The Decoy Effect

While studying behavioral economics I came across an interesting phenomenon called the decoy effect. This is something that large corporations use in their marketing techniques to get you to buy something they want you to buy. 

How it is done!

consumers will tend to have a specific change in preferences between 2 options when they are presented with a third option that is asymmetrically dominated by one of the initial 2 options. 

for the sake of understanding lets name these options as 

A - option one

B - option two

C - option three (decoy)

Now ‘C’ plays a very important role. it is extremely strategic, ‘C’ is inferior and dominated by ‘A’ in every way possible and it is inferior to ‘B’ in some aspects and superior in some aspects.

The consumer is tricked by ‘C’ and is more likely to prefer option ‘A’ whenever option ‘C’ is given and less likely to prefer ‘A’ whenever ‘C’ is absent. 

for example let’s look at Hard drives.

Say that when you go purchase a hard drive you only care about which has the highest storage and is available for the cheapest price. 

Consideration Set 1

           A       B

price     $100    $70

storage   1 TB   650 GB

here some people may prefer A for higher storage and some people may prefer B because it is cheaper. Now say suppose the company offers another option to the consumers a ‘Decoy option’ ‘C’. this option has lower storage than both A and B and is more expensive than ‘B’ and less expensive than ‘A’. 

Set 2

           A       B       C

price     $100    $70       $85 

storage   1 TB   650 GB   500 GB

In set 2 the consumer will be more likely to choose option B which is the target choice the company wants the consumer to make. 

Similarly, is the company wanted to make their target option A they would so the following by introducing a decoy option ‘D’ instead of ‘C’. where this option has a higher price than both A and B and has more storage than ‘B’ and less storage than ‘A’. 

Set 3

           A        B         D

price     $100    $70       $120

storage   1 TB   650 GB   800 GB

In set 3 the consumer will be more likely to choose option A which is the target choice the company wants the consumer to make. 

The decoy effect can also be measured as to how much more a consumer is ready to pay to choose the target rather than the competitor.

Even though the above examples are exaggerated in reality the Decoy is very very close to one of the options. The consumer is almost indifferent between the options and sometimes may also end up buying the decoy option. The role of the Decoy option is to increase the frequency of purchase of the target product which the firm wants the consumers to buy. it basically polarises the consumer into making a choice that the firm has targeted for themselves.

to be more economical and manage personal preferences in your daily lives, it is important to identify such decoy options in some personal expenditures, for example :

1. choosing an internet plan
2. choosing a phone and data plan
3. subscriptions of various kinds and choices of multiple offers 
4. temporary housing/ hotel deals, Etc

To get more guidance to understand decoys and how to use them for your own business feel free to get in touch with me.