Decoy prices are used to cause a shift in preference between other available prices. The goal of the decoy is to make one price (presumably the price more profitable for the seller) more attractive to the consume.
Dan Ariely found a beautiful example of decoy pricing and included it in his book Predictably Irrational. It has been widely circulated but, because it is such a fine example, it is included again here:
The interesting part is that the second option seems superfluous. It is priced exactly the same as the third option but does not include the web subscription. It is clearly inferior to the third option in all possible ways. Why would anyone choose it when they could also get the web option for free by choosing the third option?
And that is exactly what Ariely found when he surveyed 100 students. Nobody chose the decoy option, and the overwhelming percentage (84%) chose the higher priced third option.
So why even offer the second option if it makes no sense and nobody is going to choose it? Would it not make more sense to run a simpler ad, with fewer choices. that would be easier for consumers to digest and respond to?
Ariely tried just that. He created an alternate version of the ad without the second option and ran another survey with different students.
The results are very different. Without the decoy price to frame the relative outstanding value provided by option three most people chose the cheapest option.
So, while the decoy price may not ever be selected, it is very effective at making the more expensive option more attractive, with a dramatic effect on overall sales. If just one hundred new subscribers responded to the ad the decoy price raises revenue approximately 43%. It’s worth noting that more would also feel like they had stumbled on to exceptional value.
This decoy effect is also known as the “asymmetric dominance effect”. The decoy price, the second option, is said to be “asymmetrically dominated” by the other two. It is “dominated” because it is inferior to both of them. It is “asymmetrically” dominated because the other two options dominate it to different degrees. The third option completely dominates the decoy (is better in all possible ways) while the first only partially dominates (price – it is only cheaper, not better).
Without the decoy neither of the other two prices clearly dominates the other. One dominates on price (it is cheaper), the other dominates on features (you get more). There is no clear winner.
Introducing the decoy price changes that. The third option becomes the preference because it so completely dominates the decoy, and there is a major shift in overall preference.