The decoy effect

Decoy literally means luring something or someone into the direction you want, and this is exactly the goal of the decoy effect: leading someone away from the cheap option and lure them towards the expensive option. In the article about nudging we already shortly explained what the decoy effect is. The decoy effect (also called the asymmetric dominance) has to do with adding a third option when you offer a cheap and an expensive product. This third option is priced between the cheap and expensive option, but closer to the expensive option. However, it is crucial that the quality of the third option is a lot less attractive than the most expensive option. The result of this is that more people pick the most expensive option than when you don’t offer the third option.

Decoy eng

The illustration above describes how the decoy effect works; on the left hand side we see two options which are clearly differentiated from each other. Option B has a much higher quality but has a correspondingly higher price. The two options are clearly different from each other. In the image on the right hand side we add a third option (B-). This third option is clearly less than version B quality wise, but price wise they are reasonable similar. The comparison between B and B- is made easy by adding the third product. Therefore, since adding the third option, visitors perceive the quality of version B higher than version B- and also higher than version A.  Introducing the decoy (B-) makes the comparison with version A easier as visitors think they get more for their money with version B.

Adding the B- option ensures that more people pick the B version, even tough nobody picks the B- option.

In the video below they show an experiment in which the decoy effect is being demonstrated:

How does it work?

People often think they pick a product based on the absolute value, but that’s not completely true. Dan Arielly described an experiment he conducted under students in his book: ‘Predictably Irrational – The Hidden Forces That Shape Our Decisions’. In the experiment Arielly showed that the amount of students that picked the most expensive option increased from 32% to 84% after introducing the Decoy option. This proves once again that we don’t view prices in an absolute way but in a contextual way. We decided upon the value of something after comparing it with other items.
Het decoy effect - Decoy pricing

A different example

Below is another example of an A/B test to test the decoy effect. We can see that before introducing the Decoy option 37% of all customers picked the most expensive option. However, after adding the Decoy option 79% picked the most expensive option, An increase of 114%! This increase accounted for 83.000 pound extra revenue without any extra costs

A/B test - Decoy effect

Another study done by Simonson illustrates the Decoy effect. In the study participants had to make the choice between two shredders which differed in price and the amount of paper they could shred in one go. When participants had to choose between 2 shredders that were significantly different in both price and quality only 21% picked the most expensive option. This percentage skyrocketed when they added a third option. This third option had a higher price than the cheapest option and lays between the two initial options price wise. This way the third option is slightly less attractive than the cheapest option and a lot less attractive than the expensive option. This resulted in an increase of 72% of people who picked the most expensive option.

Decoy effect - asymmetric dominance

Apple

In 2013 Apple released two new iPhone models: the budget 5C which started at 469 pounds and the 5S which had a starting price of 549 pound. Apple used the decoy effect in a smart way with the release of these two new models, some people bought the 5C but most of the people bought the 5S. The iPhone 5C was more expensive than comparable phones from different brands. However, the 5C was only released to make the 5S as people believe they get more value for their money with the 5S.

iPhone Decoy pricing - asymmetric dominance

So all in all we think that these are enough reasons to incorporate the Decoy effect in your pricing strategy.

som would like to show you how you can apply the Decoy effect, whether or not in an A/B test. Contact us to discuss the possibilities.

Read more about nudging

Read more about the som Sex & the City model (personas)