As consumers, we try to make rational decisions regarding our consumption. Before buying a product, we consider available options and compare prices to make sure we get maximum utility and benefits for the price we pay.
However, our buying behaviour is not always that consistent, as we are not aware of all the feelings, motives and beliefs that affect our decisions during the purchasing process. In fact, we often end up acting rather irrationally and under the influence of the decoy effect.
Consumers experiencing the decoy effect
Marketing psychology is a field that studies consumer behaviour to better understand how and why people act the way they do while shopping. One of the many fascinating examples of the rational consumer turning into an irrational one is a phenomenon called the decoy effect. It is a marketing psychology term that describes a situation in which the consumer is experiencing a cognitive bias when comparing the prices of two sets of products.
The decoy effect concept revolves around the idea of comparison. The consumer is presented with two sets of products to choose from (called consideration set). For example, at the movies, the consumer would be offered two options (small and large) of popcorn buckets in the first set and three options (small, medium and large) in the second. Respectively, the price for the small bucket in set 1 would be 4 euros and 7 euros for the large one. In the second set, the prices would be the same except for the the medium sized bucket, a similar but less attractive option, which would cost 6.50 euros.
When comparing the prices in set 1, a rational consumer might prefer the smaller bucket as it is cheaper. However, in set 2, the comparison of the prices seems a bit more complicated, as there is only a 50 cent price difference between the medium and large size bucket. Large bucket is more popcorn and it could be shared, so it suddenly seems like a great deal.
In marketing terms, the medium size if offered as a ”decoy” to make the consumer see the large size as an attractive option.
A similar example is behavioural psychologist Dan Ariely‘s (TED Talk) story on his research, where he asked students whether they would choose a digital subscription of The Economist for USD 59, a print-only subscription for USD 125, or a subscription for print+digital for USD 125. Of course, being rational students, most of them preferred the last option, with none of them going for the print-only one (the “decoy”). However, when the print-only option was taken out, most students preferred the first, the cheapest, option.
Businesses use the decoy effect to their advantage
For businesses, using the decoy effect is a pricing strategy that makes consumers switch to the alternative that is most profitable for the company. It makes economic sense for businesses to offer a decoy that leads to selling the option giving the highest margin, having the higher price or offering the most benefits.
However, the decoy effect goes beyond pricing and sometimes consumers value quality or convenience over the price. In this case, the decoy is something that offers less benefits than the preferred option but almost at the same price. The decoy is planned so that it is less attractive and therefore will not likely be chosen by consumers.
By using a decoy, businesses can influence our buying behaviour without us even noticing it. Sometimes businesses may offer something that they know no one will choose, but add the decoy just to ensure that the alternative they want us to buy gets chosen. By offering the third option, consumers may compare prices and believe that they are acting logically, making an informed choice and a good deal.
Businesses know that consumers do not like too many options and situations with too many things to compare. More than three options might cause consumers choice overload and decision paralysis.
Consider the decoy effect when being presented with three options
For businesses, it is worth experimenting with the decoy effect as one path to increase sales revenue and profit margins.
For us as consumers, it is good to go shopping knowing what attributes are important to us, and not just trust our intuition or gut feelings when making purchasing decisions. It might also be a good idea to become slightly suspicious when presented with three options.