The Decoy Effect: What It Is and How to Make It Work for You

Every retailer is interested in increasing their turnover or maximizing the sales of a particular product at some point or other, and one way of doing this is by using decoy products. A decoy product is an option that, when added to a choice set, alters the relative attractiveness of the other alternatives in the set and causes the customer to switch their choice from one option to a more expensive or profitable one. It’s not intended to sell, just to nudge customers toward a certain item by showing them a slightly worse alternative.

What is the decoy effect?

When people talk about the “decoy effect,” they are referring to asymmetric decoys. These work by being “asymmetrically dominated.” This means the decoy is totally dominated by the target option, the item you would like the customer to choose, in terms of perceived value, but only partially dominated by the other, “competitor” item. This is why the decoy effect is sometimes called the “asymmetric dominance effect.” It’s also called the “attraction effect” because it causes a shift in preference from itself to a similar but superior alternative.

One of the most well-known examples was described by psychologist Dan Ariely, who noticed something odd about The Economist magazine’s subscription options:

• an internet-only subscription for $59
• a print-and-internet subscription for $125
• a print-only subscription for $125

He wondered why the magazine would offer a print-only option for the same price as a print-and-internet one, so he asked 100 of his students to pick one of the three options; 16 chose the internet-only subscription and the other 84, the print-and-internet option. Then he took away the print-only subscription, which no one had picked anyway, and asked the students to choose again. This time, 68 of them chose the cheaper internet-only option and 32, the print-and-internet option. The print-only decoy had made 52 people buy the most expensive option and netted a hypothetical profit of $3,432.^[1]

When deciding between multiple choices of products or services, being aware of the decoy effect could help you make better choices.

The decoy effect was first described by academics Joel Huber, John Payne, and Christopher Puto,^[2] who demonstrated that the presence of decoys could increase the sales of things like beer, cars, restaurants, films, and TV sets. Their results were revolutionary because they challenged the established thinking that introducing a new product could only take market share away from an existing one.

They found that decoys were most effective when they extended the target’s weakest dimension, making its deficit in that dimension seem less important. Say you are selling beer. You have two different beers on offer:

• Beer A, which costs $1.80 and has a quality rating of 50
• Beer B, which costs $2.60 and has a quality rating of 70

Right now, there is a trade-off between price and quality, and each of your customers chooses according to which attribute they find most important.

But you would like to sell more of Beer A, so you add a third choice, the decoy:

• Beer C, which costs $1.80 and has a quality rating of 40

Now Beer A’s quality rating is in the middle rather than the bottom of the set. Additionally, the decoy has increased the range of the quality attribute from 20 (50 to 70) to 30 (40 to 70), making the 20-point advantage of Beer B over Beer A seem smaller. In Huber, Payne, and Puto’s study, this resulted in a 20 percent increase in demand for Beer A.

There is also a special type of asymmetric decoy — the phantom decoy — which dominates the target product but is unavailable at the time of choice. These tend to work best when they are more attractive than the target on its best dimension, and just as good on the other dimension. Using our beer example, should we want to sell more of the superior craft beer, Beer B, we would use:

• Beer D, which costs $2.60 and has a quality rating of 80 but is “out of stock”

Now that the most attractive option is unavailable — maybe because it’s so popular — many customers will feel compelled to get the next best thing.

Phantom decoys can be divided into two sub-groups; those whose unavailability is known from the beginning (“known phantoms,” as in the example above), and those whose unavailability is revealed only after a customer tries to purchase them (“unknown phantoms”). Phantom decoys should be used with care. Whereas known phantoms generally exert a positive effect, unknown phantoms tend to create stress and anger, and they can scare customers away. Those who decide to choose again from the more restricted choice set generally feel dissatisfied and unfairly treated, and they are less likely to buy from the retailer again.^[3]

If one option seems much better than the others, it could be the decoy effect at work.

Why decoys work

The decoy effect is considered “a violation of rationality.” A person is presented with two items and thinks that Item A is better than Item B, until they are presented with a third option and suddenly they decide that Item B is better than Item A. That makes no sense. So, why do decoys work?

Making decisions between two items is a stressful business.^[4] There are all those different attributes to evaluate, values to remember, combinations to consider, importance to weigh. The decoy takes the stress away by highlighting which attributes the customer should focus on and making it easier for them to justify the choice of the dominating option — the target — because it is so obviously better than the dominated option — the decoy. In fact, having to justify one’s choice increases the decoy effect, as the focus of the decision is shifted from a choice of good options to a choice of good reasons for selecting that option.^[5]

Decoys are also said to capitalize on loss aversion, a term that describes how our losses tend to be more unpleasant than equivalent gains are pleasant. But the very definition of “loss” is subjective; losses and gains are defined relative to some reference point. In a three-choice set, the decoy serves as the reference point from which the consumer compares advantages and disadvantages. From the viewpoint of the asymmetrically-dominated decoy, the target is better in every way, and the competitor option is better in some ways but less good in others. Loss aversion causes the consumer to direct more focus toward disadvantages when making their decision, making them more likely to pick the target product.

Research has also determined that people are more averse to lower quality than they are to higher prices, another psychological quality exploited by decoys that are designed to push customers toward targets of higher quality and higher price.^[6]

That said, decoy effects have been found in humming birds^[7] and amoebas^[8] so we could just be hard-wired to make choices using comparative, context-dependent criteria.

Nonetheless, decoys work for all kinds of products, from paper towels and tissues^[3] to vacations^[9] and diamonds^[10]. The decoy effect doesn’t just affect people’s product choices; it affects a whole range of decisions, including personnel assessments,^[11] mortgage repayment choices,^[12] and social policy judgments.^[13]

Moreover, decoys have even been shown to work when they are in a different product domain and cannot be directly compared with the target product. This is as long as consumers form an initial impression of each product separately before making a choice, and products all vary along a common attribute dimension. For example, in a choice set that includes a (target) fridge with a fast freezing time but moderately high operating cost and a (competitor) fridge with a slow freezing time but low operating cost, a (decoy) dishwasher with a higher operating cost than both fridges and an artificial intelligence feature nudges the consumer toward choosing the target fridge.^[14] Since consumers often encounter products successively rather than simultaneously, and information about a product’s attributes is not always conveyed in a way that makes feature-by-feature comparisons easy, this type of decoy may be more useful than you think.

To be really effective, however, decoys need the right conditions.

The decoy effect is often used when setting the sizes and prices for things like coffee, soft drinks, and popcorn.

The right customers

The decoy effect works best on people who are unfamiliar with the product.^[15] For example, it’s reasonable to prefer a restaurant with a 5-star rating over one with a 4-star rating, and to prefer paying $200 rather than $250 for dinner. However, for the decoy effect to occur, a person needs to be unsure whether a 1-star difference in ratings is worth the $50 price difference. The people most susceptible to decoys are those who tend to rely on intuitive reasoning.^[16] These people often will be men.^[17]

Decoys are not as effective when people are more interested in the choice at hand, perhaps because they are buying a big-ticket item; they pay more attention to the information that’s available and are prepared to make the effort to process it more accurately. This is not the same as looking for reasons to justify a choice, because a choice best supported by reasons is not necessarily the same as the most optimal choice. For example, a consumer who normally never shops may select the same brand of pasta sauce as their spouse because this choice is more easily explained to the spouse, but it doesn’t mean they actually think that it’s a good trade-off between price and quality.

Decoys are much less likely to work when a customer has strong prior preferences — for instance, they always prioritize quality over price, or they are loyal to a particular brand.^[18] Decoys are almost totally ineffective when it comes to influencing people over the age of 65. This is either because the experience that they have built up over the years in the marketplace has made them better able to ignore decoys, or because they are simply more cautious in their purchases.^[19]

Finally, decoys can be undesirable to a certain segment of the population; for example, high-price/high-quality decoys tend to have a greater impact among people who desire and can afford such products, whereas low-price/low-quality decoy works better for those with limited financial resources.^[20]

The right position

For a decoy to be effective, it must be positioned properly. When a decoy is very similar to the target product but not clearly inferior, it can reduce the preference for the target via a “similarity effect,” a term that describes the fact that the introduction of a new, similar product tends to hurt similar alternatives more than dissimilar ones.^[21]

On the other hand, when the decoy’s inferiority is obvious, it increases the attractiveness of a similar target by drawing the consumer’s attention toward the attributes on which the target is superior.^[22] However, the decoy should not be too inferior; decoys that are similar yet very inferior to a target product are said to “taint” the comparable target product with their bad properties and produce a “repulsion effect,” which leads consumers to choose the competitor item.^[23] For example, if you are selling two TVs, one of which (the competitor) is of high quality but also expensive, and the other of which (the target) is cheaper but of lower quality, a decoy which is also cheap and of much worse quality may prompt consumers to think “You get what you pay for” and make them choose quality over price.

Decoys with skewed attributes should also be avoided. When two products are rated as exceptional on one of two attributes and mediocre on the other — for example, MP3 player A, rated 10/10 on features but 4/10 on ease of use, versus MP3 player B, rated 9/10 on features but 5/10 on ease of use — the addition of a decoy with attributes favoring player A — MP3 player C, rated 10/10 on features but 2/10 on ease of use, also results in a repulsion effect. Because comparison of the superior attributes is essentially meaningless, the consumer focuses on the second attribute, resulting in the decoy being dropped and the target and competitor items being grouped together to form a category based on their perceived similarity. The consumer then chooses the competitor item because of its superior value on the second attribute.^[24]

The right information

For the decoy to work, the dominance relationship between it and the target product needs to be obvious. As such, the decoy effect tends to work best with products or services for which precise attribute values are typically described, such as product price, product features, or length of warranty. Decoys that include pictures — for instance, differently priced hotel rooms whose quality is depicted with a photo — generally do not work. Neither are decoys effective when they are inferior in a qualitative rather than a quantitative sense — for example, the brand and flavor of microwave popcorn — or when the consumer is able to experience at least one of the attributes directly — such as drinks that can be consumed, or facial tissues that can be touched.^[25]

Decoys work better when the information provided is not particularly meaningful. For example, if a consumer has a choice between two types of frozen concentrated orange juice and they are comparing the price with quality ratings given by a consumer report, a standard decoy listing those two attributes will do the job. However, if they are given more elaborate — that is, meaningful — information about the alternatives, for instance, they are told more about the flavor, aroma, and nutritional values of the juices, this may prompt the consumer to think about their own experiences and rely less on the information provided. This significantly reduces the decoy effect.^[26]

The decoy effect is also severely limited when attributes are expressed as losses. For example, framing a returns policy as “Returns denied after 15 days” rather than “Returns permitted within 15 days” can be enough to eliminate the decoy effect.^[27] When people are forced to choose between undesirable options, their attention is drawn to the fact that they are being forced to make trade-offs with no way of avoiding a bad outcome. They become more vigilant; even if the decoy initially points toward the asymmetrically dominating target, they soon realize that the target is also undesirable and start evaluating the remaining options.

Decoys that are perceived as popular tend to increase the decoy effect because people have a tendency to value the opinions of others. If the decoy is of a popular brand, consumers are more likely to take it into consideration instead of dismissing it out of hand and to compare it to the nearest — target — brand. In most cases, they will decide that the target has superior attributes.^[15]

Finally, decoy effects are driven by forces that make two-product contrasts work; in larger choice sets (4, 5, 6, etc.), it becomes more difficult for customers to keep track of which attributes of which products are better than others. They are also ineffective when the customer is unable to identify the dominance relationship quickly and unambiguously, for instance, because the decoy and target items have been placed too far apart on a menu or the customer is in a hurry. It takes time for consumers to detect the relationships between the dominated decoy, the target product, and the competitor.^[28] Consumers can’t act on a relationship that they don’t perceive.

References:

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