It’s a Friday night, and you and your partner have both had a long week. Neither of you are in the mood to cook, so you’ve decided to treat yourselves and go out for some pizza.
‘What about Don Beccaccia? Their homemade calzone is simply to die for,’ suggests your partner. ‘We went there with your sister that time, remember?’
You remember it well.
The food was delicious, but the restaurant itself is a whole thirty-minute drive away. Can you be bothered to go all that way?
Reading your mind, your partner offers another suggestion; ‘we could always just go to Pizza Shack? It’s right down the street, but the food isn’t exactly the best’.
Now you’re torn.
On the one hand, Pizza Shack is undeniably convenient. On the other…well, you can almost taste that delicious calzone.
Whilst you’re weighing up the pros and cons, your partner has tracked down one final option on Trip Adviser. The reviews show that the food is better than at Pizza Shack, but worse than at Don Beccaccia. However, the drive to this restaurant takes an arduous forty-five minutes.
Needless to say, you quickly rule this final option out. Why travel forty-five minutes knowing you could have pizza of a better standard a mere thirty-minute drive away?
Suddenly, the journey to Don Beccaccia doesn’t seem so bad. Decision made, you and your spouse happily jump in the car and head off in search of that famous calzone.
But, hang on.
Why has the introduction of this third option made any difference to your decision at all?
On the surface, nothing has changed. Pizza Shack is still more convenient, and the food at Don Beccaccia is still better. Why does the existence of this third restaurant make you any more likely to choose one over the other?
The answer lies in a totally irrational phenomenon now known as the ‘decoy effect’. It seems that we are unable to evaluate the merits of each option in a vacuum. Instead, faced with this third restaurant; the ‘decoy’, we subconsciously compare it to the merits and drawbacks of the other two. An effective decoy is superior in some aspects and inferior in others to one option, but inferior in all aspects to the other.
In this instance, the third restaurant is worse than Don Beccaccia on two counts: it’s further away, and the food isn’t as good. However, it is only worse than Pizza Shack on one count: it’s further away. The result is that this decoy restaurant makes Don Beccaccia appear particularly attractive, and as a result, you are more likely to choose it.
Now, imagine if the situation had been slightly different.
In this scenario, the decoy option is only fifteen minutes away, but the food is somewhat worse than at Pizza Shack. In this context, research has shown that the majority of people would choose to eat at Pizza Shack. Whilst the decoy option is worse than Pizza Shack on two counts; quality of food and convenience, it is only worse than Don Beccaccia on one count; quality of food.
A wonderful example of the decoy effect in action comes from an episode of ‘Brain Games’, a National Geographic series highlighting the absurdities of human behavior.
In this particular episode, moviegoers at a high-end cinema are given the option of purchasing one of two sizes of popcorn, the prices of which are prominently displayed on a board next to the concession stand. Customers can buy a small for $3.00, or a large for $7.00. Unsurprisingly, most opt for the small. Whilst they might have otherwise chosen a large, a full $7.00 for popcorn just feels like a total rip-off. However, when a third option is added (a medium-sized popcorn for $6.50), something strange happens. All of a sudden, $7.00 for a large doesn’t seem so steep. After all, it’s only 50 cents more than the medium. When debating whether to purchase a small or a large, it’s easy to evaluate the merits of each option. On the one hand, a small is only $3.00. On the other… well, you get to eat a lot more popcorn.
In this scenario, most people end up choosing the smaller, more economical option. Add a decoy, however, and the results are dramatically different. At $6.50, a medium-sized popcorn is significantly more expensive than a small, but only 50 cents cheaper than a large, a negligible sum for most people. Compared to a small, the medium has one drawback and one positive. You get more popcorn, but at a relatively steep price. Compared to the large, there are two drawbacks. Not only are you paying almost the same price, you are actually getting less popcorn. Surely it makes economic sense simply to purchase the large?
In his book, Predictably Irrational, Dan Ariely showcases a real-life example of the decoy effect. Browsing the internet one day, Ariely came across an advert that caught his attention. This particular ad offered three options to subscribe to The Economist, a prominent newspaper headquartered in London. Would-be subscribers could choose between the following:
1) ‘Web Only’ subscription: $59
2) ‘Print Only’ subscription: $125
3) ‘Print and Web’ subscription: $125
Who in their right mind would pay $125 for a ‘Print Only’ subscription, when they could have a ‘Print and Web’ subscription for exactly the same price? Suspecting some behavioural mischief was afoot, and unable to elicit a response from The Economist, Ariely decided to see whether adding the ‘Print Only’ subscription would make any difference to the number of people opting for the more expensive option.
Surveying a group of 100 MIT students, Ariely asked them to choose between two of the subscriptions. In this first scenario, the choice was limited to between the ‘Web Only’ and ‘Print and Web’ options, priced at $59 and $125 respectively. In this instance, only around 32 percent chose the ‘Print and Web’ subscription, whilst the remainder opted for the ‘Web Only’ one. This seems reasonable. After all, why pay extra if you are happy to read it online?
However, when Ariely added the decoy, something strange happened.
Whilst, unsurprisingly, none of the students chose the ‘Print Only’ option, the number of participants choosing the ‘Print and Web’ subscription skyrocketed to an incredible 84 percent. Assuming The Economist recorded similar results, the inclusion of the decoy would have led to a staggering 30 percent increase in revenue, compared to the ‘Web Only’ and ‘Print and Web’ subscriptions alone. Not bad for an option that no one actually chose!
‘I have to admit, I probably would have taken the package deal myself’ confides Ariely. It is this phenomenon that makes the decoy effect especially potent. Even when we are aware of its existence, we are powerless to resist. Human nature wins out, above all else.
‘Even when are aware of (the decoy effect’s) existence, we are powerless to resist. Human nature wins out, above all else.’
Taking advantage of the decoy effect is an intelligent way for businesses to boost profit margins, by nudging customers into purchasing a higher value product than they would have otherwise. By creating a decoy version of a product, you can make the original seem economical by comparison, resulting in a significant boost in sales.
Perhaps the most common way of putting the decoy effect to work is in pricing tables. In his excellent blog, Paul Olyslager has captured several examples of companies using this technique to influence customers into choosing one product over another. A relatively simple one comes from none other than Apple, in the price table for their ‘iPod Touch’ devices.
Imagine if the only options were the 16GB and the 32GB models. If you want the extra features and storage capacity offered by the 32GB model, you are obliged to fork out $70 more than you’d pay for the 16GB. Is it worth it? It’s a tough call, but add a decoy option and the decision becomes a lot easier. Why would you pay $100 to upgrade from the 32GB to the 64GB if you don’t get any new features? Besides, a 32GB iPod can hold around 8000 songs, which is more than enough for your average audiophile.
This deal looks even worse compared to the difference between the 16 and the 32GB options. For just $70, you can double your storage capacity and receive some extra features to boot. Suddenly, the 32GB version looks like the best value for money. What’s more, some canny marketer at Apple has even paired the 32GB and 64GB together, making you even more likely to compare the merits of the two.
When deciding on what should act as a decoy product, businesses should consider introducing new features to distinguish an existing high-value product from another offering. These new features must be something totally irrelevant to their customer’s decision-making process, but at the same time justify an inflated price tag. Few people require the extra storage offered by the 64GB iPod Touch, but it still explains the increased price. A common example is by offering a product in an additional colour, or by bundling additional (but unnecessary) products together.
Used properly, the decoy effect can dramatically increase the likelihood that your customers will choose your most valuable offering. Adding a decoy neither restricts free will, nor disadvantages either party. In fact, whether we know it or not, we encounter the decoy effect on a near daily basis. Remember that when next you visit a certain fast-food chain, and are asked whether you would like to ‘supersize’ your meal for say, just, 75p more. Could you be being taken in by the decoy effect?
And, at just 75p, do you care?