Decoy Prices & Price Anchoring
Over the past week new content has been added that covers some very powerful pricing techniques.
The first is decoy pricing. A full definition of decoy pricing (and an explanation of the related asymmetric dominance effect) has been added to the pricing glossary. The basic idea is that introducing a decoy price can make an existing price much more attractive. The key is that the new decoy price be only partially dominated by all but one of the other options (meaning it is inferior to them in some, but not all, aspects) and completely dominated by one of the other options (inferior to that option in all aspects). This makes the completely dominant price much more attractive than the others.
Examples of decoy pricing were also added – in addition to the classic example of decoy pricing on subscriptions to The Economist there is one from another publication, the New York Post. Another example, that looked at how decoy prices were effectively used on the popular crowd funding site Indiegogo, has been on the site for several months.
The new content also covers the concept of anchor pricing. A definition of anchor pricing, one that uses the introduction of iPad pricing as an example of anchor pricing, has been added to the pricing glossary.
The idea behind anchor pricing is that humans tend to place too much information on the first piece of information received and basing later evaluations of information received subsequently on that "anchor". By introducing an anchor price first it is possible to favourably frame the value in prices introduced later.
Another example of anchor pricing, one that you see on almost any trip to the mall (and definitely any visit to Amazon.com) involves the way sale prices are presented on price tags. The discounted sale price is almost always presented alongside the higher original price. This allows that higher price to serve as an anchor, one that makes the discounted sale price seem much more attractive in comparison.