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.

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:

  1. The target product – or the product that a business wants to you purchase.
  2. The competitor product – or the product that competes with the target.
  3. 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.

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.

Connected Thinking Tools

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.
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.
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.
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.

Main Resources:

Scroll to Top