Mastering consumer behavior, and your own decision making progress, is an invaluable skill and the decoy effect has an important impact on both consumer behavior and your own decisions. A post, The decoy effect: How you are influenced to choose without really knowing it on the Conversation blog, written by Gary Mortimer, deconstructs the decoy effect into its key elements. The decoy effect is primarily used in product pricing, with companies using it to drive users to a more expensive or profitable alternative.
A restaurant example helps illustrate the decoy effect. The restaurant may offer two dishes. One is a hamburger, side and drink for $5. The second is a double burger, two sides and large drink for $10. You would mentally make some calculation of their relative value but it is not clear that the more expensive option is a better value. You would decide if doubling everything worth it?
Using the decoy effect, the restaurant might offer those two options but add a third one, a double burger, one side and a regular drink for $9. For $4 more than the $5 option, you are getting a bigger burger. But for just one dollar more, you get the bigger burger plus an extra side and a larger drink. Thus the $10 option looks like an incredible bargain. In reality, it is no better a bargain than the $5 meal when you had two options, but now because of the decoy effect most people would select the $10 meal.
Asymmetric dominance effect
Customers change their preference between two options when a third option is presented, a phenomenon called asymmetric dominance. This effect suggests a decoy is priced to make one of the other options much more attractive. The decoy option is dominated in terms of perceived value (quantity, quality, extra features and so on). Companies do not price the decoy to generate sales but to nudge customers towards the target selection.
In the blog post, the author discusses the first time academics identified and showed through experimentation the decoy effect. “These findings were, in marketing terms, revolutionary. They challenged established doctrines – known as the “similarity heuristic” and the “regularity condition” – that a new product will take away market share from an existing product and cannot increase the probability of a customer choosing the original product.”
The decoy effect is enabled by another phenomenon, choice overload. As customers face many options, the further options increase anxiety and hinder decision-making. Customers then adapt by reducing the number of criteria they use for choosing, maybe using price and volume to decide on the best value. Mortimer writes, “through manipulating these key choice attributes, a decoy steers you in a particular direction while giving you the feeling you are making a rational, informed choice.”
Using the decoy effect for good
While the decoy effect can be abused to drive consumers to over-priced options, it can also be used to highlight the value of an option that is in both the provider’s and customer’s best interest. Mortimer quotes research by Dan Ariely that looked at three subscription offers from the Economist, which he replicated for the Australian newspaper:
In this scenario, customers could receive either a digital version of the newspaper, a digital version plus the weekend edition or digital plus the printed version. The cost of digital only was the same as digital plus weekend. In this case, the decoy effect highlights the value of the mid-price option rather than driving customers to the most expensive option.
The decoy effect is a powerful tool in driving consumer decisions. When you are deciding between options, rather than look at the relative value of each option directly compared with the others, understand the value to you and make the optimal choice for yourself. When creating options for your customers, consider using the decoy effect to highlight the benefits of options that your customers are more likely to prefer rather than tricking them into the wrong purchase.
- The decoy effect is used when pricing products, adding a third option that drives customers to the most expensive or profitable option
- A phenomenon called asymmetric dominance causes customers to change their preference between two options when a third option is presented.
- The decoy effect is enabled by another phenomenon, choice overload, as customers who face many options will adapt by reducing the number of criteria they use for choosing.