The book is a great read for anyone involved in sales or putting together pricing structures, because it touches on one very interesting piece of information that can have a drastic effect on sales figures, if put into practice properly. We’ll examine that phenomenon, which we’ll call pricing relativity, or perhaps better, value relativity.

The book details a set of studies done at academic institutes in the United States in which test subjects were given sets of offers and asked which they would be most likely to buy. The results showed an incredibly interesting trend which demonstrated that people do not make buying decisions based on absolute value, they make buying decisions based on relative value.

Essentially, it’s not the perceived value of the particular item that counts, what matters is the perceived value of that item in relation to other similar items.

For instance, one example used in the book is a magazine subscription ad in which the available subscription options are a) online only for $59  b) print only for $125 or c) print and online for $125. When confronted with this set of options, the vast majority of subjects chose option c, print and online, while some chose option a, and almost none chose option b.

The test was then run again, but this time, option b was removed. If people were making their buying decisions logically, in theory the results should be the same. After all, the absolute value of option c has not changed, and the only option removed was the one that no one chose anyways.

However, the actual results showed that in the second test, the majority of subjects chose option a, the cheaper online only subscription, while only some choosing the higher priced option. What had changed?

The difference in the two tests is that in the second test, option b, the “decoy” had been removed. In the first test, option b was $125 for print only, and option c was also $125 for both print and internet. Therefor, while the absolute value of option c had not changed, the relative value of option c was significantly higher in the first test because it was sitting beside an option of equal price, but less perceived value.

After all, if print only is $125 and print and online is also $125, then seemingly if we choose option c, we’re getting the online subscription free of charge! In the second test, with the decoy removed, people now no longer have that comparison to make, and with the relative value of option C now diminished, many opt to go for the cheaper option.

Understanding this pattern in buying behavior can help you in setting your pricing and in boosting sales for slow moving products. For instance, if you have only one product for sale, and you’ve found that it isn’t selling the way you’d like it to, consider introducing a more expensive version of that item.

While you may sell some of the higher end version, the real effect will be that people will now have a comparison to make, and in relation to the more expensive option, the original item will seem of greater value, and sales may increase substantially.  This very scenario has been tested and proven to work in the past.

This concept of relative value driving people’s buying decisions is an exceptionally important one for any entrepreneur to understand and I’d highly recommend you read into it in depth. The book is called Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely and as well as this topic, it covers many other areas of human decision making that can be applied to help your business succeed.