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The Decoy Effect: A Marketer's Psychological Weapon

Price is a crucial element of the marketing mix, and much thought goes into setting prices to nudge us towards spending more.

There’s one particularly cunning type of pricing strategy that marketers use to get you to switch your choice from one option to a more expensive or a profitable one. This is known as the decoy effect.

The decoy effect also called the asymmetrical dominance effect, is a phenomenon where people tend to have a change in preference between two options when presented with a third option that is asymmetrically dominated.

According to rational choice theory, the decoy effect should not really exist in practice. But this theory relies on the assumption that consumers’ purchasing decisions are perfectly “rational” and take into account all the “right information”. However, the consumer does not possess the “perfect” level of information about a product’s utility. As a result, consumers’ purchasing decisions are often made without taking into account full information about any given item. This incites companies to wisely choose their marketing and pricing strategies, ensuring that imperfect information is sometimes deliberately provided to consumers in order to maximize both sales and margins.

Let’s take an example to understand how Decoy pricing really works.

National Geographic ran an experiment to test how the decoy effect influences consumers to buy a large popcorn rather than a small or medium one.

To begin with, they offered the first group of consumers a small bucket of popcorn for Rs. 150 or a large one for Rs. 210.

The result revealed that most of the consumers chose to buy the small bucket, due to their personal needs at that time.

As for the second group, they decided to offer three options: a small bucket for Rs. 150, a medium bucket (the decoy) for Rs. 200 and a large one for Rs. 210.

This time, most of the consumers chose the large bucket because they saw value in more popcorn for only Rs. 10.

The medium bucket was asymmetrically dominated by the large bucket. In other words, the decoy effect encouraged consumers to go for the expensive option.

Okay, one more example. Let’s take Apple this time.

Not long ago, Apple unveiled their new iPod Touch devices. As you can see, for $229 you get 16GB, for $299 you get 32GB, and for $399 you get 64GB.

When you want to double the storage capacity – going from 16GB to 32GB – you pay $70 extra and get more features, such as a 5MP iSight camera and iPod Touch Loop. When you want to double the capacity from 32GB to 64GB, you pay $100 more but don’t get extra features for it.

You might conclude the 32GB version is the best value for money. Only a few would buy the 16GB version and even fewer would buy the 64GB version. The 16GB and the 64GB version act as the “price decoy” to make the 32GB version as the best option.

By the way, the iPhone 5S with 16GB will be available for $199, which is $30 less than the new iPod Touch and has a lot more functionality. Fair enough to say that the iPhone comes with an additional service plan.

So, take a pause and think which one would you buy?

If you’re good at doing maths in your head or committed enough to use a calculator, you might work out that the medium is a slightly better value than the small, and the large better value again.

But the pricing of the medium option – $70 more than the small but just $100 cheaper than the large – is designed to be asymmetrically dominated, steering you to see the most expensive iPod Touch as the best value for money.

So have you just made the sensible choice, or been manipulated to spend more on a device bigger than you needed?

However, in conclusion, the decoy effect is a scientifically proven method and can be used in almost every business.

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