Decoy effect

Decoy Effect: A Complete Practical Guide to The Psychological Pricing and Marketing Hack

Decoy effect is a cognitive bias that you can use in your product pricing, in finance and even in politics in order to influence people’s decision making.
By using this guide, you’ll understand how the decoy effect works and learn how to use it in your marketing and pricing strategy to improve your business results.

What is The Decoy Effect?

The decoy effect is a phenomenon whereby consumers will tend to have a specific change in preferences between two options when also presented a third option that is asymmetrically dominated. 

In simple words, when there are only two options, consumers will tend to make decisions according to their personal preferences.
But when consumers are offered another strategical decoy option, they will be more likely to choose the more expensive of the two original options.

To illustrate the concept, let’s have a look at the following example:

National Geographic ran an experiment to test how the decoy effect influences consumers to buy a large popcorn rather than a small or medium one.

To begin with, they offered the first group of consumers a small bucket of popcorn for $3 or a large one for $7.

decoy effect - popcorn without decoy

The result revealed that most of the consumers chose to buy the small bucket, due to their personal needs at that time.

As for the second group, they decided to offer three options: a small bucket for $3, a medium bucket (the decoy) for $6.5 and a large one for $7.

decoy effect popcorn include decoyThis time, most of the consumers chose the large bucket because they saw value in more popcorn for only $0.5.

The medium bucket was asymmetrically dominated by the large bucket. In other words, the decoy effect encouraged the consumers to go for the expensive option.

Watch the National Geographic’s popcorn experiment below (2 minutes long):

Decoy Effect – Scientific Proof

Pros. Joel Huber conducted a study to see how the decoy effect impacts our everyday decisions.

He asked the first group of people to choose between two options: a five-star restaurant that was 25 minutes drive away, and a three-star restaurant that was 5 minutes drive away. Their dilemma was quality versus convenience.

The decoy effect - restaurant study example 1
At this point, each person in the group chose according to their personal preferences.

Pros. Huber decided to ask the second group to choose between three options, include a four-star restaurant located 35 minutes drive away.

The decoy effect - restaurant study - example 2

The result showed that most of the people chose the five-star restaurant option.
The rational – the four-start restaurant (C) was asymmetrically dominated by the five-star restaurant (A) in both driving distance and restaurant ranking.
The decoy effect made option A look particularly attractive and directed the people’ attention to the restaurant’s quality.

For the third group, pros. Huber twisted the experiment and offered a different decoy – a two-star restaurant at a 15-minute drive.
The decoy effect - restaurant study - example 3
In this scenario, most of the people chose the 3-stars restaurant.
Because restaurant D was asymmetrically dominated by restaurant B in both dimensions, the decoy effect caused the participants to move their attention to the driving distance.

Behavioral Finance and The Decoy Effect

The decoy effect appears to work in the financial market as well.

Brittany Paris from the university of New Hampshire conducted a study on how the decoy effect can influence investors decisions.

The first group of investors was offered two stocks:

  • Stock A: long-term growth of 20% and a dividend yield of 2%.
  • Stock B: long-term growth of 10% and a dividend yield of 7%.

Decoy effect - behavioral finance example 1

In this situation, the investors divided their answers according to their own personal preferences.

Later on, Paris offered the second group three stocks:

  • Stock A: long-term growth of 20% and a dividend yield of 2%.
  • Stock B: long-term growth of 10% and a dividend yield of 7%.
  • Stock C: long-term growth of 15% and a dividend yield of 1%. (The decoy)

Decoy effect - behavioral finance - example 2

This time, most investors chose stock A over stock B.
Stock C was asymmetrically dominated by stock A in both growth and yield. As a result, the decoy effect caused investors to increase the perceived importance of growth over income.

The third group was also offered three stocks but with a different decoy:

  • Stock A: long-term growth of 20% and a dividend yield of 2%.
  • Stock B: long-term growth of 10% and a dividend yield of 7%.
  • Stock D: long-term growth of 8% and a dividend yield of 4.5% (The decoy).

Decoy effect - behavioral finance - example 3

In this scenario, most investors preferred stock B and valued income over growth, due to the attractiveness of stock B in both dimensions (in contrast to stock D).

Decoy Effect In Politics

This next example is based on a study conducted by Pros. William Hedgcock from the University of Lowa.

The study suggested that when there are two frontrunners in a political race, how people perceive the third candidate can influence undecided voters towards one of the candidates.

For instance, let’s take two leading democratic party presidential candidates:

  • Candidate A is strong on national security and a fresh face in Washington (an advantage in this scenario).
  • Candidate B is also strong on national security but consider as an old Washington face.
  • Both candidates have a similar chance to win the election.

The decoy effect in politics 1

Now candidate C joins the race (the decoy). Undecided voters perceive him as less experienced on national security issues, and an old Washington face.

The decoy effect in politics 2

Under those circumstances, candidate A beats candidate C in both parameters, while candidate B beats candidate C only on the national security matter.

As a result, the decoy effect increases the attractiveness of candidate A and moves the voters’ attention to the ‘fresh face in Washington’ parameter.

The decoy effect can work the other way around too if candidate B changes the perceived parameters of candidate C to his advantages (for instance, health care).

With this in mind, the decoy candidate can potentially stand to the advantage of both sides.

Decoy Effect Examples

Online subscription pricing – The Economist

The Economist magazine experiments its pricing structure quite often and implements the decoy effect in order to increase their key product sales.

The magazine offers three subscription options: digital, print, and print + digital.

The first example below demonstrates the print version as a decoy.

Decoy effect pricing - the economist 1

The digital offer is priced $62 (for 12 weeks), the print offer is price $70 and the print + digital offer is priced $87. The print offer (the decoy) is asymmetrically dominated by the print + digital offer and increase its attractiveness as a result.

The second example below demonstrates a different pricing structure with two decoys:

Decoy effect pricing - the economist 2

The print version is priced $70, the digital is priced $30 and the print + digital is priced $30 too. Yes, that’s not a mistake. The decoy effect should be an unreasonable offer.

Do you really see three choices in this price structure? Seems like the only one that makes real sense is the “best value” offer.

So does the decoy effect really works for The Economist?

Professor Dan Ariely, a behavioral economist and the author of “Predictably Irrational“, tested one of The Economist’s pricing structure a few years ago with 100 of his students.

In order to test the decoy effect, pros. Ariely asked his students to choose between two offers: the digital and the print + digital.

Decoy effect pricing - the economist 3

The answers revealed that 68% of the students chose the digital subscription, at a total revenue of $8,012.

When pros. Ariely gave his students three options (The Economist’s original pricing structure with a decoy), the result changed dramatically.

Decoy effect pricing - the economist 4

84% of his students chose the print + digital subscription at a total revenue of $11,444, while none of the students wanted the print.

In turns out that by adding the decoy effect, The Economist improved sales by 43%!

Watch Pros. Dan Ariely explains his test on a Ted talk (2 minutes long):

 

Product pricing – Apple

Apple takes advantage of the decoy effect by offering three pricing options for its 13-inch MacBook Pro in order to sell more of the higher priced offer.

The decoy effect pricing - apple example

  • The leftmost offering includes the basic offer for $1,499.
  • The middle includes an advance offer for $1,799.
  • The rightmost offering includes the advance offer plus twice the storage for $1,999.

If you already consider buying a better MacBook, it seems silly not to go for twice the storage for “only” $200 more.

The middle option (the decoy) is asymmetrically dominated by the rightmost offering and therefore, the decoy effect increases its attractiveness.

 

Saas Pricing: Shutterstock

Shutterstock uses the decoy effect too at its pricing structure:

Decoy effect pricing - shutterstock example
The monthly packages includes 10 images for $29, 50 images for $99, 350 images for $169 and 750 images for $199.

If you need more than 50 images per month, the 350 images package feels unreasonable because for a bit more ($20) you can enjoy more the twice as many images.

In this example, the 350 images package is asymmetrically dominated by the 750 images package. For this reason, the decoy effect increases the likelihood of choosing the higher priced package.

How to Implement The Decoy Effect?

Follow the next five simple steps to add the decoy effect to your price offering:

  1. Choose your key product
    The one you want to sell more of. Make sure it is popular with your customers.
  2. Structure your key product
    Remember, your key product should contain more benefits than the other products, and higher priced.
  3. Create a decoy
    Your goal is to make the decoy asymmetrically dominated by your key product and to increase your key product attractiveness as a result.
  4. Have at least three offers (recommended)
    However, don’t add more than five (beware of the choice overload bias).
  5. Price the decoy close to your key product (the high-priced option)
    Choose same or a slightly lower price.

In conclusion, the decoy effect is a scientifically proven method and can be used in almost every business. Give it a shot and test its influence on your results.

 

References:
Huber, J., Payne, J. W., and Puto, C. 1982. Adding asymmetrically dominated alternatives: violations of regularity and the similarity hypothesis.
Paris, B. 2011. The decoy effect and investors’ stock preferences.
Hedgcock, W. 2009. Could ralph Nader’s entrance and exit have helped Al Gore? The impact of decoy dynamics on consumer choice.
Pros. Dan Ariely. Predictably Irrational: The hidden forces that shape our decisions.


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