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Tuesday, January 13, 2009

Decoy pricing

Bruce Firestone, in the EQ Journal Blog, offers some intriguing suggestions and advice about pricing -- suggesting that creating comparisons with "decoy pricing" can help you to maintain your price.
He offers an example directly relevant to our business (and something to consider for the future):

Pricing is an art. Of course, you must always be truthful but use the smart truth.

Decoy pricing is also very effective. Dan Ariely describes it well in his book. Let’s say you want people to buy your magazine; then you might offer:

a) Internet only Subscription: $59;
b) Magazine only Subscription: $129;
c) Magazine and Internet Subscription: $129.

Now obviously, b) is the decoy. It turns out that if you only offer a) and c), a majority will select the cheaper option, option a). By including the decoy, you can get the opposite result—a majority will order option c) because they are getting the Internet edition for ‘free’.

The psychology underpinning this is that people are not very good at assessing things in a vacuum. They need to be able to compare—to do some comparison shopping.

How much is a magazine subscription worth? I don’t know. But if I can get the subscription for $129 with something that is worth $59 thrown in for free, well, that is the option for me!

Can you use this concept in your own business? Perhaps you may find a model involving service calls and service bundles -- create packages with variables which induce the choices you would like people to make.

In one of his examples, he cites a hotel which reduced room rates to attract clients during a recession -- occupancy continued to drop. Only when the owner discovered that booking agents thought the price is too low (and thus the place must be a dump), and raised prices even higher than before, did volume rise.

Again, most of the time, lowering your price even under competitive pressure will not solve your business problems -- you may make things worse with lower volume and sharply reduced margins. Think of other answers first.

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