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The Decoy Effect – Pricing Strategy You Don’t Want to Overlook
Alex DePaoli
Alex DePaoli
October 26, 2018
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The Decoy Effect – Pricing Strategy You Don’t Want to Overlook

Similarly, it is not uncommon to see a brand or a store offer a product that exists only for the purpose of making another product look better, or simply to adjust the products on their shelves to highlight certain items over others. For example, the high priced iPhone 5s ($199) can make a more moderately priced iPhone 5c ($99) look like a bargain. Alternatively, the 5c might also look like a great purchase if it were next to an older iPhone with fewer features. In both of these cases, the set of product choices can have a meaningful impact on what a customer chooses.

Using another product to create a contrast is straightforward. Things start to get interesting when we have three alternatives to choose from.

Illustration of different iPhones to show the decoy effect

The Decoy Effect

Suppose that in addition to the iPhone 5s and 5c, Apple had also released another iPhone 5 variant (let’s call it the 5x) which was identical to the 5s in every way (including price) except it has a lower quality camera. How will this affect customers’ choices of iPhone?

The first result is obvious – no one will buy the 5x because it is strictly worse than the 5s. The second effect may be more surprising: sales of the 5s will likely be higher than if the 5x were never an option.

The “Decoy Effect,” also known as asymmetric dominance, has been around in the behavioral economic literature for a long time, but really gained traction when Itamar Simonson and Amos Tversky published a 1992 paper exploring the impact of the set of choices on choice itself. The authors illustrate (using film cameras instead of iPhone cameras) that if customers are indifferent between Option A and Option B (the 5s and 5c), introducing an Option A- (the 5x) will increase the likelihood that Option A is picked.

The Decoy Effect is largely driven by the same forces that make two-product contrasts work. However, in larger choice sets (4, 5, 6, etc), it becomes more and more difficult for customers to keep track of which options are better than others, and on which dimensions. Including a decoy Option A-, which is obviously a worse option than an Option A, will draw customers’ attention to Option A and increase the likelihood that they will pick it. Note that this works best when there is no clear winner between Option A- and the other options so that only Option A can be said to dominate A-.

The Compromise Effect

Another favorite finding in behavioral economics that Simonson and Tversky discuss is called the “Compromise Effect,” and it also emerges when customers are faced with three options. The psychology underlying this effect is essentially that people either dislike or get tired of making mental trade-offs between products. Deciding which features are important, how much they are worth, which product has the right combination, etc. can be mentally taxing, and people tend to prefer to simplify the process as much as possible (sometimes consciously, and sometimes without realizing it). Because of this, if a customer is presented with three products with no clear best choice, they are more likely to settle on the one that seems like a “middle” or compromise option (which is why the Compromise Effect is sometimes called “the Goldilocks Effect”). For example, in the original paper, participants were shown two microwaves:

  • 0.8 cubic foot Panasonic for $180
  • 0.5 cubic foot Emerson for $110

About 43% chose the Panasonic, but once the authors introduced a third microwave priced at $200, 60% of customers chose the Panasonic. Note that is60% out of three options whereas before it was 43% out of two options. The share of customers choosing the Emerson dropped from 57% to 27%.

The following screen-grab is straight from Amazon, and guess which microwave is the #1 bestseller:

A list of microwaves on Amazon

Another important reason for the attractiveness of the Compromise option is that it is more justifiable. People are more comfortable selecting an option when they feel they have a good reason to pick it, and balancing trade-offs is an easy and satisfying rationalization (see this 1989 paper, also by Itamar Simonson). With this in mind, the little bit of social proof offered by that “#1 Best Seller” flag can only serve to strengthen the Compromise Effect. Similarly, anything that gives your customers a good reason to justify buying a product is a great way to promote that choice.

According to a 2003 paper by Ravi Dhar and Itamar Simonson, there is one important limitation that hurts the effectiveness of the Compromise Effect: the option to walk away. Customers choose the Compromise option because they see it as a way to simplify their choice, but not choosing anything is also a way to simplify the choice. Thus, Compromise works best when customers are committed to buying something. If they are free to walk away, then the effect is much weaker.

While this may limit the types of products that would strongly benefit from a Compromise choice set, it may suggest how a brand might want to position itself. If your customers are committed to buying your type of product, but not committed to buying it from you, the Compromise Effect would suggest that you should position your brand as a middle-ground between your competitors to attract the most customers.



Managing choice sets – the foundation of Decoy Effect

The Decoy and the Compromise Effects highlight the importance of paying attention to all of the options you put in front of your customers. On one hand, that means you need to consider how customers will be making trade-offs between your products, and whether you may already have items acting as decoys or Compromise options. On the other hand, it suggests that it you don’t have decoys or compromises, you might want to create some.

Decoys are probably easier to create as you simply need to offer a less desirable variant of an existing product or promotion. Unlike the iPhone 5x example, it does not need to be exactly the same as your target product except with one shortcoming, but it should be immediately obvious that it should be directly comparable. Remember as well that the key function of the decoy is not only to make your product look good, but to draw attention to it. So strip out a feature, raise the price, or otherwise make it slightly less attractive, and you have a decoy!

Creating a Compromise option requires identifying which product you want your customers to buy, and then making it look like a balanced option among your other offerings. Remember to also play on both of the underlying drivers behind the Compromise effect: make your product an easy choice, and make it a justifiable choice. The easier and more justifiable your target product seems in comparison to the offerings around it, the higher the chance it will be picked!

Finally, it is also important to consider the number of options you give your customers. Having many options, especially if the trade-offs between them are more complex, can be demotivating to your customers because selecting the “right” option is too daunting (although this is not always the case). Both the Decoy and the Compromise Effects show up most strongly in groups of 3, so if possible, you might consider getting your customers to view products 3 at a time.

One feature that would do this nicely (and that I don’t think I’ve ever seen before) is a product comparison tool. If customers want to directly compare two items out of your stock, allow them to view details of those products simultaneously, but then add a third “recommended” item that serves as either a Decoy or a Compromise.

Takeaways on the Decoy Effect

  • People are attracted to products that are clearly better than some other option in their choice set (a “decoy”) regardless of other options.
  • People are attracted to products that are seen as compromises between other options, especially when they are committed to buying something from that product category.

Always bear in mind that when anyone is making a decision, the context is extremely important. Having decoy products to make your target product look better, or which make it look like the smartest option, can meaningfully impact your customers’ choices.


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