Psychology of Pricing: The Decoy Effect

Have you ever thought of pricing beyond cost + margin?

Did you ever notice the way you make decisions by available choices?

Did you ever feel curious when a book judged by its compelling cover became a boring read?

Have you ever thought why a shirt is priced at 2999 instead of 3000?

Most of the times we make irrational iterations to justify the rationality of our decisions. Psychology plays a mindboggling part in pricing and many times we fall into the trap of it and end up buying more, expensive or even useless.

Psychological pricing has many forms, and you may come across many such types of things around your local retailers or grocery shops. Just like I bought apples on a relatively high price because of a sticker depicting “High Quality,” only to find them rotten inside. Damn smart street vendors!

The decoy effect is definitely not the only cognitive bias that is apparent in humans.

To understand The Decoy Effect, let’s start with an example:

The Economist is widely known for using The Decoy Effect. Out of the below-mentioned choices, try to choose one out of three offers:

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Many of us will argue that the offer I (left) is the best option. It is cheap to have both the subscription for US$15, which are worth of US$24 (US$12 each). You will suddenly feel that you are making a rational choice with a right amount of deal. Other options seem irrelevant, and you are ended up spending more even if you do not need one or other kind of subscription.

Dan Ariely found in The Economist magazine and wrote about in his book Predictably Irrational but it touches on the concept of decoy pricing or the “asymmetric dominance effect” effect.

Confused?

Let’s take another example: The bottle with $30 tag suddenly becomes reasonable after the introduction of $50 tag bottle.

Image result for decoy effect and anchoring

 

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i5: What Has Changed in Consumer Decision Making?

Why do we do the things we do? What is it exactly that drives our action? What do we know about our motives? A consumer decision-making journey is not easy to understand. We rarely make rational choices in our lives and our purchases!

The consumer decision journey has evolved significantly over the past decade due to the internet, digital innovation and the subsequent rise of the internet. Consumers are moving outside the marketing funnel by changing the way they research and buy products. Instead of a path to purchase that is traditionally linear, it has become more of a cycle. Moreover, it is not just dependent on products or brand, it involves channels too.

i5 model involves 5 steps of consumer journey: Introduction, Inspection, Investigation, Involvement and Inclination. It defines how a consumer starts its journey by need recognition and eventually passes through various steps to develop loyalty towards a brand or make an exit to explore other options.

INTRODUCTION

Introduction is the first step when a consumer recognizes a need and interprets it for myriad reasons. It includes psychological as well as physiological needs. The arousal of need is triggered by the stimuli (internal and external), stronger the stimuli, stronger will be the motivation to further involvement in the decision-making process.

INSPECTION

In this step, a consumer tries to evaluate his association with brands. The salience or a brand being top of mind in a decision situation is the first critical factor. Any first-hand experience (past usage) with the brand and second-hand experiences (influencers) on social media or directly communicated by the brand. The overall positive feeling created by these experiences will nudge consumers to choose one brand over another.

 

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i5 Model of Consumer Journey was developed by Sourav Raina while he was pursuing Masters in Market Research and Consumer Behaviour at IE Business School, Spain.

 

INVESTIGATION

During the investigation stage, a consumer looks after the channel which suits the most. It may involve convenience, low prices, offers or lock into a loyalty-based program. With the continuous evolvement of e-commerce platforms and comparison sites, a consumer inclines to make a smart decision. Furthermore, the combination of both channels (online and offline) is also in use to decide to purchase. The concepts like “showrooming,” are byproducts of it.

INVOLVEMENT

Involvement is the user experience phase or the period of usage. It is the “moment of contact” of a brand and a customer.

INCLINATION

Involvement creates experience and experience shapes inclination. How well a brand delivered against expectations is critical to developing the loyalty loop, advocacy and repurchase decision. An unsatisfied consumer exits the journey to look after further options.