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Intelligent price management using ‘decoy products’

No product is an island – it is always viewed and compared by the customer in the context of other offerings. With the help of a well thought-out price management, you can suggest to customers that you offer a product of high quality at a fair price. In our previous blog, we reported on how you can avoid the errors where you throw away high margins. Now we will show you how you can increase the margins of your top items thanks to so-called ‘decoy products’.

In his book, Predictably Irrational, Dan Ariely, Professor of Psychology and Behavioural Economics at Duke University, Durham, North Carolina, presents the following example: In the 1980s, the mail-order retailer Williams-Sonoma, based in San Francisco, began selling hitherto unknown bread-baking machines. The $275 device sold poorly. Customers remained united that bread would be further bought from bakeries. But when the retailer added a second bread maker to the range, things changed. The new, much larger and half-as-expensive bread-baking machine boosted sales of its predecessor. The customer, according to Ariely, no longer had to decide inside a “void space”. Instead, customers could consider what a bread maker would be worth to them.

Smart price management: Add a decoy product to your range to make the more expensive offering more appealing

Of course, you do not need to produce a more expensive product to sell the cheaper one. Instead, introduce a decoy product that drives sales of the more expensive offering by smart price management. Ariely presented his ‘decoy theory’ by means of a further example: A subscription promotion for the magazine The Economist. The offer was as follows:

Web editione$59
Print edition$125
Web  & print edition $125

Ariely understood that this price management had to be an intelligent strategy from the marketing experts at The Economist. Nobody interested in subscribing to the magazine could predict whether the web subscription was a better deal than the print one. But every person interested knew immediately that the combination package of web and print was a better deal than the print subscription alone. To test whether the magazine’s pricing strategy was successful, Ariely surveyed 100 students from the Massachusetts Institute of Technology (MIT) about which subscription they would choose. The choices were as follows:

SubscriptionNo. of students
Web edition for $5916
Print edition for $125 0
Web  & print edition $12584

The Economist had thus achieved a high profit with its more expensive offering. And this was all thanks to its decoy product, the print-only subscription. To observe what difference the decoy made, Ariely then undertook another survey, this time omitting the print-only offer. In this instance, 68 students voted for the web subscription and 32 for the combined subscription. A much more significant difference.

With the help of a decoy product, you can create an expanded scope to your broader offering

How can this be explained? Without the decoy product, none of the students could say which of the subscriptions was the best. In cases of doubt, most customers opt for the cheaper product. This, according to Ariely, is like in a restaurant: No customer orders the most expensive dish on the menu, but most likely the second. The customer, after all, has no internal instrument for measuring the value of a thing. Customers are orientated on the relative advantage of one product over another and measure their values on this basis. The customer performs comparisons.

If you add a similar variant of your more expensive product, as in the print-only subscription of Ariely’s example, you will be influencing this comparison process. With the aid of a decoy product, you create for customers a targeted framework for comparisons – a framework that offers the opportunity to make the more expensive offering much more attractive.

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