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According to Wikipedia, the “decoy effect” (also known as the “asymmetric dominance effect”) is the phenomenon whereby consumers switch their preference between two options when they are also presented with a third option that is asymmetrically dominated.
In simpler language, this is how lures are used on a daily basis during consumer experiences:
Scenario 1: You order a medium Pepsi at the theater for $2.75, and the person behind the counter asks, “Would you like a large for just 25 cents more?” You say, “Yes”… that’s the decoy effect.
Scenario 2: You are sitting at an airport terminal bar waiting for your plane to board. As soon as he orders his $7 cocktail, the bartender smiles and says, “Do you want a double shot for just $2 more?” He says, “Yes” … that’s the decoy effect.
I have no idea what your consumer’s response would be in similar circumstances, but I know from my own experience that I will choose the asymmetrically dominated option almost 100% of the time.
In the traditional “Good-Better-Best” pricing model, Dan Ariely, author of the New York Times bestseller, Predictably Irrational – The Hidden Forces That Shape Our Decisions, revealed to me the best use of a lure.
Turn to page 5 of Dan’s fascinating book and you’ll find an interesting study he conducted with 100 students at MIT’s Sloan School of Management. (He set out to test the predictability of the choices they made from a subscription offer to The Economist magazine that stumbled across the Internet a short time before.)
The Economist Subscription Offer Review: In Dan’s Ariely’s words, “I read these (three) offers one at a time. The first offer (the $59 internet subscription) seemed reasonable. The second option (the print subscription $125) seemed a little pricey, but still reasonable. “But then I read the third option: a print and internet subscription for $125. I read it twice before my eyesight returned to the previous options,” she writes.
At this point, Dan asked himself the same question thousands of my students have asked when presented with the same buying situation:
“Who would want to go for ‘Best’ (print only – Offer B) when both ‘Good’ (Internet only – Offer A) and ‘Best’ (print only – Offer B) can be purchased for the same price of $125 (‘Best’ – Offer C)?”
Good question.
Here is The Economist’s sleight-of-hand pricing model in a nutshell:
Offer A: Internet Only Subscription for $59
Offer B: $125 print-only subscription
Offer C: $125 Print & Internet Subscription
Economist Subscription Offer: When Dan gave these same three options to 100 students at MIT’s Sloans School of Management, here’s how the results played out:
Offer A: Online Only Subscription for $59 ~ 16 students
Offer B: $125 print-only subscription ~ 0 students
Offer C: $125 Print & Internet Subscription ~ 84 Students
Fascinating, right?
In my own marketing experience, I’ve found that the decoy pricing model influences my prospects to have a strong bias toward Offer C or the “Best” option in the Good-Better-Best pricing model.
Dan Ariely discovered the same phenomenon.
Economist subscription offer (decoy removed): When Dan removed the decoy (Offer B or the “Best” option in the Good-Better-Best model), he wondered if all 100 MIT students would react the same way. After all, the option he eliminated was Offer B (the one no one selected), so it shouldn’t have made any difference to him, right?
Not quite…
Under the removed decoy condition, Dan found that 68 of the students chose Offer A (Internet only) for $59. That’s 425% more and represents a smaller gain.
But wait, it gets even better… only 32 students chose Offer C (Internet-Print combo) for $125. That’s a 262% decrease and represents far less profit!
Here are Dan’s actual results for a similar offer without the lure (print-only option):
Offer A: Online Only Subscription for $59 ~ 68 students
Offer B: $125 Print & Internet Subscription ~ 32 Students
Final Analysis: As consumers, it seems that “the more we get, the more we want.” As marketers, using a lure when testing prices can be an unreasonably predictable excuse for your prospects to choose the “Best” option, which is probably the most beneficial for both parties anyway. Test your price and use this model with your product and see what happens!