What is the Decoy Effect?

E. Raymond Corey, Harvard Professor

“Pricing is the moment of truth — all of marketing strategy comes to focus on the pricing decision.” 

Everyone wants to increase their sales. But not all sales are created equal — some are more profitable than others. In any given product line, items that seem like they’d provide similar profitability, often don’t. That’s because the cost to market, manage, and sell a product doesn’t have a direct correlation with the final price. Products that cost less to sell bring in a bigger percentage of their sale price — they’re more profitable for the brand.

So how do you get customers to pick the option that’s best for your bottom line? There are a few tactics you might use. You could:

  1. Decrease the number of choices
  2. Keep your high-margin products top of mind
  3. Reduce the risk of trying a new, high-margin product

But, there’s a way to price your products that will make choosing the highest margin item a no-brainer. It takes advantage of a proven psychological trigger.

It’s called the Decoy Effect, and it’s a research-backed way to influence customer choice based on pricing.

What is the Decoy Effect?

The Decoy Effect describes how price comparisons between products affect choice. It states that when there are only two options, and they’re priced “fairly,” people make decisions according to personal preference. But, if there’s a third choice that’s overpriced compared to the first two options, it changes how people consider all of the options. The third option is a “decoy” choice.

Decoy Effect Illustration

Image created by the author

The decoy’s purpose is to change perceptions of the other options, not sell.

Why? Customers compare the other products against the decoy. And because the decoy price is unreasonably high, everything else seems reasonable in comparison. The Decoy Effect works because people are clueless about what something is supposed to cost. William Poundstone, author of “Priceless: The Myth of Fair Value,” put it this way.

“People tend to be clueless about prices. Contrary to economic theory, we do not really decide between A and B by consulting our invisible price tags and purchasing the one that yields the higher utility. We make do with guesstimates…”

Examples of the Decoy Effect in Action

Below you can see two examples of choice sets — one without a decoy, and one with a decoy.

Choice set with no decoy:

No decoy effect

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This choice set is far apart both in features and in price. A customer looking at these options would be swayed more by their own needs than by the car’s price.

Choice set with a decoy:

Decoy effect

Image created by the author

In the example above, the price of the medium coffee ($6.50) acts as the decoy to push more people toward a large. The price difference between the small and the medium is much more than the price difference between the medium and the large.

The greater the difference between the decoy and the low-priced option, the greater the effect.

The ROI of the Decoy Effect

The Decoy Effect uses price differences to change a customer’s perceptions. Dan Ariely described it this way, in his book Predictably Irrational:

“The decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated.
This effect is the “secret agent” in many decisions.

Ariely proved the efficacy of this “secret agent” with a study on subscription options. He asked people to choose which version of the Economist they’d prefer to buy.

Source image via The Economist

In the “no decoy” experiment, there was only a digital version ($59) and a print version ($125).

In the decoy experiment, there were three options:

  1. Digital version ($59)
  2. Print version ($125) — the decoy option
  3. Combo version where customers got both digital and print versions for the same price as print-only ($125).

The print-only option was the decoy. It cost the same as the digital + print combo but was an inferior choice. 

In the “no decoy version,” 68% of customers bought the digital version, and 32% bought print only. The total revenue was $8, 012.

In the “decoy” version, no one bought the print-only version (the decoy). 84% of customers purchased the print+digital combo, and 16% bought digital-only. The total revenue was $11, 444. The introduction of a decoy option immediately raised total revenue by over 42%.

How to apply the Decoy Effect

1. Choose the product you want to sell the most

2. Create three product choices

3. Make sure these three choices include a “secret agent” decoy

4. Price the decoy close to the high-priced option

5. Make the decoy only marginally better than the low-priced option

The bottom line

“If you double the number of experiments you do per year you’re going to double your inventiveness.” — Jeff Bezos

The best way to test the Decoy Effect in your business is to launch an experiment.

It doesn’t need to be served to all customers at first, and it doesn’t need to go live immediately.

But the science shows if you implement the Decoy Effect, you’ll find the “secret agent” option can increase your profits virtually overnight.