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.

Main Guides:

• Business Models
• Business Strategy
• Marketing Strategy
• Business Model Innovation
• Platform Business Models
• Network Effects In A Nutshell
• Digital Business Models

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