Quick Definition: The Decoy Effect says 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 (decoy) choice that’s overpriced, it can change which option people choose.
“Pricing is the moment of truth — all of marketing strategy comes to focus on the pricing decision.”
- E. Raymond Corey, Harvard Professor
Everyone wants to increase their sales. But not all sales are created equal — some are more profitable than others. That’s because the cost to market, manage, and sell a product doesn’t have a direct correlation with the final price. So how do you get customers to pick the option that’s best for your bottom line? You could:
- Decrease the number of choices
- Keep your high-margin products top of mind
- Reduce the risk of trying a new, high-margin product
But, there’s also 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 called the Decoy Effect - a research-backed way to influence customer choice using price.
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.
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... We make do with guesstimates”
Real-World Examples of the Decoy Effect
Below you can see two examples of choice sets — one without a decoy, and one with a decoy.
Choice set WITH NO decoy:
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:
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.
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How the Decoy Acts as a "Secret Agent"
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.
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:
- Digital version ($59)
- Print version ($125) — the decoy option
- 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
Using the Decoy Effect in real life can feel complicated, but if you break down the process it's not difficult to apply.
- Choose the product you want to sell the most
- Create three product choices
- Make sure these three choices include a “secret agent” decoy
- Price the decoy close to the high-priced option
- Make the decoy's features only marginally better than the low-priced option
The best way to test the Decoy Effect in your business is to launch an experiment. It doesn’t need to be shown to all customers at first, and it doesn’t need to go live immediately. But studies show if you implement the Decoy Effect, you might find that the “secret agent” option increases your profits virtually overnight.