Decoy Pricing: Secret Strategies Your Competitors Use to Get Customers to Spend More

Everyone's bought something on a whim because it seemed like a fantastic deal. No personal touch necessary. Make no mistake, the store knows it.

The other day I was in a sporting goods store looking for a running shirt. I found one that I liked and went to the dressing room to try it on. It fit perfectly – success!

It was then that I noticed a red tag advertising two shirts for $19. One shirt was priced as $12.5 so to add a second and only spend $6.50 seemed like an excellent deal. Of course I bought two.

I didn’t need both, but not buying two would have been foolish. Consumers run into these kinds of pricing tricks every day.

But why is it so effective?

You Don’t Always Get What You Pay For

People tend to believe that "you get what you pay for" which over time has been translated in their mind to mean “expensive = good.” Usually, the “expensive = good” stereotype works out great. Typically a higher price reflects top quality.

That’s not always true, of course. Robert B. Cialdini gives a great of example of this in his book "Influence: The Psychology of Persuasion."

In it, he tells a story of a jewelry shop that managed to clear slow-moving turquoise pieces by accidentally doubling the price of the merchandise.

People are unlikely to know the exact value of things like jewelry so they use the only info they have - the price - as their guide. Since expensive means good, it was a natural choice for customers to make and the products sold out quickly.

Want to know how your competitors do it?

What follows are many proven pricing strategies that you can implement and use in your business.

Bundling for a “Perceived” Better Deal

The earlier story of me buying two running shirts when I only needed and wanted one is a perfect example of bundling – the practice of selling several items for a supposedly bargain price.

The more items you bundle together, the harder it is for the consumer to add up costs for all the individual items to make a judgement if it’s really a good deal. Thus, they are more likely to buy if it “seems” like a good deal.

A good way to use bundling is for getting rid of slow moving merchandise.

Last year a friend of mine was looking to buy winter running gloves. When he found a bundle that included socks, gloves, beanie and more, he didn’t hesitate to buy it because “it was a good deal for all this gear.” He only wanted gloves but ended up buying the bundle which seemed like a good deal. Success for the merchant who was likely trying to get rid of their winter gear.

Try this: Bundle together merchandise that is selling well with things that are slow moving. The results may surprise you.

$150 Armani T-Shirts Used as a Decoy

Image via Groupon

You walk into an Armani shop and see a teeshirt selling for $150 – is it inexpensive (for Armani) or not? It doesn’t feel inexpensive.

Nearby you spot another shirt for $75, and right behind it, a pair of $400 jeans. 

“Maybe $75 isn't so bad, after all, it is Armani” you think to yourself and proceed to buy it. At the end of the month your credit card statement comes and you see that $75 price again. It doesn’t make any sense; why did you spend $75 on a black teeshirt again?

Why indeed.

The reason for this irrational behavior is a phenomenon known as anchoring. It’s a common human tendency to rely too heavily on the first piece of information offered (the anchor) when making decisions.

Anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other decisions are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.

Armani knows that very few people are likely to ever buy that $150 t-shirt. But they also know that without it, their sales for the $75 one would plummet. Sure, there are the 1% who will only want the best, the most expensive and they have that available. Yet for most, the pricier option is there to make the primary choice ($75 t-shirt) look more attractive.

Have you ever noticed when entering a store how the first things you see are neatly organized and displayed full price new (expensive) merchandise and all the on-sale stuff is further at the back of the store? Anchoring.

Same with online. Smart ecommerce merchants know that the bulk of their traffic will come in through deeper pages and rarely see the homepage. So retailers put higher-ticket items at the homepage to condition the 1% that come through that.

Anchoring is one the few truly versatile strategies that works in almost any scenario. It can be used on- and offline in a variety of domains and it even works great for subscription businesses.

Choice, Anchoring, and Subscriptions

Screenshot of Candy Club

The basics of any subscription business are simple. Every month you bundle together a bunch of products under a unifying theme (beer, candy, wine, clothes, beauty products, etc.) and send them out.

The fun begins when it comes to pricing. You can have price dependant on the size of the package and offer options that way. Or, you can have the same size for all but the pricing is dependant on the length of the subscription (1 month, 6 months, 1 year, etc.). Or both.

From a pricing psychology point of view, it doesn’t really matter which way you go. The only thing that matters is that you offer your customers choice. When you give people a choice between options, you are giving yourself the opportunity to influence that choice. When there is one option available, the choice is either to buy or not.

With multiple options, the choice becomes which plan I to want to buy. With multiple options (typically three) you can also start to use anchoring. You can price one option as clearly the “premium” one with a larger price and some extras to act as an anchor, and one clearly inferior option that doesn’t make sense from a value perspective. Because the majority of people are ok with “average” having the high price option will typically move the consumer toward the middle price.

It also helps to highlight the preferred option. Adding words like “most popular,” putting a rectangle around it, and otherwise making it a no-brainer choice are all good strategies.

Wait.

If the aim is to get more people to buy the “preferred” middle option, why do we need to have the cheapest one in there at all, isn’t it irrelevant? Sometimes. But in the case of the subscription model, it gives the people who just want to “try it” an option. Even if they have to pay a higher cost initially, they don’t feel locked into a subscription.

But sometimes, the irrelevant option is there to influence behavior and to see this, let’s look into Entrepreneur and its subscription options.

The Importance of Irrelevant Options

Back in early February, I subscribed to Entrepreneur magazine. I was reading an article on their website and saw an ad for a print subscription. It seemed like a good price, so I clicked through to the pricing page and was greeted with the following:

At first I was puzzled by their pricing scheme. Digital-only is the same price as print-only, and for only a $1 more I could get both.

It's a crazy good deal, why on earth would they even have options for digital or print only if the price is pretty much the same between all the options?

Then I remembered a famous TED talk by behavioral economist Dan Ariely that talks, among other things, about the importance of irrelevant options. It’s a great conversation filled with actionable insights, you should watch it (after finishing this article, of course).

It all started to make sense. You see, Entrepreneur wanted me to get the digital + print subscription. To make me want to want it, they added inferior, decoy priced option for only a $1 less.

The general idea here is that we actually don't know our preferences that well, we're susceptible to all of these influences from external forces: the defaults, the particular options that are presented to us, etc.

The Seduction of Charm Pricing

Screenshot of Refurb.io

Have you noticed how prices are typically just below a round number? Frequently, the ending number is 9 or 99. A price that is just below a round number is known as a “charm price.”

The idea behind this is that it makes the price seem smaller than it is. The difference between $200 and $199 is only $1 but $199 “seems” a lot less. 

Because, in western cultures, we read from left to right, the first digit of the price resonates with us the most. That's why we’re more likely to buy a product for $4.99 than an identical one for $5. The item that starts with a four just seems like a better deal than the one that starts with five.

In eight studies published from 1987 - 2004, charm prices were reported to boost sales by an average of 24% relative to nearby prices. And in late 2013 Gumroad released data that showed that indeed, charm prices lead to more sales:

Image via Gumroad

In both analysis, the difference is not always massive but it’s still always there. And over time it adds up.

Can you guess how many new orders a year a company that has 100,000 visitors a month (1.2 million a year) gets when sales get a 24% bump?

They get 288,000 new orders! 288,000 from just changing a few digits around. Amazing.

I mean sure, a 24% increase in sales seems a bit out of this world. But even if we take an average increase in new orders from Gumroads’ data (1.185%) we still get over 14,000 new orders.

That’s a significant change that takes little time to implement.

Paradoxically, when you’re selling luxury and higher-end merchandise, having charm prices may end up hurting your business as this pricing scheme can “seem” like being cheap.

The solution for a lot of higher-end restaurants and retailers has been to have prices only ending with whole numbers to give an atmosphere of elegance and high value.

Screenshot of Harrods

Final Thoughts

People tend to be clueless about prices. We don’t choose between products by being rational and comparing their features like per like. We believe that if something costs more, it has to be better quality. Why would it cost more otherwise?

Trivial things like expensive t-shirts can alter our understanding of what is a good price, and we end up buying $65 ones because “it’s a great deal!”

As smart marketers, we can use these shortcomings to our benefit and design and price our products around these principles to sell more.

How many of the principles above are you using already?