Did you know the average person is exposed to about 5,000 ads per day?
That’s BONKERS! But most of the time, we only notice a very small fraction (or we’d go insane, and you’d find us singing jingle after jingle in our mom’s basement while rocking back and forth, sucking our thumbs).
But if you take a closer look at the ads you do notice, you’ll see one common theme throughout. They use principles of psychology to grab your attention.
The design is based on psychology. As well as the copy. And in case you ever wondered why so many fast food companies use red…it’s because the color stimulates hunger and attention. Yes, they are playing with our minds.
But psychology in marketing isn’t just limited to your ads. It can be applied to one of the most important pages on your website — your pricing page.
When you present your visitors with a few options, they become overwhelmed or just go with the cheapest option. How do you get them to choose the option you want them to buy (AKA: the one with the best profit margins)?
Let’s back up for a second. Before we dive into the how, we’re going to simply follow a customer through their journey buying a TV from an online retailer.
TV A is 40” and $200
TV B is 50” and $300
And yes, this is the most affordable TV shop on the entire interwebs.
The user has to decide do they want to pay less and get a smaller screen or dish out more moolah and get a big screen to kick back and watch.
Not such an easy decision, right? That bigger screen looks AMAZING, but is it really worth 150% of the price more? More often than not, the customer will go with the cheaper option.
Insert the decoy effect
The decoy effect, also known as asymmetric dominance, is a principle that comes down to cognitive bias (we make wrong judgment calls based on our relative biases — such as perceived value — rather than absolutes).
When it comes to your pricing, it basically exists as a way to make your higher pricing look more desirable, by being “asymmetrical” (lesser in all ways but one). Let’s go back to our television example and introduce a third option: TV C.
TV C is 45” and $305
TV C is more expensive than both A and B, making it inferior in price. But it is slightly bigger than A, making it somewhat superior to A (thus, it is “asymmetrical). However, it is CLEARLY a worse deal than B, because it is smaller and more expensive and makes TV B look like a steal.
If we wanted to make it less obvious, you could price it for $295 and still look like a worse deal than TV B. Or, you could add an extra feature that doesn’t affect decision making. For example, while TV A and B are black, you could justify the extra pricing for TV C because it’s a bright shade of yellow.
Examples in real life
The Economist (the magazine), has a very famous example of decoy pricing
As you can see from the screenshot above, they offered their online subscriptions for $59 a year, a print subscription for $125 a year OR you could get their print AND web subscription for $125 a year.
What do you think most people chose?
Dan Ariely, an MIT professor, decided to put The Economist example to the test (see more of his behavioral economics in this Ted Talk). He gave the exact ad you see above to 100 MIT students and asked them what they would choose.
16% chose the online subscription.
0% chose the print subscription.
84% chose the combo deal.
Whoa! Zero percent chose the print subscription option. So, Dan thought to himself, if you have an option nobody wants, why not take it off? So Dan did just that and gave a new ad (sans the print-only option) to another 100 students.
Now instead of less than a fifth choosing the cheaper option, 68% chose it. Whereas, only 32% went for the $125 option. To put that into financial perspective, with the “decoy” in place, The Economist would have made $3,432 more from 100 MIT students than if they didn’t have it.
You see, the option that “no one wanted” wasn’t intended to sell. It was intended to make the pricier option look like a good deal in comparison.
Another great example of this in the works was done by National Geographic.
They offered moviegoers a small popcorn for $3 or a large for $7. Most people, unsurprisingly, went with the small. $7 just seemed a little too pricey for popcorn…after all, it was over DOUBLE the price of the small.
However, when they added a third option, a medium for $6.50, all of a sudden the large was getting chosen much more because people’s cognitive biases skewed its value. After all, it was only 50 cents more to get way more popcorn.
Is this ethical?
It’s easy to look at marketing psychology tactics like the Decoy Effect and question the ethics surrounding them. Sure, you can do it, but should you?
The answer, in this case, is yes you should, if you’re comfortable with it, because it is ethical.
One ethical guideline that researchers have to abide by is free will — we cannot force a participant to do something. Well, in this real-life scenario, you are not forcing anyone to do anything. You are simply providing them with an alternative (albeit not an appealing alternative) and letting them decide. You are not altering your current offerings in any way. Your customers still have the free will to choose the lesser option (as 16% did in The Economist example).
Applying the decoy effect to your business
It’s all good and well to know what they decoy effect is, but what about applying it to your own ecommerce business?
Well, before you can go ahead and add a decoy, you first need to identify which price point you want to sell more of. For example, if you sell vacations and you have a basic room 3-day stay for $500 and a luxury room 5-day stay for $700, you need to decide between the two. Profit margins dictate you’ll probably want the luxury 5-day package to sell more.
Once you’ve decided which product you want people to buy more of, go ahead and add a third package. In this scenario, it will be a basic room 5-day stay $700. The price is the exact same as the luxury room’s stay for the same length, so why on earth would anyone choose the basic room option?
Remember, your goal is not to have anyone buy your third option. It is there to juxtapose the higher priced option and show what a great value it is. And when buyers can get your luxury version for the same length of time, for the exact same price, they will choose it.
The decoy effect is incredibly powerful and not utilized enough. However, once you get comfortable with the technique, you’ll begin to see it popping up everywhere. And you’ll begin to see your sales hike up without doing anything to the products you’re selling more of.