The Decoy Effect: The Trick of Marketing Strategy

Have you ever been faced with a difficult decision when trying to choose between two options that seem equally appealing? It’s not uncommon to feel stuck in this situation, but what if I told you that there is a psychological bias that can make the decision easier for you?

Enter the decoy effect, a subtle but powerful tactic used in marketing and decision-making that can influence your choices without you even realizing it. By introducing a third, less attractive option, businesses can steer your decision towards their desired outcome.

But how does the decoy effect work, and how can you avoid falling prey to its subtle influence? In this article, we’ll explore the ins and outs of the decoy effect, its applications in marketing and decision-making, and how you can use this knowledge to make more informed choices.

What is the decoy effect?

The decoy effect, also known as the attraction effect or asymmetric dominance effect, is a phenomenon in behavioral economics and decision theory which describes the increased preference for an option when a third, clearly inferior (decoy) option is introduced.

In a typical demonstration of the decoy effect, individuals are given a choice between two options: A and B. Each option has different attributes, and neither option is universally superior to the other. That is, option A may be better in one aspect but worse in another, compared to option B.  When a third option, D (the decoy), is introduced, it is designed to be clearly inferior to either A or B (or both) on every attribute. The key feature of the decoy is that it is designed to be close but inferior to one of the options (say, A) and far inferior to the other (B).

In theory, the introduction of the decoy should not change the initial preferences between A and B, as D is objectively worse and should not be chosen. However, in practice, individuals tend to increase their preference for the option (A) that dominates the decoy. The decoy serves to make option A look more attractive, thereby influencing the individual’s choice.

The decoy effect is widely used in pricing and marketing strategies. For example, in a subscription model, a company may offer a basic plan, an advanced plan, and a professional plan. The advanced plan is designed to serve as a decoy, being less attractive than the professional plan but close in price, thereby encouraging customers to opt for the professional plan.

Despite its widespread application, the exact psychological mechanisms underlying the decoy effect remain a topic of ongoing research. One possible explanation is that individuals use relative comparisons rather than absolute comparisons when making decisions, and the presence of the decoy option alters these relative comparisons. Another explanation is that individuals may have an aversion to making extreme choices, and the decoy serves to make one of the options seem less extreme.

The decoy effect has important implications in many areas, including consumer behavior, public policy, and voting systems,  by illustrating how seemingly irrelevant options can influence preferences and choices. However, it also raises ethical considerations about the manipulation of consumer choices.

History of the decoy effect

The decoy effect was first introduced in the 1980s by marketing researchers Joel Huber, John Payne, and Christopher Puto. They conducted a series of experiments to study how consumers make choices when presented with different options.

One of the most famous experiments involved popcorn and soft drinks at a movie theater. Participants were offered two options: a small popcorn for $3 and a large popcorn for $7. They were then given a third option, which was a medium popcorn for $6. In this scenario, the medium popcorn served as the decoy.

Even though the medium popcorn was not the most attractive option in terms of value or quantity, it influenced the participants’ choices. In fact, most participants chose the large popcorn over the small popcorn, despite the higher price, because it seemed like a better value compared to the medium popcorn.

Since then, numerous studies have been conducted on the Decoy Effect and its impact on consumer behavior. Researchers have explored different aspects of the effect, including how it varies based on product attributes, how it can be used to influence charitable donations, and how it interacts with other decision-making biases. The Decoy Effect has also been applied to other fields outside of marketing, such as economics and political science.

All in all, the Decoy Effect has proven to be a valuable concept in the world of marketing and consumer behavior, and remains a topic of interest and exploration among researchers and marketers alike.

How does the decoy effect work?

The decoy effect is a robust and significant cognitive bias in decision-making theory, affecting individuals’ preferences between two options when a third, clearly inferior option is introduced.  The underlying mechanisms of the decoy effect, as well as its applicability, can be broken down into the following key points:

1. Introduction of a decoy: The decoy effect relies on the presence of a third, less desirable option known as the decoy. This decoy option is asymmetrically dominated, meaning it is comparable but inferior to one option (say, A) and significantly inferior to the other option (B).
2. Violation of the regularity principle: The decoy effect seemingly violates the principle of regularity, a foundational concept in rational choice theory. This principle suggests that the introduction of a new, less desirable option (the decoy) should not increase the probability of choosing one of the original options. Yet, the presence of the decoy often leads to an increased preference for the option (A) that clearly dominates the decoy.
3. Relative thinking: The psychological basis of the decoy effect lies in relative thinking. Human beings evaluate options comparatively rather than in isolation. The decoy option alters the relative comparison, making the option that dominates the decoy (A) appear more attractive.
4. Value-added attribution and compromise effect: Additional theories explaining the decoy effect include the value-added attribution model and the compromise effect. The former suggests that the decoy might lend additional positive attributes to the superior option, thereby increasing its overall attractiveness. The latter posits that individuals prefer options that appear as a reasonable compromise among the available alternatives, and the presence of the decoy can render one of the original options as such a compromise.
5. Practical applications: The decoy effect is widely applied in areas such as marketing and politics. In marketing, companies often use a decoy price to make other options seem more appealing. In politics, the introduction of an extra, less desirable candidate can sway voters’ preferences.

The decoy effect operates by manipulating relative comparisons, leveraging cognitive biases, and highlighting the importance of context and framing in shaping our choices. Despite seeming to counter intuitive reasoning, it remains a robust phenomenon that continues to inform our understanding of human decision-making.

The decoy effect in psychology

The decoy effect holds considerable significance in the field of psychology. This cognitive bias, where a third, less desirable option (the decoy) shifts preferences between two other options, underscores the nuanced mechanisms of human decision-making and reveals important insights into cognitive processes.

Fundamentally, the decoy effect operates through the principle of relative thinking, a core psychological concept. Individuals tend to make decisions not based on an absolute evaluation of options but rather by making comparisons between them. The introduction of the decoy option changes the relational dynamics between the original two options, making the one that dominates the decoy appear more attractive. This phenomenon indicates that decision-making is heavily influenced by the context in which choices are presented.

Several psychological theories have been proposed to explain the decoy effect.  One such model is the value-added attribution model, which suggests that the decoy endows the superior option with additional positive attributes, thereby enhancing its attractiveness. This model reflects the psychological process of attribute augmentation, where the presence of a dominated option amplifies the perceived value of the dominating option.

Another psychological explanation comes from the compromise effect, a theory suggesting that individuals prefer options that seem to be a reasonable compromise among available alternatives. In the context of the decoy effect, the decoy might render one of the original options a ‘middle ground’ or ‘compromise’ option, increasing its appeal.

The decoy effect also indicates the influence of framing effects on decision-making, a major focus in cognitive psychology. Framing refers to how the presentation of information can significantly impact individuals’ perceptions and decisions. In the case of the decoy effect, the framing of options (through the inclusion of a decoy) alters the perceived value of the original options, revealing how susceptible human judgment is to contextual framing.

From a methodological perspective, the decoy effect is a powerful tool for investigating decision-making processes. It allows researchers to design controlled experiments that can reveal the underlying cognitive mechanisms involved in preference formation and choice selection. Moreover,  it demonstrates the limitations of traditional rational choice theory and highlights the role of heuristics and biases in decision-making, central themes in cognitive and social psychology.

How to use the decoy effect in business

The decoy effect is a powerful tool in the realm of business, particularly in areas like marketing, pricing, product positioning, and consumer behavior. Understanding how to effectively apply this cognitive bias can aid businesses in enhancing their strategies, influencing consumer choices, and optimizing profitability. Here are some key ways to use the decoy effect in business:

1. Pricing strategies: Perhaps the most common use of the decoy effect is in pricing strategies. By offering a product or service at multiple price points, where one option is a decoy, businesses can steer customers towards a more expensive or profitable option.  For example, a business might offer three versions of a product – a basic version, an advanced version (the decoy), and a premium version. The advanced version could be priced close to the premium version but with fewer features, thereby making the premium version appear more valuable.
2. Product positioning: Businesses can also use the decoy effect for product positioning. By introducing a product that is clearly inferior to another product in the lineup (the decoy), businesses can make their target product appear more attractive and induce customers to choose it over others.
3. Package and bundle deals: In creating package or bundle deals, businesses can employ the decoy effect to make certain packages seem more attractive. By offering an inferior bundle as a decoy, businesses can push consumers towards choosing a more profitable bundle.
4. Advertising and promotions: The decoy effect can be utilized in advertising and promotional activities. By portraying a product or service as superior to a less desirable option (the decoy), businesses can highlight the value and advantages of their offerings, increasing their appeal to consumers.
5. Negotiation strategies: In negotiations, offering a decoy option can shift the other party’s preferences and lead to more favorable outcomes. By proposing an option that is clearly inferior to the preferred outcome, the preferred outcome seems more advantageous.
6. Service plans: For businesses offering service plans, such as insurance or subscriptions, introducing a decoy plan that is less attractive can steer customers towards choosing a higher-priced plan.
7. Menu design: In the restaurant industry, the decoy effect can be used in menu design. By strategically placing a high-priced item (the decoy) on the menu, other less expensive items may seem more attractive to customers.

The strategic use of the decoy effect can be a potent tool for businesses to guide consumer preferences and choices. However, businesses should employ this strategy ethically, ensuring not to mislead or exploit consumers. Understanding and respecting the balance between influencing consumer behavior and maintaining consumer trust is crucial for long-term success.

How to avoid the trap of the decoy effect

Falling into the trap of the decoy effect may not always lead to the most beneficial decision for the individual. The following are key strategies to avoid the potential pitfalls of the decoy effect:

1. Awareness of the decoy effect: The first step towards avoiding the decoy effect is understanding its existence and how it operates. Awareness of this cognitive bias and its influence on decision-making can help individuals critically evaluate their choices.
2. Independent evaluation: Try to evaluate options on their individual merits rather than in comparison to one another. Consider each option independently and assess whether it fulfills your specific needs or objectives.
3. Rational analysis: Make decisions based on a systematic, logical analysis. Evaluate the features, costs, and benefits of each option in a structured manner, which can help minimize the influence of cognitive biases.
4. Avoid rushed decisions: Take your time when making decisions, especially those that are significant or complex. Hastily made decisions are more prone to being influenced by cognitive biases, including the decoy effect.
5. Seeking second opinions: Consult others to gain different perspectives. Other individuals may not be influenced by the same biases and can provide valuable insights.
6. Limiting options: Research suggests that having too many options can lead to decision fatigue and make individuals more susceptible to cognitive biases. Wherever possible, try to limit the number of options you’re considering to a manageable amount.
7. Awareness of context and framing: Be mindful of how options are presented or framed, as this can significantly impact perceptions and decisions. Recognizing the influence of context and framing can help you see beyond superficial comparisons and make more informed decisions.
8. Reflection on past decisions: Reflect on past decisions and consider whether the decoy effect may have influenced your choices. Learning from past experiences can provide valuable lessons for future decision-making.

Although it’s not always possible to completely avoid cognitive biases like the decoy effect,  being aware of their influence and employing thoughtful, critical decision-making strategies can significantly mitigate their impact.

Advantages and disadvantages of using the decoy effect in marketing

The decoy effect has both notable advantages and potential disadvantages when applied in a marketing context.

Advantages of using the decoy effect in marketing

1. Influence consumer choices: One of the primary advantages of the decoy effect is its ability to steer consumer choices towards a particular product or service. By introducing a decoy option that is inferior to a target option, marketers can make the target option seem more attractive.
2. Increase revenue: The decoy effect can be used to nudge customers towards more expensive or profitable options. This can lead to increased revenue and higher profit margins for the business.
3. Promote new or underperforming products: The decoy effect can also be leveraged to enhance the perceived value of new or underperforming products. By positioning these products as superior to a decoy, businesses can boost their appeal and stimulate sales.
4. Enhance perceived value: By strategically placing a decoy next to a target product, marketers can highlight the value and advantages of the target product. This can lead to a greater perceived value of the product in the minds of consumers.

Disadvantages of using the decoy effect in marketing

1. Potential for consumer backlash: If consumers perceive that they are being manipulated or pushed into a decision, it could lead to a backlash. This can damage a brand’s reputation and erode consumer trust.
2. Ethical considerations: The use of the decoy effect can raise ethical concerns, as it involves influencing consumer behavior by presenting an option intended to be less attractive. Marketers must ensure they use this strategy responsibly and transparently to maintain ethical standards.
3. Short-term focus: While the decoy effect can boost sales in the short term, it might not be a sustainable long-term strategy. Consumers may eventually realize the decoy tactic and become resistant to it, decreasing its effectiveness over time.
4. Complexity in implementation: Designing a successful decoy requires a nuanced understanding of consumer behavior and preferences. If not executed properly, a decoy could potentially dissuade customers or confuse them, leading to decision paralysis.

In conclusion, while the decoy effect presents compelling opportunities for marketers to influence consumer behavior and boost sales,  it should be used judiciously and ethically. Businesses should balance the potential benefits of the decoy effect with considerations of consumer trust, long-term brand reputation, and ethical marketing practices.