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.
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:
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
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)
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.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
