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How to Test Decoy Pricing

Posted on 4.04.2016

Pricing strategy can be one of the most complicated areas for Web professionals and the reason is simple - price causes strong emotions in consumers.

In many ways, response to price is natural - either we repel from the high price because our brain indicates that a product is not for us because it is expensive or we're compelled to purchase it because the price seems like such a good deal that the opportunity can't be passed up.

While there's a great deal of data about the optimal way to approach product or service pricing, few sellers know the first thing about the practice of price optimization. That however means there is an opportunity for those willing and interested in testing these digital waters.

“People tend to be clueless about prices," wrote William Poundstone, the author Priceless: The Myth of Fair Value.

"Contrary to economic theory, we don’t really decide between A and B by consulting our invisible price tags and purchasing the one that yields the higher utility, he says. We make do with guesstimates and a vague recollection of what things are “supposed to cost.”

Sellers of good services (at least the good ones) recognize the role that price plays in the buying experience for consumers and continually test different approaches to determine their impact. The decoy effect, also called the asymmetrical dominance effect, for example, is a phenomenon where people tend to have a change in preference between two options when presented with a third option that is asymmetrically dominated.

This natural behavior, resulting from the decoy effect, is often exploited in pricing tables. By integrating a third – being the decoy – product, we can increase the preference for the dominating option. Companies push customers, who usually tend to buy the cheapest product, towards a more expensive product.

To use decoy pricing to your advantage there are a few tactics you might want to consider. For example, the decoy price has to clearly be the least attractive option so its features, benefits and price must be clearly inferior to the other two options.

Testing decoy pricing requires a fairly substantial audience sample, as well as a commitment to engage in periodic analysis of the results. Competitive forces and seasonal influences may cause problems in terms of test accuracy if tests go on too long, so test decoy options on a limited basis initially (in an A/B or multivariate mode).

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