You’re at a movie theater and about to buy some popcorn. You see three options on the menu:
- Small: $3
- Medium: $6.50
- Large: $7
Which one would you choose?
If you’re like most people, you’d probably go for the large one. After all, it’s only 50 cents more than the medium one, and you get a lot more popcorn. Plus, you don’t want to feel like you’re missing out on a good deal.
But what if I told you that the medium option is actually a decoy? It’s there to make the large option look more attractive and valuable by comparison. It’s unlikely that anyone would buy the medium option on its own, but it serves a purpose: it influences your perception of the other options.
This is an example of decoy pricing, a powerful psychological technique that can help you optimize your SaaS pricing strategy and increase your sales.
|Effect||Definition||Example in Decoy Pricing|
|Anchoring||Using an initial piece of information as a reference point for evaluating subsequent information.||The presence of the decoy option with a higher price makes the preferred option look like a better deal.|
|Framing||Interpreting information differently depending on how it's presented or worded.||The decoy option frames the preferred option as a smart choice offering more value for money.|
What is Decoy Pricing?
Decoy pricing is a pricing strategy that involves offering an unattractive or inferior option next to your preferred option to make it seem more appealing and desirable.
The decoy option is usually priced similarly or slightly lower than your preferred option but with fewer features or benefits. This creates a contrast effect that makes your preferred option stand out as a better value proposition.
Decoy pricing aims to nudge customers towards choosing your preferred option over other alternatives, such as competitors’ products or doing nothing at all.
Why Decoy Pricing Works
Decoy pricing works because humans are not very good at making rational decisions based on absolute values. Instead, we rely on relative comparisons and heuristics (mental shortcuts) to simplify our choices.
One of these heuristics is called anchoring. Anchoring is when we use an initial piece of information (the anchor) as a reference point for evaluating subsequent information. For example, if we see a shirt priced at $100 first, then another shirt priced at $50 seems like a bargain. But if we see the $50 shirt first, then the $100 shirt seems expensive.
Another heuristic is called framing. Framing is when we interpret information differently depending on how it’s presented or worded. For example, if we see an offer that says, “Buy one get one free,” we might think it’s a great deal. But if we see an offer that says “50% off when you buy two”, we might think it’s less attractive. Even though both offers are mathematically equivalent, they create different impressions in our minds.
Decoy pricing leverages both anchoring and framing effects to influence our decision-making process. Adding an unattractive option next to your preferred option creates an anchor that makes your preferred option look better by comparison. You also frame your preferred option as a smart choice that offers more value for money than the decoy option.
|1. Identify your preferred option||Determine the option that maximizes revenue and customer satisfaction.|
|2. Identify your decoy option||Choose an option with fewer features/benefits and a similar or slightly lower price than the preferred option.|
|3. Create contrast between options||Ensure there's a noticeable difference between the options for customers to perceive the value gap.|
|4. Test and optimize pricing||Experiment with different feature and price combinations to find the optimal balance between conversion rate and revenue per customer.|
How to Use Decoy Pricing for Your SaaS Product
Decoy pricing can be applied to any product or service that has multiple options or tiers with different features and prices.
Here are some steps to follow when using decoy pricing for your SaaS product:
- Identify your preferred option: This is the option that you want most customers to choose because it maximizes your revenue and customer satisfaction.
- Identify your decoy option: This is the option that you want few customers to choose because it has fewer features or benefits than your preferred option but a similar or slightly lower price.
- Make sure there’s enough contrast between your options: The difference between your options should be noticeable enough for customers to perceive the value gap between them.
- Test and optimize your pricing: Experiment with different combinations of features and prices for each option until you find the optimal balance between conversion rate and revenue per customer.
Examples of Decoy Pricing in SaaS
Many successful SaaS companies use decoy pricing in their pricing models. Here are some examples:
HubSpot is a platform for marketing, sales, and customer service. It offers four plans: Free (limited features), Starter ($45/month), Professional ($800/month), and Enterprise ($3,200/month).
The Starter plan acts as a decoy for HubSpot’s Professional plan, which has many more features such as automation workflows, reporting dashboards, custom domains, etc., but costs almost 18 times more than the Starter plan. The huge price jump creates an anchoring effect that makes the Professional plan seem more valuable by comparison. The Starter plan also frames the Professional plan as a wise investment for growing businesses that need more advanced tools and support.
Shutterstock is a stock photo and video platform that offers three plans: Basic ($49 for five images), Professional ($199/month for 750 images), and Team ($379/month for 750 images and team features).
The Basic plan acts as a decoy for Shutterstock’s Professional plan, which has much more value per image (26 cents vs. $9.8) but costs only four times more than the Basic plan. The small price difference creates a contrast effect that makes the Professional plan look like a steal. The Basic plan also frames the Professional plan as a smart choice for frequent users who need access to a large and diverse library of content.
Amazon Web Services
Amazon Web Services (AWS) is a cloud computing platform that offers various services such as storage, computing, networking, database, etc. It uses a pay-as-you-go pricing model where customers pay for the amount of resources they use.
AWS uses decoy pricing in its storage service called S3. It offers four tiers of storage: Standard ($0.023/GB), Intelligent-Tiering ($0.025/GB), Standard-Infrequent Access ($0.0125/GB), and Glacier ($0.004/GB).
The Intelligent-Tiering tier acts as a decoy for AWS’s Standard tier, which has a slightly lower price but similar performance and availability. The small price difference creates an anchoring effect that makes the Standard tier look more attractive by comparison. The Intelligent-Tiering tier also frames the Standard tier as a simple and reliable option that doesn’t require any management or optimization.
Decoy pricing is a powerful technique that can help you optimize your SaaS pricing strategy and increase your sales. By adding an unattractive or inferior option next to your preferred option, you can influence your customers’ perception of value and nudge them toward choosing your preferred option over other alternatives.
To use decoy pricing effectively, you need to identify your preferred option, create your decoy option, ensure enough contrast between your options, and test and optimize your pricing.
Decoy pricing can be applied to any product or service that has multiple options or tiers with different features and prices. Some examples of SaaS companies that use decoy pricing are HubSpot, Shutterstock, and Amazon Web Services.