What is Decoy Effect?
Decoy Effect explained clearly with real-world examples and practical significance for marketers.
Decoy Effect is a cognitive bias where consumers change their preference between two options when a third, strategically inferior option is introduced.
What is Decoy Effect?
The decoy effect manipulates consumer choice by introducing an asymmetrically dominated option that makes one of the original choices appear more attractive. Marketing researchers Dan Ariely and Joel Huber first documented this phenomenon in the 1980s, showing how an inferior “decoy” option increases demand for a specific target product.
The effect works through three options: the target (the option marketers want customers to choose), the competitor (an alternative option), and the decoy (an option that is clearly inferior to the target but comparable to the competitor). The decoy makes the target appear like exceptional value by comparison.
The Mathematics Behind Consumer Choice
The mathematical principle behind the decoy effect involves dominance relationships. When Option A costs $100 with 5 features and Option B costs $150 with 7 features, consumers might split their choices. However, introducing Option C (decoy) at $140 with 6 features makes Option B appear superior, shifting preference toward the target.
Behavioral economists measure the effect’s strength using choice share analysis. In controlled studies, introducing an effective decoy typically increases target selection by 15-25 percentage points. The phenomenon occurs because consumers use relative comparisons rather than absolute value assessments when making purchasing decisions.
The decoy must be asymmetrically dominated, meaning it performs worse than the target on most attributes while remaining somewhat competitive with the alternative option. This positioning creates a clear preference hierarchy that guides consumer choice toward the marketer’s intended target.
Decoy Effect in Practice
The Economist’s $125 Lesson
The Economist famously demonstrated the decoy effect with their subscription pricing. They offered three options: web-only subscription for $59, print-only for $125, and web plus print for $125. The print-only option served as a decoy, making the combined package appear like exceptional value. When behavioral economist Dan Ariely removed the decoy from his experiment with MIT students, preference for the combined package dropped from 84% to 32%.
Cinema Popcorn Psychology
Movie theaters extensively use decoy pricing for popcorn. A typical cinema might price small popcorn at $6, medium at $7.50, and large at $8. The medium size acts as a decoy, making the large appear like better value despite the minimal price difference. AMC Theatres reported that introducing this pricing structure increased large popcorn sales by 40% while maintaining overall profit margins.
Apple’s iPad Storage Strategy
Apple employed the decoy effect when launching the original iPad lineup. They offered 16GB for $499, 32GB for $599, and 64GB for $699. The middle option served as a decoy, positioned with poor value per gigabyte compared to the high-end model. Internal sales data showed that 40% of customers chose the 64GB version, exceeding Apple’s projections for their highest-margin product.
Starbucks Size Manipulation
Starbucks applies the decoy effect across their beverage sizes. The tall (12oz) at $4.50 and venti (20oz) at $5.50 make the grande (16oz) at $5.25 appear poorly positioned. However, this actually drives customers toward the venti size, which has the highest profit margin per ounce. The company reported that venti sales increased 23% after implementing this pricing structure across major markets.
Why Decoy Effect Matters for Marketers
The decoy effect provides marketers with a powerful tool for influencing consumer choice without changing the core product offerings. By strategically introducing inferior options, brands can guide customers toward higher-margin products while maintaining the appearance of consumer autonomy in decision-making.
This technique proves particularly valuable for premium positioning strategies. Luxury brands use decoy options to make their flagship products appear more reasonable by comparison. The presence of an overpriced decoy legitimizes premium pricing while creating a clear value hierarchy that consumers can easily navigate.
Digital marketers find the decoy effect especially useful for subscription services and software pricing. SaaS companies regularly implement three-tier pricing structures where the middle option serves as a decoy to drive upgrades to enterprise-level packages. This approach can increase average revenue per user by 20-30% compared to simple two-option pricing.
The effect also enhances customer lifetime value by encouraging initial purchases of higher-tier products that create stronger brand attachment and reduce churn rates. Companies using effective decoy strategies see improved conversion rates and higher average order values across their customer base.
Related Terms
- Anchoring Bias – Cognitive tendency to rely heavily on the first piece of information encountered when making decisions
- Price Bundling – Strategy of offering multiple products or services together at a single price point
- Loss Aversion – Psychological principle where people feel losses more intensely than equivalent gains
- Choice Architecture – Design of environments in which people make decisions to influence their choices
- Behavioral Economics – Field combining psychological insights with economic theory to understand decision-making
- Value Perception – Consumer’s assessment of a product’s worth based on benefits received versus costs incurred
FAQ
What is the difference between decoy effect and anchoring bias?
The decoy effect involves three options where one inferior choice influences preference between the other two, while anchoring bias occurs when the first piece of information disproportionately influences subsequent judgments. Anchoring affects numerical estimates, whereas the decoy effect specifically changes choice preferences through comparative evaluation.
How do you identify an effective decoy option?
An effective decoy must be asymmetrically dominated by the target option, meaning it performs worse on most key attributes while remaining somewhat competitive. The decoy should be obviously inferior to the target but close enough to the competitor to create meaningful comparison points for consumers.
Can the decoy effect backfire on marketers?
Yes, poorly designed decoys can backfire when consumers recognize the manipulation or when the decoy accidentally becomes more attractive than intended. Additionally, if customers focus primarily on price rather than features, an expensive decoy might drive them toward the cheapest option instead of the target.
Does the decoy effect work in online environments?
The decoy effect remains effective online, particularly in e-commerce and subscription services. Digital platforms can easily test different decoy configurations and measure their impact on conversion rates. However, the effect may be weaker online where consumers can more easily comparison shop across multiple retailers.