Decoy Effect

Updated on March 19, 2024
Article byPriya Choubey
Edited byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Decoy Effect?

The decoy effect or asymmetric dominance effect happens when the buyer finds one of the two options most suitable when the seller introduces a third less appealing pricing alternative. It is a sales strategy that aims to manipulate the buying preference of the consumers.

Decoy Effect

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When an asymmetrically dominated or less appealing third option is present, the buyer changes their perceptive bias or preference between the first two options. In short, they buy the product that can more accurately compensate for what the third option lacks.

Key Takeaways

  • The decoy effect is a sales tactic whereby the seller brings in a third less favorable option to force the consumer to select the targeted product from the two previously available options.
  • The businesses adopt this practice to increase sales and profitability while making the customers believe they got a steal deal.
  • Customers can avoid being tricked into such manipulation by taking a rational decision based on their budget, need, features, and usability of the product or service.

Decoy Effect Explained

The decoy effect in business is a cognitive bias strategy whereby the seller introduces a decoy pricing option that is somewhat uninviting, with the two prevailing pricing alternatives. Thus, the consumer selects the best alternative (target option) from the prior two options. The seller’s idea here is to influence and dominate the buyers’ decisions.

The third pricing alternative is bait to make the consumers believe they are making a smart choice. Hence, it is a pricing option that is close to the low-priced or high-priced alternatives in some or the other way. It can offer a little better quality at a considerably high price or a significantly inferior quality at a minimal price difference. It is a widely used approach in the service industry, e-commerce, B2C selling, SaaS offering, and others.

The impact of decoy pricing was tested during an experiment conducted by MIT professor Dan Ariely who presented the three different subscription plans for ‘The Economist’ before his students:

  1. Web-only subscription at $59
  2. Print-only subscription at $125
  3. Web+print subscription at $125

He then divided his students into two groups. The first group was given only two options, A and C. At the same time, the second group was given all three alternatives. The results were surprising; 68% of the students from group 1 selected web only, while 32% opted for web+print. However, 16% of students in group 2 went for Web only, and 84% took Web+print. Therefore, he concluded that option B was the useless or decoy pricing alternative that only justified option C to increase the overall sales by 30%.

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Examples

Check out these examples to gain a better idea:

Example #1

Suppose a company offers the following three alternatives for getting the visiting cards printed:

  1. 1000 visiting cards for $50 with standard quality;
  2. 2000 visiting cards for $110 with HD quality;
  3. 2000 visiting cards for $95 with standard quality.

The last one is a decoy option which makes the consumer feel like they need an option that offers visiting cards with good quality. So, naturally, they lean towards the second option, which is a little more pricey but offers HD quality.

Example #2

Suppose Nick wants to purchase a notebook. The notebooks available in the store are as follows:

  1. 300 pages notebook for $1.8
  2. 200 pages notebook for $1.5
  3. 100 pages notebook for $1.2

Among the above three options, the third one is a decoy alternative which costs significantly high when the price per page is compared with the previous two options. Thus, it draws attention of Nick towards opting for the 300 pages notebook.

How To Avoid?

Whether offline or online shopping, customers are often manipulated by decoy pricing, and they make irrational decisions, paying more than they have planned or buying additional units they don’t need. Thus, this strategy distracts the consumers from making a rational choice and fascinates them to buy what is far better than the decoy option.

Consumers can avoid being trapped in such a marketing practice if they:

  • Look out carefully for what each option has to offer;
  • Determine the need in terms of quantity, quality, features, and usage;
  • Evaluate the per unit cost and how much extra the seller is demanding for the value addition; and
  • Remember their previous irrational decisions and avoid repeating the same mistake.

Decoy Effect vs Compromise Effect

The decoy effect and compromise effect both affect the consumers’ decision-making process, but they are contradictory to one another in the following ways:

  • In decoy pricing, the seller manipulates the consumer preference by adding a third less favorable product pricing option to make a particular alternative look most attractive. But, in a compromise effect, the consumer is bound to select the intermediate option out of the three alternatives due to price, quality, and safety restrictions.
  • In the former, the customer has various other options; however, the consumer has limited alternatives in the latter.
  • The decoy effect works on the consumers’ ideology of avoiding loss, while the compromise effect emphasizes the customers’ habit of selecting the median option rather than the extreme choices.
  • The former depicts the cognitive bias strategy of the seller, while the latter highlights consumer behavior.
  • An example of decoy pricing is when a consumer buys a burger with coke and fries at $2.99 instead of only a burger at $2.19 or a burger with coke at $2.49. An instance of the compromise effect is when a traveler takes the train instead of a bus or flight.

Frequently Asked Questions (FAQs)

Is the decoy effect ethical?

The asymmetric dominance effect is an ethical marketing practice as it is not deceiving the consumer or present false information. However, in the context of the decision theory, it defies the principle of independence of irrelevant alternatives for consumer manipulation.

How do companies use the decoy effect?

It is one of the best marketing phenomena that shift a majority of customers towards buying products that are expensive, high in volume, or more profitable for the seller. Business organizations often apply this cognitive bias strategy to influence customer purchase decisions. It helps the companies to sell their preferred product or option to the consumers while providing three choices to them. Thus, it results in significant sales and profit maximization for the business entities.

Is the decoy effect manipulative?

Yes, the decoy pricing strategy manipulates the consumers’ preference while they don’t understand such an indirect influence and assume to make a smart choice of goods or services. Hence, it triggers the customer’s fear of making a loss, resulting in irrelevant decision-making.

This article has been a guide to what is Decoy Effect. We explain the topic, including its examples, comparison with the compromise effect, and how to avoid it. You may also find some useful articles here –