Apple's Brilliant Decoy Pricing Game

Ben Kunz has an insightful short article about how Apple's pricing strategies bend your mind into thinking their products are a good deal.

Decoys, in marketing, are products, services, or price points that a business doesn't really want you to take, but rather use as a reference to make another product look better.

Economist Dan Ariely, author of Predictably Irrational, gives the classic example of a Realtor who shows you a home that needs a new roof, right before taking you to a higher-priced house she really wants to sell. It's hard to tell if a $400,000 colonial is a good deal - but compared with a $380,000 home that needs work, it looks quite good...

Decoys explain why Apple often sells each gadget in a pricing series, such as the new iPod Touch's $229, $299, and $399 price points for different storage capacities. You may gladly spend $229 to get a hot media player, thinking it's a deal compared with the highest-priced version and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features.

The $399 "decoy" has clouded your judgment. Apple wins the best of both worlds - stoking demand for products that look like bargains and for all the decoys it sells at much higher prices. Yes, some people will spend $399 for a music player with slightly better technology - and Apple makes even fatter margins.

Read the full story at Bloomberg Businessweek.