discount or add more features such as a free CD.

Majority of marketers do the same. On the pricing page of any Web service you typically see multiple columns filled with different prices and features, with fancy color coding to indicate what’s included and what’s missing.

My experience shows that logically designed pricing plans rarely make people choose wisely. In fact most people end up buying the cheapest option, assuming they like your product. Research shows that the irrational pricing plan given above actually works better. Now more people end up buying C. In the absence of option B, more people end up buying A.

The strategy employed here is referred to as “decoy marketing” – creating an obviously inferior product or decoy (option B) to boost the sales of the product you want to sell (option C).

What you have effectively done is,

  • Distract people from option A
  • Make people compare between B and C and conclude that C is much better. Behavioral economist Dan Ariely has found that we “tend to focus on comparing things that are easily comparable, and avoid things that cannot be compared easily.”
  • Avoid showing too many options thus helping people arrive at a decision quickly

There are many examples of smart decoy pricing. Consumer electronic companies introduce new versions that make one of their own products look inferior, and FMCG companies create slightly bigger packets with more volume at the same price to make you pick their brand of toothpaste or cream.

A word of caution when using the decoy strategy in India: Firstly, the majority is highly price sensitive so don’t omit the loss leader (lowest price option). Many will still choose the lowest option irrespective of features. Secondly, add-ons in the higher priced options must be universally useful when using decoy pricing, so giving an additional license of software for no charge does not work. Not everyone wants more licenses. Provide addons that everyone wants.

Can your product or service benefit from creating decoys? Think about it and let me know if you run an experiment. I’m in the middle of an experiment and will share the results once I have enough data.

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