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.
|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.|
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.
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
The competitor product
Or the product that competes with the target.
The decoy product
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.
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
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.
- 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.
- 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.
- 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.
Connected Thinking Frameworks