PRICE PLOY: Manipulative Pricing Strategies Revealed
What determines the price of a product?
You may think pricing a product would be easy: you take the cost of making it and add a little profit on top. Unfortunately for us consumers, this is rarely the case.
Big businesses use complex pricing strategies. These include "decoy pricing", "odd pricing", "predatory pricing" and "psychological pricing".
Wikipedia reveals there are 27 pricing strategies in common use. Reading through, it appears only two pricing strategies are of benefit to the consumer.
25 of 27 pricing strategies are designed either to maximise profit through psychological tricks, or to fight off competing businesses so the active company can keep control. The latter is bad for consumers as it reduces the amount of choice we have.
Why should I care about pricing strategies?
If you understand why companies price products the way they do, you can learn how to spot tricks and make better decisions.
You learn what the fair price should be: the cost of making the product plus a fair profit.
This article is my first in a series revealing the manipulative pricing practices businesses employ to make you pay more. I'm calling the series Price Ploy.
Business has a responsibility to society. To treat you fairly and to help your local community thrive. Prices have a big impact.
The first price ploy is called "Decoy Pricing". Here's how it works:
Decoy pricing is when you're shown three products, two of which have higher but equal prices.
For example, imagine you're buying a subscription to a magazine:
- Web Subscription – £59
- Print Subscription – £125
- Web and Print Subscription – £125
Immediately, our psychology draws us to compare the two products with a similar or equal price.
Our psychology drives us to compare the latter two prices (£125). The reaction is Huh? Why are they the same price? Obviously the third option is a deal compared to the second.
Dan Ariley, author of Predictably Irrational, tested this on students. When asked which they would choose...
- Web Subscription – £59 (16 students)
- Print Subscription – £125 (0 students)
- Web and Print Subscription – £125 (84 students)
- Total revenue: £11,444
Here's what happened when Dan removed option 2, the decoy:
- Web Subscription – £59 (68 students)
- Web and Print Subscription – £125 (32 students)
- Total revenue: £8,012
In this last example, with the decoy removed, the decision changes. Now the cheapest option is more attractive.
By introducing a decoy (which the company never intended to sell anyway), the business was able to encourage people to spend more money. Total revenue increased with the decoy.
EXAMPLE: Apple iPod Touch
In the image below, you can see an example of decoy pricing from Apple and the iPod touch:
Which iPod Touch would you buy?
Most people chose the 32GB at $299. You get all the extra features of the most expensive option, but without the extra $100 price tag.
The 32GB seems to be the best deal. It's not that much more expensive than the first, but you get nearly all the benefits of of the 64GB option.
Which is the decoy? The top-end 64GB is the decoy. It's disproportionately priced more expensive. This is actually called premium decoy pricing:
"Where an organisation artificially sets one product price high, in order to boost sales of a lower priced product".
If Apple had just compared the 16GB and the 32GB, more people would have bought the cheapest option.
How Do I Spot Decoy Pricing?
- You're presented with three price options or more
- Two of the three have similar prices, OR
- One of the prices is oddly high
Decoy pricing is just one of 27 commonly used pricing strategies. Below, you can see a full list taken from a table of contents on Wikipedia.
Next time, we'll be looking at "Psychological Pricing". For example, £3.99 instead of £4, and how we think this means we got it for the lower price than £4 but in fact, businesses would normally charge just £3.
What do you think? I would love to hear your feedback. Share your thoughts in the comments below.