Pricing and the Decoy Effect - Strategies to assist businesses in motivating people to spend more

The Decoy Effect provides a means for companies to impact customer decision-making and boost revenue by deliberately structuring available alternatives. Grasping the psychological underpinnings of this phenomenon and adopting principles of ethics allows businesses to properly utilize this pricing approach to their benefit.
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Pricing and the Decoy Effect - Strategies to assist businesses in motivating people to spend moreTAØI CHÍNH DOANH NGHIEÄP Taäp 02/2024 Pricing and the Decoy Effect - Strategies to assist businesses in motivating people to spend more Chu Mai Anh; Hoàng Quốc Việt - CQ58/22.04CLCP rices and marketing strategies are important for how a business works. Remarkably, the methods of payment used during purchases greatly impact spending behaviors. For instance, a consumer is likely to spend more when using acredit card compared to cash payments. Hence, this comes at odds with the economictheory, which argues that the method of payment should have no effect on spending, soconsumers seem to be indulging in irrational behavior. In addition, understanding howcustomers spend money can help more accurately understand spending patterns. Pricing isanother key factor that is equally important for marketing strategies. Corporations devotesubstantial contemplation and effort to strategically pricing items and services. The goal isto subtly shift consumer inclinations and steer their purchasing decisions towards offeringsthat are more advantageous or lucrative from the companys perspective. One of thestrategies firms use to switch from one option to a more expensive and profitable one iscalled the Decoy Effect. So what is the Decoy Effect? The Decoy Effect describes how price comparisons between products affect choice.It states that when there are only two options, and they’re priced fairly, people makedecisions according to personal preference. But, if there’s a third choice that’s overpricedcompared to the first two options, it changes how people consider all of the options. Thethird option is a decoy choice. Dan Ariely once noticed something interesting while browsing The Economistsmembership website. They were offering an online-only subscription, a print and onlinecombined subscription, and a print-only subscription. Intrigued, Ariely decided to studyhow presenting these options in this way might influence peoples choices. For Group 1, there were two subscription options: a web-only membership and aprint and web subscription. Group 2 was given all three subscription options: an online-only, a print-only, and aprint and web subscription. Here are the choices made by each group: Group 1: when given a choice between two options: Only the web was chosen by 68percent of respondents, while 32 percent preferred both print and web. Sinh viªn 39Taäp 02/2024 TAØI CHÍNH DOANH NGHIEÄP Group 2: Offered three options: 16% picked only online, 0% chose only the paper,and 84% chose online + paper. In Arielys initial study group, his earnings were $8,012 with 68% of studentschoosing the online-only membership and 32% choosing the print and online subscription.However, with the second group where he included a print-only decoy option, his totalearnings increased to $11,444. Moreover, the percentage of students opting for the printand online subscription rose to 84%, while none selected the print-only decoy option. Byintroducing a dominated option that was unlikely to be chosen, The Economist was able toboost sales by 30% according to Arielys research. Table 1: Subscription rate with and without the Decoy Choices Group 1 Group 2 Web only: $59 68% 16% Print only: $125 X 0% Web and print: $125 32% 84% Implications of The Decoy Effect Implications of The Decoy Effect for the customers Firstly, thanks to diversifying product lines, customers have more shopping options.Although the difference is not big, in fact, it is useful in many cases. For example, Apple is such a famous brand that everyone wants to own theirproduct, even if it is not the most advanced phone model in the same generation. Thecreation of iPhone SE is the clearest proof when it also brings higher sales than iPhone 6Plus - with the same performance and iPhone 7 Plus - produced in the same year. Secondly, many consumers are too careful in their considerations, making the choicetake a lot of time. This is not too bad, but if the product has many different lines andmodels, the story is different. Implications of The Decoy Effect for the businesses Firstly, businesses can stimulate consumers to choose to buy high-priced items inthe same product line. This will maximize revenue and profits. Secondly, creating decoy products can also be seen as a new policy in businessactivities, even enhancing a businesss position against competitors. We can return toApple with the 2nd generation iPhone SE version. Obviously, this product continues to bean example of the decoy effect in business with its characteristics of price, performance, Sinh viªn 40TAØI CHÍNH DOANH NGHIEÄP Taäp 02/2024and design. Directing buyers to the main iPhone line. However, it also creates a significantdistinction in Apples sales style. How do businesses use The Decoy Effect? Give customers freedom to choose When customers only have one choice, they will feel uncomfortable because it feelslike you are forcing them to buy at that price. Therefore, when selling, you should givecustomers many other options. Customers have the right ...