Premium decoy pricing is when a firm set the price of one good deliberately high in order to make other goods appear good value and attractive.
For example, a clothes shop may have a few jackets priced at £300. This gives the impression that the clothes brand is high quality. Then they may offer a second ‘non-premium’ jacket at £150. At 50% less than the high offer, the consumer may feel the £150 jacket is good value.
Why premium decoy pricing works
Premium decoy pricing works because of the psychological importance of relative pricing. Consumers like to feel they are getting a ‘bargain’ and getting a similar product at much reduced price enables a sense of good value.
Secondly, by launching a flagship product – that is very expensive, it can generate interest in the brand. Even if the high priced product is overly expensive, it may improve the brand image of the whole product line.
Price skimming. By setting a very high price for some range of goods with higher market value, the firm may also be able to exploit customers who have very inelastic demand and are willing to buy the most expensive good. For example, a gold plated iPhone may retail for $20,000 – this may appeal to those who wish to buy a good with a perceived status symbol.
Limitations of premium decoy pricing
A high price may discourage consumers. If consumers only glance at the higher-priced good, they may write off the brand/company as too expensive and not buy. It could be a high risk to set a high price and hope consumer sees the lower-priced good.
It depends on the product in question. For some goods that are very price-sensitive, trying to set higher price for some premium goods may be ineffective as customers do not equate high price with higher value.
Customers may see through it. Some consumers may feel the higher price is just a rip-off and this could negatively affect their opinion of the whole brand.
It depends on the competitiveness of the market. If it is easy for consumers to compare prices, then it will be less influenced by premium decoy pricing because they will be comparing the price of different firms rather than between two similar products of same company.
Examples of premium decoy pricing
Super unleaded. Petrol stations often sell two varieties of petrol
- Ordinary unleaded
- Super-unleaded petrol. The super-unleaded is 20% more expensive and may give consumers the impression the basic petrol is better value.
Special model of bicycle. A bike manufacturer may bring out a limited edition bicycle that is 50% more expensive than the standard model with top of the range accessories. The eye-catching bike and model may make the standard model appear better value.
Limited edition handbag. Many handbag manufacturers bring out limited edition very high priced bags. For example, Chanel Imitation Pearl Flap bag is priced at approx £11,000. Very few will be able to buy, but it gives the impression of luxury and will help brand image for more affordable Chanel handbags.