The Art of Decoy Pricing

Over Christmas, I read Dan Ariely’s “Predictably Irrational” – a fascinating Book. One surprise, then a few snippets that suggest Apple execute a few important things to textbook standard – albeit with one glaring mistake.

The one surprise was from The Economist, who offered:

Economist Subscription Offer

At first blush, a silly offer. In tests, 16% chose the Internet only edition, 0% the print only one, and 84% the print plus Internet offer. However, offer only the basic and top flight offer:

Economist Revised Offer

and the takeup goes to 68% and 32% respectively. Hence, the presence of a similar, but clearly inferior, decoy swings the takeup of the high priced option from 32% to 84% of the takeup. Which is exactly what happened when Apple’s iPhone line-up became the iPhone 4s, 5c and 5s – with the 5c and 5s prices starting at circa £469 and £549 respectively. Everyone jumped at the most expensive 5s model, leaving short supply of that model and a glut of the slightly less expensive (but less capable) unsold 5c models.

As to the more positive things that reminded me of Apple, the following struck chords:

  • Perceived prices being high through restricted product supply
  • Setting (high) price anchors with arbitrary coherence; Johnny Ives gushing verbals at Apple announcement events, no less. Reassuringly expensive, just like some french lager ads.
  • the use of “free” components to take all risk out of a risk/reward comparison
  • Social norms of help at a Genius Bar versus competitor costly pains when a product goes wrong
  • Minimising options. I recall Steve Jobs redefining the Mac lineup to a 2 x 2 matrix; consumer/professional vs laptop/desktop, one model in each box. Likewise iPhones and iPads to good/better/best models.
  • Lower prices distinctively make us believe lower quality; Apple do the opposite, even wrapping the packaging to reinforce the quality feel. Even their boxes are things of beauty, apparently no expense spared.

There are further snippets about folks following a herd instinct as a sense of belonging (ordering meals aloud in a Restaurant; make sure you call your choice first!). Also the fact that if you affirm your honesty in some way before initiating any task, you are likely to follow it with the absolute truth – something our judicial system does very well.

I ended up in a difference of opinion with a friend on DNA testing (Jane ordered a testing kit from 23andMe, just before the US Food & Drug Administration told them to stop releasing results of their genetic tests). Textbook defence on my part having invested in one side of the argument, just like supporters of opposing football teams having self centred views of the exact same incident (it’s a penalty! No, he dived! How could you think that, it was right in front of you! …).

So, with that, some karma. I know how I’d react, and I could see my own irrationality.

People. They are confusing things. And in all ways but one slight pricing hiccup, Apple are eerily clever.