Why Do Placebos Work?

MIT Behavioral Economist Dan Ariely discusses the medical effectiveness of placebos, and outlines how expectations of a given situation will affect our experiences of that situation.

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Decoy pricing is a method of strategically pricing products so that consumers will choose the one that you most want to sell to them. This can work well if you have a certain product that reaps a greater profit margin or if you are over stocked on a certain item, and you don’t want to start discounting.

The method itself is quite simple as it plays on one of the factors humans use in decision making: relativity.

Whether it be in love, social class, or consumer products, we all view things relative to the things around it. Take the following image for example.


This visual demonstration depicts the illusion of relativity. Although the circles in the middle are the same size, when placed within the smaller circles on the left the circle seems bigger than when it is placed within the larger circles on the right.

Dan Ariely in his book ‘Predictably Irrational’ first stumbled across decoy pricing in an ad presented by the Economist. The ad consisted of 3 different offers. These offers were:

Economist.com subscription – US $59
Print subscription – US $125
Print & web subscription – US $125

As you read over the offers above, you are probably sitting there and thinking “..who in their right mind would purchase the print only subscription?”. You are thinking that because you see greater value in the print & web offer, relative to the print only offer.

To prove this theory Ariely gave these options to 100 students from MIT’s Sloan School of Management. The students selected as follows:

Economist.com subscription – US $59 (16 students)
Print subscription – US $125 (0 students)
Print & web subscription – US $125 (84 students)

So far the results were as expected; the students saw greater value in the print & web subscription. Being the fine academic that he is, Ariely decided to remove the print only subscription before testing another group of 100 students to see if the results would be similar. This time the students selected as follows:

Economist.com subscription – US $59 (68 students)
Print & web subscription – US $125 (32 students)

Ariely’s theory was right. In the absence of the decoy, the students choose much differently. The Economist had successfully controlled the outcome of the decision making process for their customers.

Decision making for humans is hard, so why not make it easier for us? By providing a much easier way of choosing a product (based on value), you are more likely to increase your amount of sales. This is because people can decide on the spot, rather than having to go home and think about it – which could lead to you losing them to a competitor.

Have you had any success with decoy pricing? We’d love to hear your stories.

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