Why Some Offers Look Too Bad to Be True
Which of the following subscription models for a news-magazine looks like the best deal?
Take a moment to decide. Done? Which one did you choose? You probably did not pick the middle option, a print subscription for 125$. Why would you, if you can get both print plus online for the same price? Most likely you considered option 3 to be the best offer. If you did, it might be due to a simple trick which is known as the decoy effect.
The decoy effect (also called the asymmetric dominance effect) is used by marketers to influence the customer’s decision-making when choosing one out of several options. It is often applied when there are two offers a customer can choose from, like two different subscription packages or two sizes of the same product. Usually, one of both comes along with better quality or other positive aspects but at a higher price, which is why the company wants its customers to pick this option over the cheaper one.
At this point the decoy effect comes into play: A third option is added to the existing two. The decoy option outclasses the first other option in one aspect and is inferior to the second option in two aspects. Take a look at the 3 subscription models at the beginning. Option 2 in the middle is the decoy. It’s more expensive than option 1 (inferior in price) but offers a better subscription (a print-subscription is considered to be more valuable than the online-subscription in this example). But while option 2 is partially better than option 1, it is entirely inferior to option 3: Number 3 offers the best subscription model (print & online) but for the same price as option 2.
The result: The print subscription for 125$ (2) looks like a horrible deal, and the print & online subscription (3) for 125$ seems like the most value. But don’t get fooled: Option 3 is not better than option 2 – it’s just not as bad. This explains why the phenomenon is called decoy effect: The asymmetrically dominated offer serves as a bait and tricks the customer into picking the most expensive product.
In an experiment conducted by Dan Ariely with 100 students from the MIT Sloan School of Management, a subject group had to choose between the three different subscription models that you saw at the beginning. The result of the experiment: Only 16 students chose option 1, nobody chose option 2, and 84 students chose option 3.
Let’s take a look at a second experiment conducted with another student group of the same size, but with only two options available:
1. Online-only annual subscription for 59$.
2. Print-and-online annual subscription for 125$.
This time, 68 students picked option 1, and only 32 chose the more expensive option 2. Without the terrible offer from the first experiment, a much smaller number of people was willing to buy a subscription for 125$.
How to make use of it
If you are a marketer, I’d recommend you make use of the decoy effect wherever possible. It’s easy to implement and can increase your sales significantly. Important to know is that the asymmetric option doesn’t need to be higher or equal in price to the option it shall promote. In an experiment conducted by national geographic, the customers of a cinema could choose from three different sized popcorn bags. A small bag for 3$, a medium one for 6,50$ and a large one for 7$. The decoy (the medium) was slightly lower priced than the large bag but contained much less popcorn, which made the large portion being sold for $7 look like a terrific deal. The result: Far more people decided for the large bag. Before the decoy option was included, most people picked the smaller, cheaper popcorn portion.
The decoy effect can be used on many different products and in variable forms. One can use, for example, more than just one decoy. In this article’s example it would look like this:
1. An annual online subscription for 100$.
2. An annual print subscription for 100$.
3. An annual subscription for both print and online for 125$.
Options 1 and 2 are both decoys, leaving the customer with only one “real” alternative. However, providing only one expensive offer could exclude those potential customers who would have paid for the cheaper offer and are not willing or able to afford a higher price.
In theory, you can use a decoy even if you offer more than three options, but I doubt that the effect will be equally strong. In the example from the beginning, there are two “real” options and one decoy. If the number of real options would be increased from two to four, the decoy could lose most of its effectiveness. One out of the four products will look like an excellent deal thanks to the decoy, but there are still three other reasonable options at hand. I believe that the probability, by which a customer picks the option you want him to take, decreases with the number of available options. Therefore, a total of 3 purchase options (including one decoy) is the most effective set up in my opinion.
How to avoid the decoy effect
If you don’t want to get fooled by this trick you should avoid comparing the offers and look at each one alone. How much value do you get? Are you willing to pay the price for it? If you see an option that seems asymmetrically priced, be aware that it could be bait. Its only purpose might be to make you think that the most expensive option is also the most valuable one. Don’t fall for it.
Think of the three subscription models from the beginning and imagine that the decoy in the middle would be missing. Suddenly, an online-only subscription for 59$ and a subscription for print & online for 125$ look equally good.
How to avoid the decoy effect
If you don’t want to get fooled by this trick you should avoid comparing the offers and look at each one alone. How much value do you get? Are you willing to pay the price for it? If you see an option that seems asymmetrically priced, be aware that it could be bait. Its only purpose might be to make you think that the most expensive option is also the most valuable one. Don’t fall for it.
Think of the three subscription models from the beginning and imagine that the decoy in the middle would be missing. Suddenly, an online subscription for 59$ and subscription for print & online for 125$ look equally good.
