Have you ever been presented with three pricing options and found yourself immediately drawn to one of them? Maybe you were buying software, choosing a subscription, selecting a service
package, or even ordering something from a restaurant menu. One option seemed inexpensive but limited. Another was considerably more expensive but offered much more. Then there was a
third choice that somehow made the more expensive option suddenly seem like a much better deal. There is actually a marketing principle behind this. It is called the decoy effect, and small
business owners can use it to help customers better understand the value of what they are offering.
What Is the Decoy Effect?
The decoy effect is based on a relatively simple idea: customers rarely evaluate prices in isolation. They compare one option against another.
Let’s say a business consultant offers two packages:
Basic Package: $500
A 90-minute consultation with written recommendations.
Premium Package: $1,000
A consultation, detailed business analysis, written recommendations, and three follow-up sessions. A potential client might look at those choices and think, “Do I really want to spend twice as
much?”
Now let’s introduce a third option:
Enhanced Package: $900
A consultation, detailed analysis, written recommendations, and one follow-up session.
Something interesting happens.
The customer is no longer simply comparing $500 against $1,000. Now the customer can compare the $900 Enhanced Package directly against the $1,000 Premium Package.
For only another $100, the Premium Package provides two additional follow-up sessions. Suddenly, the $1,000 option may appear to offer considerably more value.
The $900 package has become the decoy.
Why Does This Work?
Many customers do not have an established reference point for determining what your product or service should cost.
This is particularly true with professional services. How much should business consulting cost? Website development? Tax planning? Marketing services? Landscaping? IT support?
Without a reference point, customers create one by comparing the choices you give them.
The decoy helps frame that comparison.
Instead of asking:
“Is this service worth $1,000?”
the customer may begin asking:
“If I’m already considering spending $900, wouldn’t I be better off spending another $100 and getting substantially more?”
You haven’t discounted anything. You haven’t reduced your margin. You have simply changed how the customer evaluates the choices.
Could This Work in Your Business?
The decoy effect can be particularly useful for businesses offering multiple levels of service.
Think about whether your business could offer three choices such as:
Good | Better | Best
A landscaping company might offer basic lawn maintenance, an enhanced maintenance package, and a comprehensive property-care program.
An accountant might offer tax preparation, tax preparation plus year-round planning, and a comprehensive advisory package.
A contractor might offer different levels of materials, warranties, or services.
A restaurant can even use the principle when structuring menu sizes, combinations, or packages.
The key is designing the choices so customers can easily identify the differences in value.
There Is an Important Catch
A decoy should not be deceptive.
The objective isn’t to create a ridiculous option that no rational person would ever purchase just to manipulate someone into spending more money. Each package should represent a legitimate
offering that you are prepared to provide.
The goal is to make the relative value of your preferred option easier to see.
That distinction matters. Good marketing helps customers make decisions. Bad marketing makes customers feel tricked into making them.
Take Another Look at Your Pricing
Business owners spend considerable time determining what to charge. We analyze labor, overhead, competition, margins, and profitability.
But there is another question worth asking:
How are you presenting those prices to your customers?
Sometimes the answer to increasing sales isn’t lowering your price. It may not require a promotion, discount, or special offer at all.
It may simply require restructuring your choices so customers can more easily understand where the greatest value lies.
The decoy effect reminds us that pricing isn’t only about the number on the invoice. It’s also about the choices surrounding that number.
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TITAN Business Development Group, LLC
business coaching | advisory | exit planning
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