the Decoy Effect: What It IS & HOW TO UTILISE IT FOR YOUR BUSINESS
The decoy effect is a psychological phenomenon that influences consumer decision-making. It works by presenting a third, less attractive option (the decoy) to nudge customers towards a preferred choice.
When used strategically, the decoy effect can drive sales, improve profit margins, and simplify customer decision-making.
Here’s everything you need to know about the decoy effect and how to leverage it for your business.
Understanding the Decoy Effect
The decoy effect occurs when consumers are presented with three options: two similar options and one that is clearly inferior (the decoy). The decoy is specifically designed to make one of the original options—the "target"—appear more appealing.
For example, imagine you’re at a cinema, and there are three options for popcorn:
Small popcorn: $4
Large popcorn: $8
Medium popcorn: $7.50 (the decoy)
While the small popcorn seems affordable, and the large popcorn feels expensive, the medium popcorn (priced close to the large) makes the large popcorn appear like a better deal.
Customers are nudged to choose the large popcorn, even if they initially intended to buy a smaller size.
How the Decoy Effect Works
The decoy effect relies on the principle of relativity—customers often evaluate options based on their relative value rather than absolute value.
By strategically positioning the decoy, businesses can influence customer perception and guide them toward a higher-value choice.
How to Use the Decoy Effect for Your Business
1. OptimiSe Pricing Strategies
Use the decoy effect to make your premium products or services more appealing. Introduce a middle-tier option that is slightly less valuable but priced closely to the premium option. Customers will naturally gravitate towards the premium choice, feeling they’re getting more for their money.
Example: If you’re selling a software subscription, you could structure your pricing as follows:
Basic Plan: $10/month
Premium Plan: $25/month
Standard Plan (decoy): $23/month
2. Improve Upselling Opportunities
Introduce a decoy product that encourages customers to choose a higher-priced item. This works well in industries like hospitality, retail, and eCommerce.
Example: A restaurant could add a high-priced wine that makes the next expensive option seem more reasonable.
3. Design Better Product Bundles
When creating bundles or packages, include a decoy option that highlights the value of the bundle you want customers to choose.
Example: A fitness studio could offer:
Single Class: $20
Monthly Membership: $80
5-Class Pack (decoy): $75
4. Test and Iterate
The effectiveness of the decoy effect can vary by audience and context. Use A/B testing to experiment with different pricing structures and decoy placements to identify what resonates best with your target market.
Ethical Considerations
While the decoy effect can be a powerful tool, it’s important to use it ethically. Ensure that all options provide value to your customers and avoid manipulating pricing in a way that could erode trust. Transparency and fairness should always be a priority.
Conclusion
The decoy effect is a simple yet effective way to influence customer choices and maximise your business’s revenue. By strategically positioning decoy options, you can guide customers towards higher-value decisions while enhancing their perception of value. When used thoughtfully and ethically, the decoy effect can be a valuable addition to your marketing toolkit.
Looking to optimise your pricing strategy and drive more conversions? Contact Meaningful Agency to learn how we can help your business grow.
