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How The Decoy Effect Can Help Improve Shopify Profits
Last modified: November 16, 2023
When it comes to building profitability on your Shopify store, you need to look at increasing the average order value of your sales. The higher the average order value, the higher profits you will make on each order and therefore the fewer number of customers you need to make your store financially sustainable.
To help you with increasing the average order value, there are several techniques you can use. However, one that is often not used, but can be very powerful, is the decoy effect.
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What Is The Decoy Effect?
The decoy effect is when you have a pricing strategy that convinces the customer that going for a more expensive option is more value to them. This is achieved by using three price points with the mid-price point and the high-price point so close together that the added value of the high-price point seems more valuable for the customer.
For instance, if you’re in a cinema and they offer three sizes of soda: small, medium and large and these are priced at $4, $8 and $10, the large at $10 would seem more valuable because it is only $2 extra for what is equivalent to a small and a medium added together (in theory).
Research has shown that this strategy is very effective with some studies showing a near 300% increase in sales of the top-tier item.
A classic example would be the Economist. It sold subscriptions to its publications with a digital copy, hard copy and a digital plus hard copy. The Digital copy was half the price of the hard copy, but the combined offering (digital and hard copy) was the same level as the hard copy. The result was that they increased conversion on their website, earning more revenue. Most of the sales were for the digital and hard copies.
Prior to this change, most subscribers were to their digital only offering.
How To Add A Decoy Strategy Into Your Store
If you sell something in amounts (like weights, sizes, etc.) that customers can choose from (i.e. not clothes) or you sell memberships, software or licenses, then you can easily use the decoy effect. To start with, choose three levels of your product. It’s important to ensure that the top-tier level is at least the amount of the other two levels combined.
Then you need to create a pricing strategy that puts the lower level product at a specific point, the mid-priced product at about double that and the final level at about the combination of the mid-price point plus half the low-price point.
Alternatively, you could determine what the price would need to be for the profit level to be 80% for the low and mid-price points and the top-tier product to be about 40-50% profit margin. The idea is that you’re trying to discourage people from buying the two lower levels and get more people to buy the top tier product.
Conclusion: How The Decoy Effect Can Help Improve Shopify Profits
The decoy effect can really help you improve Shopify profits. To make a great success of the decoy effect you might need something like a pricing table or good graphics. You should always have good product descriptions to showcase why your top tier is more valuable than your other tier items. The great thing about the decoy effect is that it can be used in most niches and doesn’t cost you any money to implement it but it can have fantastic results.
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Can the decoy effect backfire and if so, how can this be prevented?
The decoy effect can backfire if customers perceive it as manipulative or if the pricing structure is confusing. To prevent this, ensure clear communication and maintain a logical, customer-friendly pricing strategy.
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Is the decoy effect ethical in e-commerce marketing?
The decoy effect is generally considered ethical in e-commerce marketing as long as it’s used transparently. It’s a marketing strategy that doesn’t deceive but rather influences customer choice through clever pricing and presentation.
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Can the decoy effect be used in service-based Shopify stores?
Yes, the decoy effect can be effectively used in service-based Shopify stores. By offering multiple service packages with strategic pricing, businesses can guide customers towards choosing a more profitable option.
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