Coffee at home isn’t as fun and fancy as it is in Degani

This was the first thing that came to mind, yesterday, as I poured myself a cup from the pot at home. I know there are more serious things I need to worry about than coffee at a fancy coffee shop, but, sometimes, social distancing reminds you about the little things in life, the little luxuries, you can no longer enjoy.

I work from home, so, going out to buy a cup of coffee is more than just tasting the milky froth on top. For me, it’s the whole experience of taking a small break, going on a drive, waiting in line, and debating whether I should order a medium or large (I’m sure you’re just as familiar with this all-consuming dilemma).

I can never seem to decide on the size of my coffee. I mean, the price difference between the two bigger sizes is just 50 cents and that’s a more convincing bargain, considering the fact that the small and medium sizes have a 70-cent difference.

Some time ago, I learned that this is a classic psychological bias at play and is one used by businesses around the world. It’s called the decoy effect. 

A strategy used by businesses in their product pricing and sometimes even used in finance and politics to influence people’s decision-making, as a marketer, I’m always intrigued by these aspects of psychological persuasion. Let’s put this into perspective.

For instance, imagine that my company introduces a subscription-based business model and you are offered three different options to choose from. Which would you choose?

  • $10 per month: Access to three free blog posts
  • $17 per month: Unlimited access to blog posts
  • $20 per month: Unlimited access to blog posts and to select consultancy services

According to marketing research, you are more likely to choose the $20 plan and if you do, we have succeeded in using the decoy effect in our pricing strategy.

So, what exactly is the decoy effect and how can you successfully execute it in your marketing and pricing strategy? Let’s start with the basics.

What is the decoy effect?

The decoy effect is a cognitive bias that is used in businesses, technically known as an ‘asymmetrically dominated choice’. This phenomenon usually occurs when a person’s preference for one option over the other changes when a third option, which is similar but less attractive than the third option, is added into the mix.

For instance, take the hypothetical example I used above. The difference in the price point between option one and option three is doubled. However, when another option, a decoy, which offers more value but is just shy of $3 compared to the third option is introduced into the mix, the third option becomes a better bargain.

This sways customers into believing that they are making a better choice by choosing the more valuable option even though it’s more expensive. So, what asymmetric domination means is that the decoy is priced to make one of the other options more attractive than it would otherwise be (large coffee, here I come!).

This is dominated in terms of perceived value in quantity, quality, extra features and so on but it is not intended to sell. Rather, it’s an option introduced to nudge customers away from the ‘competitor’ and towards the ‘target’, which is usually the more expensive or profitable option.

The decoy effect always works – right?

There’s a lot of human psychology at play here. When a customer is given many choices, they experience a sort of choice overload. Many studies are consistent in their findings that when we are faced with a lot of choices, it can increase our anxiety and we experience difficulties in making decisions.

So, in an attempt to reduce this anxiety, customers simplify the process by prioritising a couple of criteria like price and quantity to determine what option provides them with the best value for money. By manipulating these key choice attributes, a decoy option steers customers in a particular direction while giving them the feeling that they are making a rational, informed choice.

This decoy effect is a form of ‘nudging’, a choice structure that predictably changes people’s behaviour without excluding any options, as defined in the ‘nudge theory’ by its pioneers Richard Thaler and Cass Sunstein.

In many cases, companies also use this ‘nudge’ to encourage customers to move on to more effective and useful products. For instance, if you are a media company with a printed magazine and want to stop printing because it’s a less profitable option for you, you can use the decoy effect to sway customers to subscribe to the online edition of your magazine. In this sense, it makes sense to encourage consumers to move online.

At this stage, it would be incorrect to assume that all decoys are identifiable or conspicuous. They’re often quite subtle. For example, say you run a healthy juice bar and a small cup of juice (350 ml) costs $6.10, the medium (450 ml) $7.10, and the large (610 ml) $7.50. Which would you buy?

If you do the math, you might work out that the medium cup has a greater value for money than the small, and the large cup, even more so. Given that these choices are designed to be asymmetrically dominated, they steer customers to perceive the biggest drink as the one with the best value for money.

How can you use the decoy effect strategically?

  • Choose a product or service you want to sell more effectively

  • Provide your customers with three options. If you offer them just two choices, the customer will likely choose the more affordable option and if you give more than three options, the decoy effect will be lost. They will likely face a choice overload, as discussed earlier.

  • Create an imbalance in the choice as the goal is to create a decoy. What shouldn’t happen is that a decoy is preferred more than the higher value option! For this reason, the decoy should seem like a wasteful option.

  • Price the decoy close to the option you want to sell more of and better than the cheapest option.

  • Also, be aware of the middle-choice tendency. Customers tend to choose the middle option when presented with three options because of our bias towards the central figure in a group of three. This is why some companies place the company preference in the centre, in-between the lower-priced option and the decoy.

There’s also an alternative strategy for the decoy effect

This alternative is called an ‘irrelevant alternative’ where you make the mid-priced option the target and the lower-priced option the decoy. You can see this at play in the subscription pricing strategy used by The Australian’s digital newspaper. 

In this instance, the digital-only option is the decoy and the digital+weekend paper option is the target. The intention, here, is to discourage customers from choosing the more expensive six-day paper option because that option is not necessarily profitable for the company anymore. 

Decoy marketing – everything you’ve been looking for (and more)?

You need to understand that this strategy depends entirely on a very human and cognitive bias, meaning, there can be outliers or, in other words, customers who would not be swayed to make the decision you want them to make. 

So, as it might depend on your target audience, it would be useful if you do your own experimentation to see how it works out for your company. Determine your marketing strategy and lay out a pricing campaign with the decoy effect in play. Run it for a certain period and see the results. 

You could even do competitor research to see how others have introduced this type of pricing to customers.

The decoy effect is subtle, yet it’s seen everywhere. It affects your consumption habits and with careful observation, you could use the decoy effect in your company’s pricing strategy and increase revenue. It can also help your company make important financial decisions.

To wrap up, use the decoy effect to nudge your customers to make more profitable decisions for your company, make more economical decisions without compromising on price, and even encourage them to make more sustainable decisions that positively affect the environment.