Leveraging Contextual Effects in Decision Making
Leveraging Contextual Effects in Decision Making
Psychological Pricing (Part 6): Leveraging Contextual Effects in Decision Making
In the intricate world of consumer psychology, understanding the nuances of decision-making can spell the difference between a successful marketing strategy and missed opportunities. One such phenomenon that holds significant sway over consumer behaviour is the interplay of cognitive biases in decision-making processes. Among these biases, the compromise effect, decoy effect, descending order effect, and anchoring effect stand out as powerful tools for marketers and retailers alike. In this exploration, we delve into these psychological principles, unravelling their mechanisms, real-world applications, and implications for businesses seeking to influence consumer choices and drive sales.
1. The Compromise Effect:
A cognitive bias known as the compromise effect is seen in decision-making, where people typically select the middle option out of three options. This phenomenon results from the belief that the middle option is more sensible and appealing than the extreme options, which are perceived to be too expensive and too cheap.
The compromise effect is a useful tool in consumer psychology that retailers and marketers can use to sway consumers' decisions about what to buy. Businesses can maximize sales by strategically positioning their products or services to guide consumers toward preferred options.
Consider a car dealership offering three models: a basic economy car, a luxury sedan, and a mid-range model with moderate pricing and features. Despite the luxury car's allure and the affordability of the economy option, many consumers may opt for the mid-range model, perceiving it as offering the best value proposition.
E-commerce platforms often utilize the compromise effect in their product listings. For instance, when shopping for electronics items like Mobiles, consumers may encounter three options: a budget-friendly model, a premium version with advanced features, and a mid-tier option offering a balance of performance and affordability. Due to its perceived value, the mid-tier product is often the preferred choice.
To summarise, offer a third more expensive option to draw customers attention to the next most expensive option.
2. The Decoy Effect:
The decoy effect is a cognitive bias that occurs when introducing a much less desirable option, which influences individuals to favour a specific choice among alternatives. Marketers can manipulate consumer preferences and drive desired outcomes by strategically presenting a decoy.
Example 1: Imagine a movie theatre offering three ticket packages:
A standard ticket for $10
A premium ticket with premium seats for $17
A deluxe ticket with premium seats, free food and some added benefits priced at $20.
While the premium ticket may seem appealing, the introduction of a decoy—a premium ticket with minimal additional benefits but priced at $17 — makes the $20 deluxe ticket appear more attractive in comparison.
Example 2: Imagine a gym offering two membership options: Basic for $50 per month and Premium for $80 per month. When a third membership option, VIP, is introduced for $100 per month with a personal trainer and additional perks, more customers may opt for the VIP membership, perceiving it as a better value compared to the premium option.
How is it different from the compromise effect:
The decoy effect occurs when the introduction of a third, less desirable option changes the relative attractiveness of the original options.
The compromise effect occurs when consumers tend to choose an intermediate option when presented with three options: one expensive and one cheap option
Combo Decoy Effect: In marketing, combo decoys involve the strategic placement of multiple inferior options alongside a target option to enhance its perceived value. By contrasting options, businesses can steer consumers towards preferred choices.
Example: A subscription to a newspaper. The digital version of it costs $19/year whereas the digital version and the printed version would cost around $55/year. Here, people usually tend to go with the cheaper deal.
Now if we introduce a decoy option which give access to only the print version of the newspaper at similar price of $50/year. People would tend to go for the $55/year option, providing both digital and printed versions of the newspaper.
3. The Descending Order Effect:
The descending order effect, also known as the menu pricing effect, refers to the impact of item sequence on consumer spending behaviour. When items are listed from least to most expensive, individuals tend to spend less overall than when items are presented in descending order.
Example:
Think of a menu at a restaurant with starters, entrées, and desserts. Customers may feel that the meal is more affordable and spend less if the items are arranged from the least expensive appetizer to the most expensive dessert. On the other hand, presenting products in order of decreasing price could tempt customers to choose more expensive options, increasing their spending.
To take advantage of the descending order effect, online retailers strategically place their product listings in descending order. Luxury brands might place their flagship items at the top to draw customers in and suggest exclusivity at higher price points.