How Retailers Can Increase Revenue 39.1% Using Decoy Pricing (Dan Ariely)

Renowned behavioral economist Dan Ariely returned to his roots at Duke University following stints at MIT that included tons of thought-provoking, mind-bending research on human behavior (more correctly on human irrational behavior), which has implications and value for retail competitive pricing with regard to buyer behavior. In this video on pricing psychology, An Amazing Pricing Trick Using Price Relativity, Ariely shows the value of adding a third choice, decoy pricing, so that customers make a difficult decision more easily -- and more favorably to the retailer. Results indicate that "leading" the buyer to the desired choice and price provided a revenue increase of 39.1%.

 

Be careful not to offer the buyer too many choices -- or, conversely, not enough choices. Or as Goldilocks would say, "Just Right." (See recent blog Why “Goldilocks Pricing” Is Perfect Competitive Pricing Ploy: Provides Customer Choice & Retailer Profit

The research in the video is included in Ariely's first best-seller, Predictably Irrational.

Ariely has spent his career studying the values of human (irrational) behavior (which retailers can tap to price for profit) -- including issues such as the value of zero (pricing), the value of comparable choices, the more choice the more people fall away from making good decisions (i.e. buying), choosing behavior, cheating ("the fudging that good people do just a little bit"), the power of "free," working for rewards… in short, Predictably Irrational behavior. 

Retailers and economists can build on these idiosyncrasies -- and hopefully, make it a better world, both business-wise and for humanity, based on knowing that people behave in certain, irrational, but predictable ways, even if we don't always understand why.

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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