The Decoy Effect: Guide Clients To The Most Valuable Option

I have a sweet spot for ice cream (pun intended).

And every time I go to the creamery down the road, I always end up getting the largest size.

Why? It’s the best value and I can’t pass up a good deal. Here’s what I mean…

As I stand in line dreaming of sampling every ice cream flavor, I’m faced with their pricing sign that hangs on the wall.

• Small (1 scoop) - $3.50

• Medium (2 scoops) - $5.00

• Large (3 scoops) - $6.00

What do you think when you see those prices?

Here’s what I think: “One scoop isn’t enough. Two should be good but that doesn’t seem like a good deal. I mean, it’s only one more dollar to get a large. Let’s just do that.”

That’s the decoy effect at work.

What is the decoy effect?

The decoy effect increases the perceived value of a target offer by strategically including multiple offers.

When presented with two options, individuals might struggle to make a decision. However, by adding a third option that serves as a "decoy," one of the original choices becomes more appealing. This third option is not meant to be chosen; instead, it's strategically designed to shift preferences toward the target choice by enhancing the value in comparison.

Does it work for architecture fees?

Absolutely! Tiered pricing models have been circulating the industry for years now, but they’re not always implemented strategically.

By applying the decoy effect to a tiered pricing strategy, firms will encourage more clients to select the best, most valuable pricing option while simultaneously increasing the firm’s average contract value.

It’s a win-win. The firm captures more revenue and clients gets the most value.

Implementing the decoy effect

After you have the right offers in place, implementing the decoy effect is relatively simple. But here are all the necessary components:

01 // Number of options

Typically, three options are ideal. This allows enough diversity without overwhelming the client. The middle option is usually the decoy, making the value of the highest-priced option more obvious.

02 // Offer differentiation

To create multiple pricing options, start breaking down the deliverables of your service. For example, things like renderings, client meetings, virtual tours, material selections, etc.

The lowest-priced option will just include the basics while the highest-priced option is chock full of all the elements of a premier client experience. (PS - maybe I should write another newsletter in the future that goes more in depth on defining the tiered pricing?)

03 // Pricing strategy

Use competitive analysis, cost-plus pricing, and value-based pricing strategies to determine your baseline (lowest tier). Then, craft the decoy and premium tiers around this base, ensuring each tier offers progressively better value and benefits.

The decoy (middle option) should be priced close enough to the high-end option to make the value of the latter obvious and appealing.

For example, if your basic service is priced at $21,000, set the decoy at $23,500 and the premium option at $25,000. The small jump in price from decoy to premium is what makes the value so clear and the choice much simpler.

TL;DR

In a nutshell, when clients look at your fee proposals, they should feel they are making the smart choice—no second guessing, just clear, straightforward decisions that feel right. To implement the decoy effect:

1. Use three pricing options.

2. Differentiate each option, ensuring each gets progressively better.

3. Use the price of the middle option (decoy) to make the value of the highest-priced option obvious and appealing.