Decoy Effect In A Nutshell

The decoy effect is a psychological phenomenon where inferior – or decoy – options influence consumer preferences. Businesses use the decoy effect to nudge potential customers toward the desired target product. The decoy effect is staged by placing a competitor product and a decoy product, which is primarily used to nudge the customer toward the target product.

Aspect	Explanation
Decoy Effect	The Decoy Effect is a cognitive bias observed in decision-making, where the introduction of a third, less attractive option (decoy) makes one of the existing options more appealing, influencing the choice between the original options.
Description	– The Decoy Effect is a form of contextual persuasion, where the presence of a decoy manipulates the relative attractiveness of other choices.
Purpose	– Businesses and marketers often use the Decoy Effect to guide consumers toward choosing a specific option, typically one that is more profitable for the seller.
Example	– In pricing, a decoy may be added to make a more expensive option seem like a better value. For instance, offering a small popcorn for $4, a large for $7, or a large with a free medium for $7 makes the large with a free medium more attractive.
Neuroeconomics	– The Decoy Effect has been studied in the field of neuroeconomics, where researchers examine how the brain responds to various decision-making scenarios involving decoy options.
Consumer Behavior	– Understanding the Decoy Effect helps businesses design pricing strategies and product offerings that can influence consumer choices, ultimately driving sales and revenue.
Rationality vs. Bias	– The Decoy Effect demonstrates that human decision-making is not always rational and can be influenced by seemingly irrelevant options. It highlights the importance of understanding biases in choices.
Consumer Awareness	– Once consumers are aware of the Decoy Effect, they may be more cautious in their decision-making, but it can still be effective, especially when people are making quick, intuitive choices.
Ethical Considerations	– Some argue that the use of the Decoy Effect can be manipulative and raise ethical questions about transparency and fairness in marketing and decision contexts.
In Sum	The Decoy Effect is a cognitive bias that illustrates how the presence of a less attractive option can influence decision-making. Businesses and marketers use this effect strategically to guide consumers toward desired choices, particularly in pricing and product offerings.

Table of Contents

Understanding the decoy effect

Price is one of the most sensitive elements of a marketing mix.

Businesses understand this well and have devised pricing strategies that encourage the consumer to spend more.

The decoy effect is one such strategy.

To study how consumer product preferences are influenced by the effect, National Geographic studied the popcorn purchasing habits of cinemagoers.

When faced with only two choices – a $3 small popcorn or a $7 large popcorn – most purchased the small popcorn noting that the large was too expensive.

The experiment was then repeated with the addition of a $6.50 medium popcorn, and the consumers were again asked to choose.

This time, most chose the large $7 option.

By adding the medium-sized alternative, greater value was given to the larger size which was previously deemed too expensive.

In the context of the decoy effect, the medium $6.50 popcorn was the decoy because it was inferior to the larger option in value for money.

Decoys are deliberately inserted into product ranges to exploit consumer tendencies toward prioritizing value for money.

In dollar terms, the cinema was able to increase revenue by directing consumers from the small $3 option to the most expensive $7 option. The consumer, however, is more likely to spend money on a product or service they didn’t want or need.

Components of the decoy effect

The decoy effect is based on the concept of asymmetric domination, most evident when a consumer has three products or services to choose from. To explain this concept in more detail, let’s give each product a name:

The target product

Or the product that a business wants to you purchase.

The competitor product

Or the product that competes with the target.

The decoy product

Or the product designed to nudge a consumer toward the target product.

The decoy effect relies on the decoy product being asymmetrically dominated by the target and competitor product in at least two categories.

In the popcorn example, the two categories are price and size.

The study was successful because the medium popcorn was a decoy that was asymmetrically dominated.

In other words, the medium popcorn:

Contained more popcorn than the small size while being more expensive. As a result, it was only partially superior to the small size.
Contained less popcorn than the large size, but given that it was only 50 cents cheaper, represented less value for money than the large size.

Here, the decoy (medium) size is inserted to make the larger size more attractive.

It is not inserted to make the smaller size more attractive, making the dominance asymmetrical.

Applying the decoy effect in marketing

Marketers can use the decoy effect to their advantage and happily, research has found that consumer awareness of the effect does not diminish their tendency to choose the most expensive option.

Companies that offer tiered pricing or subscription plans are most likely to benefit from inserting decoys into their ranges.

Hosting companies can offer a feature-packed “Platinum” hosting plan that is only slightly more expensive than a lesser equipped “Gold” plan.

Coffee shops can offer large coffees closer in price to medium coffees.

In real estate, the value of a particular house can be highlighted by comparing it against two similarly priced houses with fewer features occupying less favorable neighborhoods.

Decoy Effect vs. Anchoring

anchoring-effect — The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Connected to the decoy effect, anchoring also leverages framing to change the perception of consumers toward various options.

The goal of anchoring is to channel users toward a specific price option.

Key takeaways

The decoy effect is a phenomenon where consumers change preference between two product options when a third product option is made available.
Marketers use the decoy effect to direct consumers to the product they want them to purchase. This is achieved through asymmetric domination, where a decoy product makes just one of the two remaining products attractive.
The decoy effect has almost limitless applications in business and marketing. However, it is most effective where tiered product ranges or subscription services are offered.

Case Studies

Movie Theater Popcorn:
- Target Product: Large Popcorn ($7)
- Competitor Product: Small Popcorn ($3)
- Decoy Product: Medium Popcorn ($6.50)
- Result: Introduction of the medium popcorn as a decoy makes the large popcorn more attractive, leading to more purchases of the large size.
Coffee Shop:
- Target Product: Large Coffee ($4)
- Competitor Product: Medium Coffee ($3)
- Decoy Product: Small Coffee ($2.50)
- Result: Customers are more inclined to choose the large coffee due to the presence of the decoy, even though it’s only slightly more expensive than the medium.
Cell Phone Plans:
- Target Product: Premium Plan with Unlimited Everything ($70/month)
- Competitor Product: Basic Plan with Limited Data ($40/month)
- Decoy Product: Mid-Tier Plan with Moderate Data ($50/month)
- Result: Customers are more likely to opt for the premium plan when presented with the decoy mid-tier plan, even though it’s more expensive.
Restaurant Menu:
- Target Product: Expensive Steak Dish ($30)
- Competitor Product: Chicken Dish ($20)
- Decoy Product: Vegetarian Pasta Dish ($25)
- Result: The presence of the decoy vegetarian pasta dish may lead customers to choose the expensive steak dish, as it seems like better value compared to the vegetarian option.
Gym Memberships:
- Target Product: Premium Gym Membership with All Amenities ($50/month)
- Competitor Product: Basic Gym Membership ($30/month)
- Decoy Product: Mid-Tier Gym Membership with Limited Amenities ($35/month)
- Result: Customers are more inclined to select the premium gym membership when the mid-tier option is introduced as a decoy.
Online Streaming Services:
- Target Product: Premium Streaming Plan with 4K Quality and No Ads ($15/month)
- Competitor Product: Standard Streaming Plan with HD Quality and Some Ads ($10/month)
- Decoy Product: Basic Streaming Plan with SD Quality and Frequent Ads ($8/month)
- Result: The presence of the basic streaming plan as a decoy may drive more customers to choose the premium plan for a slightly higher price.
Electronics:
- Target Product: High-End Laptop with Advanced Features ($1500)
- Competitor Product: Mid-Range Laptop with Basic Features ($1000)
- Decoy Product: Low-End Laptop with Limited Features ($800)
- Result: Customers may opt for the high-end laptop when the low-end option is introduced as a decoy, as it offers significantly more value.

Decoy Effect Highlights:

Definition: The decoy effect is a psychological phenomenon in which the presence of an inferior “decoy” option influences consumer preferences towards a target product. This effect is used by businesses to steer customers towards desired purchasing choices.
Strategy Behind the Decoy Effect: By introducing a decoy product that is strategically priced and positioned, businesses encourage consumers to choose the target product. The decoy makes the target product more attractive in comparison.
National Geographic Study: An experiment with popcorn sizes and prices demonstrated the decoy effect. When a medium-sized popcorn was introduced as a decoy, it made the large popcorn seem like a better value, leading to more purchases of the large size.
Components of the Decoy Effect:
- Target Product: The product a business wants customers to choose.
- Competitor Product: A competing option to the target.
- Decoy Product: Intentionally inferior product designed to influence the choice towards the target.
Asymmetric Domination: The decoy effect relies on asymmetric domination. The decoy must be dominated by the target and competitor in at least two categories, making the target product more appealing.
Application in Marketing: Businesses can leverage the decoy effect to guide consumers towards preferred choices. It’s particularly effective with tiered pricing or subscription plans, where the presence of a decoy makes the desired option more attractive.
Anchoring Effect: Related to the decoy effect, anchoring involves using an initial piece of information (anchor) to influence subsequent decisions. Anchoring changes consumer perception of options and is used to channel users towards specific price points.
Key Takeaway: The decoy effect is a powerful tool in marketing that exploits consumers’ tendency to change preferences based on the presence of an inferior option. By strategically placing decoy options, businesses can effectively steer customers towards desired products or choices.

Related Framework	Description	When to Apply
Decoy Effect	The Decoy Effect is a phenomenon in decision-making where introducing a third, less attractive option (the decoy) influences preferences between two other options. The decoy is strategically designed to make one of the other options seem more appealing by comparison, even though it may not be the optimal choice independently. Understanding the decoy effect can help marketers and decision-makers manipulate choices and guide consumers towards desired options.	When designing pricing strategies or marketing campaigns, leveraging the Decoy Effect can influence consumer choices and guide decision-making by strategically positioning options and shaping preferences, thus encouraging desired behaviors and maximizing sales in product launches, pricing models, or brand promotions, ultimately improving market competitiveness and enhancing profitability through cognitive bias exploitation and strategic choice architecture.
Anchoring and Adjustment	Anchoring and Adjustment is a cognitive bias where individuals rely heavily on initial information (the anchor) when making judgments or estimates, adjusting insufficiently from that starting point. The initial anchor can significantly influence subsequent decisions, leading to systematic errors in judgment. Awareness of anchoring and adjustment can help mitigate its effects by encouraging individuals to critically evaluate initial information and consider alternative reference points.	When negotiating or setting reference points, acknowledging Anchoring and Adjustment can mitigate biases and improve decision-making by questioning initial anchors and considering alternative perspectives, thus encouraging flexibility and promoting fairness in price negotiations, performance evaluations, or project planning, ultimately reducing susceptibility to anchoring effects and enhancing decision accuracy through critical thinking and conscious adjustment.
Framing Effect	The Framing Effect is a cognitive bias where individuals’ decisions are influenced by how information is presented or framed, rather than its content. The framing of options, emphasizing gains or losses, can significantly alter preferences and choices, even when the underlying outcomes are the same. Recognizing the framing effect can help individuals critically evaluate how information is presented to them and make more informed decisions based on substance rather than presentation.	When communicating options or presenting information, acknowledging the Framing Effect can improve message effectiveness and enhance decision outcomes by considering alternative perspectives and balancing information presentation, thus facilitating objective evaluation and minimizing undue influence in marketing campaigns, policy proposals, or public communications, ultimately maximizing message impact and fostering informed decision-making through conscious framing choices and awareness of cognitive biases.
Paradox of Choice	The Paradox of Choice refers to the phenomenon where having too many options can lead to anxiety, indecision, and dissatisfaction with the chosen option. While choice is generally considered beneficial, an excessive number of options can overwhelm individuals, making it difficult to make a decision or evaluate outcomes satisfactorily. Understanding the paradox of choice can help businesses streamline offerings and provide decision-making frameworks that alleviate choice overload and enhance customer satisfaction.	When designing product lines or creating service offerings, considering the Paradox of Choice can optimize customer experiences and improve decision outcomes by streamlining options and reducing decision complexity, thus alleviating choice overload and enhancing satisfaction in retail environments, online platforms, or consumer services, ultimately improving customer retention and fostering loyalty through strategic choice architecture and customer-centric design.
Decision Fatigue	Decision Fatigue refers to the deteriorating quality of decisions made by individuals after a long session of decision-making. As individuals make more decisions throughout the day, their mental resources become depleted, leading to impulsivity, procrastination, or avoidance of subsequent choices. Recognizing decision fatigue can help individuals prioritize decisions, implement decision-making routines, and delegate choices when possible to conserve cognitive resources and maintain decision quality.	When structuring decision-making processes or managing workload, acknowledging Decision Fatigue can improve decision quality and reduce errors by implementing decision-making routines and prioritizing important choices, thus conserving mental resources and enhancing productivity in work environments, educational settings, or personal life, ultimately minimizing decision-related stress and optimizing cognitive performance through awareness of cognitive limitations and strategic resource allocation.
Information Bias	Information Bias is a cognitive bias where individuals seek out unnecessary information or excessively research a topic, believing that more information will lead to better decisions. While information gathering is valuable, excessive information-seeking can lead to decision paralysis or distract individuals from relevant considerations. Recognizing information bias can help individuals prioritize essential information and make more efficient and effective decisions with the available data.	When conducting research or analyzing data, identifying Information Bias can improve decision efficiency and streamline information processes by prioritizing relevant data and avoiding information overload, thus enhancing decision quality and facilitating timely action in research projects, strategic planning, or policy development, ultimately optimizing resource allocation and promoting effective decision-making through conscious information management and strategic data analysis.
Choice Architecture	Choice Architecture refers to the design of decision environments to influence individuals’ choices while maintaining their freedom of choice. By strategically arranging options, presenting information, and structuring decision processes, choice architects can guide decision-makers towards desired outcomes without restricting their autonomy. Understanding choice architecture principles can help businesses and policymakers design decision environments that encourage desirable behaviors and optimize decision outcomes.	When designing user interfaces or developing decision frameworks, leveraging Choice Architecture can influence decision outcomes and guide behavior by structuring options and presenting information strategically, thus encouraging desirable choices and improving decision efficiency in consumer applications, public policy, or organizational processes, ultimately optimizing decision environments and promoting alignment with intended objectives through conscious choice design and strategic decision structuring.
Default Bias	Default Bias is a cognitive bias where individuals are more likely to choose an option that is pre-selected or presented as the default, even if other options are available. Default options can significantly influence decision outcomes, as individuals tend to stick with the status quo rather than actively considering alternatives. Recognizing default bias can help decision-makers design choice architectures that nudge individuals towards desired options while preserving their freedom to choose.	When designing interfaces or setting policy defaults, acknowledging Default Bias can influence decision outcomes and shape behavior by strategically selecting defaults and guiding choices, thus encouraging desired actions and streamlining decision processes in product design, organizational policies, or government regulations, ultimately optimizing choice architectures and aligning decision environments with intended goals through conscious default design and strategic choice structuring.
Status Quo Bias	Status Quo Bias is a cognitive bias where individuals prefer the current state of affairs and are resistant to change. Even when alternative options may offer better outcomes, individuals tend to stick with familiar routines or existing arrangements due to a perceived loss aversion or fear of uncertainty. Recognizing status quo bias can help decision-makers overcome inertia and implement changes by highlighting the benefits of alternative choices and addressing concerns about transitioning from the status quo.	When introducing changes or implementing reforms, addressing Status Quo Bias can facilitate acceptance and promote adoption by highlighting benefits and mitigating perceived risks, thus encouraging behavioral shifts and fostering innovation in organizational transformations, policy initiatives, or personal development, ultimately overcoming resistance and promoting positive change through conscious effort and strategic communication that addresses psychological barriers and emotional attachments to the status quo.
Loss Aversion	Loss Aversion is a cognitive bias where individuals prefer avoiding losses over acquiring equivalent gains, leading to risk-averse decision-making. Loss aversion can influence choices in various domains, from financial investments to personal relationships, as individuals prioritize preserving what they have over pursuing potential gains. Recognizing loss aversion can help decision-makers frame choices in terms of potential losses or gains to encourage more balanced and rational decision-making.	When communicating risks or evaluating trade-offs, acknowledging Loss Aversion can improve risk management and enhance decision outcomes by considering emotional responses and balancing loss avoidance with potential gains, thus encouraging prudent choices and minimizing aversion in investment decisions, negotiation strategies, or career transitions, ultimately promoting rational decision-making and mitigating undue risk through awareness of psychological biases and strategic choice framing.