No doubt you have visited a website where there is a three-panel pricing grid, like the one above. You find them, for instance, on web hosting company sites where the firm offers three levels of service, each with different features. You can also find these price panels on membership sites and a whole host of online services.
The other week, I was with a consultancy client and was talking about price panels such as these and was explaining why they can be helpful. “But we only have two different product offerings,” I was told by my client. “Aha,” I said, “there’s your first problem.”
I explained that you always need three product options, or three prices – even if you actually only have two things to sell.
The “three options” pricing panel uses a couple of pieces of psychology which helps people make up their mind as to what to buy – and also helps anyone selling anything encourage the buyer to select the “right” option (the most profitable).
The main psychological component in many of these pricing grids is the “decoy“. It is an item which is not likely to be sold but makes it much more likely that the buyer will select one of the other two items.
As an example, let’s imagine you sell calculators. You have three models, but one of them is not likely to be popular as it is specialised and not aimed at your target market. So, you only really have two products on offer, even though you promote all three. One is a basic calculator with a memory function. The second model includes tax/VAT calculations. The third model is an advanced scientific calculator in addition to everything the second model provides, though it has less memory capacity as it has to make space for all the additional mathematical calculations.
The way you might price these is £10 for the basic model, £20 for the middle model with the third model costing £25. This third model is the “decoy”. It is something you know the market doesn’t want and you don’t really intend to sell it. But what happens when you offer the item for sale is this: people look at the features and realise that the middle model has the advantage of the tax calculations, and additional memory is “only £5 cheaper” than the highly sophisticated model. They reason that the £5 extra for the scientific calculations isn’t worth it because they’ll never need them. And even if they realise that getting all of those additional possibilities is “only £5 extra”, they argue that they’ll hardly ever use them, so it isn’t worth the extra cash. The result is they opt for the £20 item.
However, if all you sell is the £10 calculator and the £20 one, there is no “decoy” to make a comparison. The shopper then sees that the machine that provides tax and VAT calculations is “twice the price” of the basic one, which is perceived as too much. As a result, the shopper tends to opt for the £10 model.
In other words, you end up selling a £20 item (double the price people might otherwise have paid) if you add a “decoy” item, which you never intended to sell, albeit perhaps occasionally.
In the case of the client I was speaking with about this topic, they offer consultancy packages which were essentially a one-off deal or a monthly subscription. I suggested they add a third package (which no-one would be likely to buy) which would act as a decoy, enabling most people to opt for what is the most profitable for my client – the monthly subscription. Just adding a third option, such as an annual subscription, would make people more likely to purchase the monthly subscription, even if that third option was never likely to be sold.
The “trick” with decoy pricing is to ensure you trigger a further psychological element of product selection known as the “attraction effect“. This happens when you make one item look more attractive than it might appear in isolation by adding an inferior product to the available range. A mid-priced car looks more appealing when there are lower-priced, more basic models available, for example. The manufacturers ensure there are elementary models available because they make the more sophisticated models look more attractive than they would on their own. The result is that more people buy the higher-priced models.
Of course, you may argue that such pricing strategies are unethical or immoral. Using techniques to convince people to buy something at a higher price is not always perceived as the right thing to do. However, it is not always about price. You can use the decoy strategy and the attraction effect together to make sure that people choose the item that most suits their needs. In studies where pricing was identical, but feature sets were different, people tended to opt for the additional features, even if they didn’t always need them. But that only happens if there is a “decoy”. This was tested in a study of students signing up for a subscription to The Economist magazine. They were offered a web-only subscription at $59, a print-only subscription at $125 and a web and print combined subscription also at $125. In other words, they got more for their money if they took the combined package.
The study showed that no-one opted for the “decoy”, the print only subscription. A total of 84% of students signed up for the combination of print and web versions of the magazine. But once the decoy was removed, so there were only two options – print or print and web combined, a mere 32% of individuals signed up for the combined offer.
What this shows is that you can offer things at the same price, but people will choose the item with most features, for fear of missing out. However, that fear is only triggered by making the item more attractive if a decoy is present. So, you can use decoys to ensure people get the maximum set of features available to them. If you think it is unethical to lure people into buying higher priced items, you can use decoys to ensure they buy things which have the maximum set of features.
When it comes to pricing what you sell, there are several psychological factors at play. One of those is risk reduction – we try to avoid spending money on products and services that are not really going to provide us with what we want or need. So we compare features and prices to make sure we are not losing out. As a result, if you do not provide price variants and feature sets for the items you sell, you are making it much harder for people to buy from you.
What this means is you need to provide people with three prices, and three feature sets, but one of them will be a decoy. That makes it easier for people to choose the item with the most features or the best deal (which would bring you the most profit). Either way, you and your customers are potentially losing out if you do not create decoys – things that people will almost certainly not buy, but which make sure they buy what you want them to purchase.