Issue 5 of The Psychology of Pricing
Most people are comparison shoppers, in that they decide what the best option is based on the choices that are available. While relying on comparisons can be a very helpful rule of thumb, there are occasional blind spots in decision making that can lead to interesting and not-always-ideal outcomes. One of these blind spots is what behavioral economists call the “Decoy Effect.”
Imagine that you’re going to the movies and you want to buy some popcorn. There are two options: A small bag for $4.50 and a large one for $7. You want decent sized popcorn, yet you can’t quite justify getting the large one, so you decide on the small for $4.50.
The next time you go to the movies, they have changed the menu. Now, they offer a small for $4.50, a medium for $6.75, and a large for $7. You still want a decent size, and the medium catches your eye. As you are about to get it, you notice that the large one is only 25 cents more - What a deal! Not wanting to miss out, you get the large one.
The popcorn decision is one example of what is known as the “decoy effect.” In the case above, the $6.75 option is the decoy, as it isn’t likely to be chosen. It is not there to be a popular choice; it is there to make the $7 option seem like a great deal.
The decoy effect shows that the way we judge a product’s worth depends heavily on what our options are. It also shows that sometimes seemingly irrelevant options heavily influence people’s choices. These “decoy” products push their references around enough to make people choose differently.
The context in which we make choices makes a difference. Options that may seem pointless given their dismal sales figures can shift what consumers choose to buy.
- Look at a restaurant menu. Can you spot a decoy?
- Have you ever taken a flight and attempted to buy Wifi? Next time, try to catch the decoy in their pricing.
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The Psychology of Pricing
In our experience at Irrational Labs, we find that it’s the companies trying to help consumers become happier, healthier and wealthier that make the most mistakes valuing their products. This course will help you better understand these mistakes and how to avoid them.
Have you ever been curious about questions such as:
- Why people get so excited about buying things that are in short supply?
- What causes promotions to drive short-term spikes in sales yet become counterproductive over time?
- When can offering a product for free actually be bad for the customer?
In 22 short and fun lessons, you will learn the answers to these questions as you are introduced to key concepts from the field of behavioral economics. You will get examples and exercises to help you take what you’ve learned and apply it to the pricing and promotions of different products and services.
This course is primarily for product managers, designers and creators of products and services that are helping improve people’s well-being.
If you choose to apply any of these insights within your company, we ask that you answer one question before making any changes: “Will this make people better off?’ This simple rule of thumb will help ensure you’re making changes that improve your customer’s bottom line as well as your company’s.
Irrational Labs: Kristen Berman, Ingrid Melvaer Paulin, and Evelyn Gosnell
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