Have you ever wondered why we sometimes make irrational choices when faced with purchasing decisions? Cognitive biases, the subtle quirks of human thinking that shape our choices, play a significant role in human behaviour. These cognitive biases, or mental shortcuts, lead us down unexpected paths, impacting our choices.
As marketers or pricing managers, understanding these biases opens doors to crafting persuasive messaging and pricing strategies that resonate with a target audience subconsciously, nudging them towards desired actions. In this final article in our series on psychological pricing techniques, we'll delve into cognitive biases, like decoy techniques, and explore how they influence decision-making processes and sway consumer behaviour effectively.
What is a decoy technique?
The decoy effect is a powerful technique for pricing and portfolio communication, both online and offline.
The mother of all decoy techniques involves introducing product alternative options that are either overly expensive, too small, or irrelevant, ultimately steering consumers toward a desired purchase/product. By creating a context in which choices are evaluated and influenced through comparison, the decoy effect can lead individuals to make decisions they might not have otherwise.
Initially described by Joel Huber, John Payne, and Christopher Puto of Duke University in a 1982 paper, this decoy effect was explored through multiple experiments testing consumer preferences across various products like beer, restaurants, and cars. Respondents consistently favoured the target product or service when presented with a decoy option, showcasing the impact of this cognitive bias on decision-making.
How to apply cognitive bias & decoy techniques to pricing communication?
Let's now examine some fundamental cognitive biases affecting conversion rates and offer valuable insight into consumer behaviour. From the instantaneous bias to the powerful decoy effect, which subtly guides decision-making through comparison, each bias presents an opportunity for marketers to fine-tune their messaging for maximum impact.
- Know when to communicate your prices as you promote your products
The timing of when your customer sees the price of your product can significantly impact their decision to purchase. If the price is displayed before the product (and its detailed features/specs), customers are more likely to make their purchase decision based on the price alone. As the price was the first product specification they received, they anchored it and used it as a reference to evaluate all the other elements.
However, if the product is shown first in all its glory and details, and the price comes afterwards, customers are more likely to consider the quality and features of the product before making a decision. You first “seduce” the consumer with all these great product features and make them dream. At the end of the product exploration, you communicate the price in little detail—i.e., the cost of all these nice features. It's essential to keep this in mind when deciding how to display your prices.
For luxury products, it's best to showcase the product features and specs first and then the price, while for everyday (i.e. cheaper) goods like food, it's more effective to display the price first (as ‘decoy feature’) and then the product details.
Remember, your customers' first impression of your product can heavily influence their decision to purchase, so it's essential to get it right the first time.
2. Add a decoy option to subtly steer choices toward the preferred option
When you have two product alternatives - one cheap and one primary - it's common for consumers to choose the more affordable option. To counteract this, you can use the decoy pricing technique mentioned above. I.e. adding a "dummy" product that is a worse deal than the primary option. This makes the main product appear more appealing and can increase the likelihood of being purchased.
Sometimes, when we have to make a choice between different options, we may need clarification on which one to choose. Adding an 'irrelevant option' - an obviously wrong option - to the list can nudge us towards your preferred choice. This applies to pricing decisions, but also to other situations like social gatherings where bringing in a less attractive friend can make us appear more appealing to others. Similarly, in politics, adding irrelevant candidates can sway votes toward a particular candidate.
The Economist example: The importance of irrelevant alternatives
In case you want to know more about this last example, check out the work of behavioural economist Dan Ariely, the author of Predictably Irrational, who uses classic visual illusions and his own counterintuitive (and sometimes shocking) research findings to show how we're not as rational as we think when we make decisions.
He uses an example from the Economist.com subscription options and pricing to explain this theory.
Ariely presented MIT students with three options: web-only ($59), print-only ($125), and print+web ($125). When offering all three options, 84% chose print+web, 16% chose web-only, and (obviously) no one chose print-only.
When he removed the print-only option and presented only web-only and print+web to another group, most students chose the cheaper web-only option. This demonstrates that the seemingly irrelevant print-only option served as a decoy, making the ‘print&web option’ appear much more valuable by comparison. Without this point of reference, people defaulted on the cheapest choice.
This experiment shows how the presence of a strategically placed, less attractive option can significantly influence consumer decisions by providing a favorable comparison for the option the seller wants to promote.
Dan Ariely-Pricing the Economist > https://youtu.be/xOhb4LwAaJk
3. Raise your prices gradually
One effective pricing strategy that makes use of cognitive bias in a clever way is gradually increasing your prices in smaller increments using the 'Just Noticeable Difference' (JND) technique, also known as Weber's law.
The JND refers to the point consumers will perceive a price change. This method allows you to gradually introduce price increases to your customers without causing sticker shock. This is particularly useful as people tend to be biased toward the idea that prices will remain constant, which can make sudden price increases jarring.
4. Avoid mentioning defective items when selling a set (e.g. in second hand store)
When selling a set of items, it's best not to mention any damaged or inferior pieces that may be included. This was confirmed by an experiment conducted by Christopher Hsee at the University of Chicago. The experiment asked participants to evaluate the price of dinnerware sets sold at a clearance sale in a local store. The store regularly priced these dinnerware sets between $30 and $60.
The experiment had three groups: one group evaluated both sets mentioned above, while the other two evaluated Set A and Set B separately. The dishes in both sets were of equal quality. The question posed was: which set is worth more?
The outcome showed that the group who evaluated both sets was willing to pay a little more for Set A than for Set B: $32 versus $30. This is a rational and logical outcome when comparing both sets. However, the results were reversed for the single evaluation groups: Set B was priced much higher than Set A, at $33 versus $23!
The psychological explanation behind this phenomenon is that sets and bundles are often evaluated based on norms and prototypes. Set A's estimated value was lower than Set B's because people wanted to avoid paying for broken dishes. Consumers read ‘broken’ and think ‘junk’. ‘Broken’ usually comes with associations of ‘junk’ or ‘lesser value’. When the average or norm dominates the evaluation, it is not surprising that Set B was valued more.
Interestingly, its value was improved by removing 16 items from Set A (7 of them intact). This shows that sometimes, less is more regarding bundles and sets. The prevailing standards and norms regarding the quality of sets and bundles can bias our perception.
5. Charge a little more for add-ons / updates / product accessories
Did you know you could charge relatively more for add-ons, updates, or product accessories? This is thanks to a psychological theory called the Sunk Cost Fallacy. People and companies are more likely to continue with a product or project if they have already invested a lot of money, time, or effort, even when it's not the best or most economical thing to do.
A classic example of this concept, is the printer and toner market. Printers themselves are often sold at relatively affordable prices. However, the cost of replacement ink or toner cartridges, especially when purchased from the same brand, can be exorbitant.
Once you've invested in a printer from a specific manufacturer, you're more likely to accept these inflated prices for compatible cartridges because you're essentially "locked in" to that brand's ecosystem. This phenomenon is sometimes referred to as being "married to the hardware”.
In other words, consumers are willing to pay more than a reasonable, conform price for add-on products if they have already invested in the basics. This could be as trivial as filling in an email address on an info page in the context of considering a future internet provider…
6. Go for an acceptable/fair price, instead of the lowest price
It's often wiser to opt for an acceptable or fair price instead of the lowest possible price. This is because consumers tend to be wary and suspicious of deals that seem too good to be true.
In a world of rampant overconsumption, people have had enough bad experiences to know that nothing comes for free. As a result, they tend to view excessively low prices with prejudice and assume that they must be deficient in some way.
To address this issue, many businesses use the Propensity Score Matching (PSM) method, or what we call the “Van Westendorp” pricing method which suggests that an ideal price range lies between "a great buy for the money" and "on the high side”. Van Westendorp's Price Sensitivity Model is based on a comprehensive, multi-question approach to indirectly measure willingness to pay, as opposed to directly asking potential buyers for a specific price point. This model assesses a range of prices rather than just one or a few, providing a more in-depth understanding of what is a ‘correct’ price for your product/service.
Conclusion
Using psychological pricing (messaging) techniques for your goods/services is one thing, however setting an accurate price at the base is something else. Price setting should be based on market insights on brand strength, product evaluation, customer needs and expectations, etc. This approach allows you to look at psychological pricing techniques as ‘the icing on the cake’.
You need a well-thought-out, insights-based price at the start. And rest assured, once you have this, you can use psychological pricing messaging techniques to maximise your earnings.
If you're looking to take your business to the next level, you need to nail your pricing strategy. At boobook, we understand this and are committed to helping you navigate the complexities of pricing. Our approach combines robust consumer-based data analysis topped with insights from behavioural economics to create pricing strategies that align with your customers' decision-making processes. This drives profitability and business growth.
As we wrap up our series on psychological pricing (messaging) techniques, we hope we inspired you to explore more about pricing strategies and how to integrate them into your overall marketing strategy.
If you have questions or want to know more, reach out to our team!
