Sometimes numbers lie. Assuming you have no innate preference towards either of the two colors, it might be hard to choose between a red Civic and a blue Civic. If instead you have a choice between a red Civic, a blue Civic, and a red Civic without air conditioning, the choice becomes much easier. Dan Ariely in his book Predictably Irrational says his research shows that most people would choose the red Civic with air conditioning over both the other cars. Details inside.
Regarding the graphic above, Ariely writes:
Option (A) is better on attribute 1–let’s say quality. Option (B) is better on attribute 2–let’s say beauty. Obviously these are two very different options and the choice between them is not simple. Now consider what happens if add another option, called (-A). This option is clearly worse than option (A), but it is also very similar to it, making the comparison between them easy, and suggesting that (A) is not only better than (-A) but also better than (B).
It’s called decoy pricing, and stores use it all the time to get you to buy what they really what you to buy.
For instance, as another example in the book shows,
An ad for an Economist subscription gave 3 options
1) Print-only for $59
2) Web subscription only access for $125
3) Print and web access for $125
Obviously 3 looks like the best deal. In an experiment Dan ran with this setup, 16 subjects chose option 1, zero chose option 2, and 84 chose option 3.
What if we remove option 2 and have people choose between print-only and print and web access, all at the same rates? The results should be the same, right, after all, it’s the same deal. Instead, the results changed dramatically. 68 chose print-only and 32 chose print and web access. It was only by option 3′s relation to option 2 that made option 3 look so good. The subscription marketers at the Economist knew this and used it to boost their sales.
Can you recall any instances of decoy pricing you’ve seen?
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That’s sort of an outlier case in decoy pricing. The much more common decoy pricing is something we’re all very familiar with, and is a cult favorite here at the Consumerist: bulk discount. People are conditioned to buy in bulk, buy larger packaging, buy options, or buy bundles because there’s the implied promise of a few bucks off the total price. Playstation bundles, for example. Buy the undercoating and get some options thrown in free, for another. Like we’ve often seen here, it’s not always the case you’re getting a better deal, or even paying less than if you just bought individual components. You should be aware of exactly what you’re getting, what you are paying for it, and, if possible, what you could be paying for it elsewhere.
In fact, that really should be tip #1 in all things Consumerist, and it would be nice to see something like it mentioned explicitly in such posts.
The example provided in the book (a great read, by the way) is for subscriptions to The Economist.
(1) Economist.com subscription $59
(2) Print subscription $125
(3) Print & web subscription $125
Since it’s hard to compare (1) to (2), most people end up comparing (2) to (3) and end up purchasing (3) – simply because it seems like a better value. The author did some research and found that most people would choose option (3) rather than (1) or (2). When he removed option (2), more people ended up choosing (1) rather than (3).
@Trai_Dep: Having recently purchased a digital camera, I think this is a great example. Companies are extremely clever with their price points with respect to electronic items, in general.
@aquaregia: You really don’t understand the point of this site, do you? Note the word “consumer†in the title.
@notallcompaniesareevil: What the fuck are you doing reading this site then? Or is my sarcasm detector off?
Everything that has transpired has done so according to my design. Your friends, over there on my retail auto lot, are walking into a trap. It was I who allowed them to know about the AC option on the red car! The blue car is quite safe from your pitiful little band.
@aquaregia:
I assure you, the author was *NOT* railing against those who sell. I just saw this guy speak (talk about timely), and on the contrary, it was an academic pursuit of his and I was in a crowd of MBA students and they were very interested in this topic for obvious reasons. I think that knowing WHY we make decisions is something that we can all benefit from, and trying to characterize this as ‘railing against those who sell’ is disingenuous.
@catcherintheeye:
Well, I’m not swearing, that’s for sure. Seriously, though, I’m here to learn things, to see things from other points of view. As I mentioned, I often disagree with what is posted here, and to the extent I can lend another viewpoint the discussion, I think more people can be bettered for having visited. Confirming your opinion every day leads to a dull existence. Challenge it, my friend, even if the challenges fail.
And for the record, there is no sarcasm in my sentiment that this post is actually very interesting. I think it’s one of the most educational ones to come along in a while. Worlds better than the mass of “OMG, this sign implies the sale price is higher than the regular price! Everyone point and laugh and then never shop at Wal-mart again!”.
I see a lot of this kind of thing that is in the example,but I think that the real “decoy pricing ” being practiced now involves hidden fees and charges that are not mentioned until near or at the very end of the transaction. ( By this time you will have invested quite a bit of time and effort and have some emotional involvement in the purchase, making it hard to back out over a small fee)
Examples – Heartland America sends me tons ofcatalogs. Dump trucks full of them. There are things in there that look interesting. But at the bottom of the order page and in the catalog printed order form,there lurks a $2 “order processing fee”. Deal breaker.” Order fulfillment is a cost of doing business. I use their catalogs as fire starters…
Car dealers- I am currently trying to buy a used car. An undisclosed $599 ” doc fee” sent me packing after we negotiated the deal. (This is a 10% bump on a $6000 car that I was buying). Again, the disclosure came too late in the deal to allow apples-to apples pricing comparisons.
Cell Phones- It used to cost money to make money. It now costs money to spend money. Lots of companies are now charging you for paying in cash.
Business has always been about sharp dealing,but it seems like big companies spend almost as much effort to get into our heads as they do to get in our wallet.
I like how a lot of people are saying “I wouldn’t fall for that” but
A) it obviously works or they wouldn’t do it, and
B) something like 90% of people think they are “above average”
This is common with household durable goods. Instead of lowering the price on a lower quality model, they come out with a higher quality model at double the price.
Before you had the option of buying an expensive household item, or not having one at all. But NOW, you have the option of buying a less expensive household item or a more expensive household item. Guess what everyone picks? They gimmicked you into buying it.
It’s about choices. If you see that option C saves you money then you choose it. Option B could have it’s price bumped up to “encourage” you to choose option C, but once again would someone choose option B and get the lesser deal?
Being able to walk from the deal and find a better one elsewhere is what isn’t mentioned here. This tactic is used with extended warranty’s. You have already made the decision to buy so now do you go for the one year or two year extended warranty. A.) who wouldn’t want to insure their purchase for a few dollars. B.) 2 years is only $50 where 1 year is $40. How many people would say, “Forget it…I don’t want the thing”. Then how many people would say, “Forget it…I am not insuring it. I know it will never break.” Then how many people would say, “Forget it, I only need 1 year even though 2 years is the much better deal”.
It’s all about choices. If you know what you want and the value of it, then presenting a phony option to “encourage” you to pick what the store wants you to purchase shouldn’t pursuade you.
Hey-y-y-y….I wrote that Wikipedia article.
@Wasabe: Really?
Excellent work in making a complicated process understandable to the laymen. Inspired examples, exploring both axes of consideration. Simply awesome job!
My most memorable instance of decoy pricing has been with iPods. Back around the third generation of the device, you could be the lowest end version for $350, the mid-range version for $450 and the high-end version for $500 (or something like that). It seemed totally silly to buy the mid-range device, even if that’s the size you wanted, since the most expensive was only a relatively small amount more. So, basically, if you wanted anything but the cheapest device you felt better off buying the most expensive option.
@Michael Belisle: You’ve hit on one of the two economic pet peeves of my teen years, one more obvious than the other:
1) if you are eating in and the place has free refills, what kind of numbnut orders anything other than the small drink?
2) OK so you’re taking geometry, like, right now over at the high school, dude, and you walk out of school, step into the pizza hut and tell me that the 16″ pizza is twice the size of the 8″?
And no there weren’t cool independent pizza joints in central North Carolina in 1980. So don’t go there.
@notallcompaniesareevil:
Thanks Maharishi
@kerry: Disney World loves this approach 1 day is like 90, 2 days is 175, by the time you get up to the 4 and 5 day tickets, you’re spending a few pennies a day extra to extend. So it’s hard to say no.
But of course the onsite hotel still costs $150 or so per night and the food will still set up back triple figures most days yada yada yada. It’s a model of brilliant marketing.
@aquaregia: Once again, you assume negativity where there is none. This is an interesting article on an extremely common sales tactic, not some kind of vitriolic rant. The purpose here is to forewarn a consumer, so that they can recognize this tactic and respond in a more savvy manner.
Only a scammer wants their customers to be ill-informed.
@balthisar: Completely off topic, and i apologize, but I’m a big fan of Nikon. The D50 and D40x are great cameras.
Just throwing that out there. Complete disclosure: there was one time in my life when I wrote Nikon advertising. Not anymore, haven’t had Nikon as a client for over a year. Just making sure you know this isnt some marketing douche seeing someone on a forum and saying “I can convince him to get a nikon.”
I lurv Economics.
@JMB: Having actually had to make that exact choice, I can say that’s pretty much how it works. I assume that part of it has to with the fact that the marginal cost of the online subscription to the publisher is zero.
@gjaluvka:
The numbnut who takes a glass with him when he leaves.
Let’s say this effect works. Let’s say you fall for it. Whose fault is it that you can’t be bothered to think rigorously before spending?
@rpm773: LMFAO
Hey. You’re giving away the tricks of the trade.
8GB iPhone 3G: $199
8GB iPod Touch: $299
Clearly the iPod Touch is a decoy designed to get you to choose the iPhone 3G over other “touch” phones.
@Geekybiker: Yeah, and if I pay the extra quarter and drink that extra large drink, I’m going to soak my seat, too.
@zanhecht: I’m sure if you sign on for two years of cell service, AT&T will give you an 8GB iPod Touch for $99!
One great example is the funeral casket industry in the US. Read The American Way of Dying to understand how a funeral director will steer you from the pine box you wanted to the Luxurious Ultrasuede-lined enameled metal casket your deceased loved one would really appreciate if he/she weren’t… uh… stiff.
One reason this works is that for most of the things we buy, we really have no idea what they are actually “worth” other than by immediate comparisons. Is regular gas worth $4.06/gallon? Beats me, I have no idea how much it costs to make and distribute gas. But if Super Unleaded is $4.36, I guess $4.06 for regular is a good price.
Gilette does this notoriously with their razors. Check out the price of the blades.