The 3 Option Decoy Effect and Relativity

How Decoy Effect in Marketing Affect eCommerce Psychology

The intersection between eCommerce psychology and marketing is an extremely intriguing field to explore as companies attempt to craft marketing strategies and apply concepts such as the decoy effect in their marketing agenda. Building up from teachings in Dan Ariely’s bestseller “Predictably Irrational”, as well as online courses in the psychology of eCommerce, it is safe to say that overarching patterns exist in user’s buying behaviour and decision making. This blog will explore “The decoy effect” and examples that relate it to how companies determine their marketing strategy, as well as pricing strategy.

Let’s explore a small scenario to better understand the decoy effect concept. It’s a hot summer’s day, and you are desperately seeking a solution that will somehow refresh you or help you cool down. You barge into a cafe where you look at the menu for anything with ice. After a quick glance at the menu, you settle on buying a mango iced tea. You’ve chosen your drink; but what about the size?

When looking over the menu, you noticed that there is a 4 dollar difference between the small and large size. You have the capacity to buy the bigger size, but you also think the small size will be sufficient. You grab your drink, and leave the cafe. Everything is great up until this point. You have your refresher, you made a relatively straightforward decision, and have left the cafe.

Let’s take on the scenario from a different angle. You enter the cafe, take a look at the drinks menu, and decide on the mango iced tea. Until this step, all action items are the same. The next step is deciding on the size of the drink. Now, you come across three options in size: small size, medium size, and large. Or, as Starbucks baristas like to constantly correct me: tall, grande, venti. Which one do you pick?

The large size looks appealing, doesn’t it? While there is a 4 dollar difference between small and large size, there is only a dollar difference between medium and large. Through simply adding a third option, stores can convince you to go for the pricier item even though you don’t need it. You are not alone in this decision, nor are you the first person to make this call. You have gone with the decision that many people are likely going to end up with.

But, why? This scenario actually has to do with the composition of our mind and brain. We are wired to constantly assess items in relation to other components. This situation influences us to evaluate not only relationships but anything that can be compared as they are assessed. In sum, when there are two options, consumers tend to decide based on their personal needs. But, grant the consumer with a third strategic option, and you can influence them to go with the pricier of the three.

“Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.”
Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions

Given the scenario we just covered, we determined that when introduced with a decision between the small and large size, many people will go with the smaller size due to the lack of relativity in the mix. But, when there is a third option of medium, there is an item of relativity, and many will prefer the large option rather than going for the medium. This applies regardless of the price advantage or the need of the customer.

We can determine the effect of these behaviours and strategic patterns in many domains of life, from eCommerce to politics. This situation is called the “Decoy Effect” in marketing. The Decoy Effect is the phenomenon where consumers tend to make a certain change in preference between two options when a third dominant option is presented to them.

What is the Decoy Effect?

The Decoy Effect was first described by academics Joel Huber, John Payne, and Christopher Puto in a paper presented in 1981. While defining the effect, the researchers asked the participants to choose from scenarios that included beer, cars, restaurants, lottery tickets, movies, and television sets. In each product scenario, participants first choose between two options. Afterwards, the participants were offered a third option, which was a bait, and they were expected to choose again. In every scenario except lottery tickets, the bait successfully increased the probability that the target was selected. These findings were revolutionary for marketing. Along with this work, scholars challenged established doctrines known as “similarity heuristics” and “regularity condition” that the probability of a customer choosing the original product cannot be increased.

For your reference, watch the “Popcorn Experiment and the Third Option”, an experiment proposed by National Geographic.

As you can see in the video, two sizes of corn are sold in a movie theatre. The smaller is $3, the larger is $7. Consumer comments determined that the discrepancy in sales was caused by the price difference between the different corn sizes. For the sake of this experiment, a medium size option of $6.5 was added, and consumers’ behaviour and sales rates were reanalysed. As a result, it was understood that the corn size that was primarily preferred was the large.

Decoy Effect Definition

Marketers refer to the decoy effect as the asymmetric dominance effect, exploring a phenomenon where consumers may signal a change in preference when presented with a third option in addition to the two options they had, creating an asymmetrical dominance towards the novel stimuli. The alternative option is considered to be asymmetrically dominant when it is inferior in all aspects to one of the options. In addition, the other option is both inferior and superior in comparison to the other alternatives. When specific attributes are considered for preferability, this option is completely dominated by the other, and partially dominated by the third.

The experiment reveals that when the asymmetrical option is present, a higher percentage of consumers tend to prefer the dominating option, as opposed to when the asymmetrically dominated option is absent. This is why the asymmetrically dominated option is referred to as a decoy, functioning to increase preference for the dominating option. The decoy effect violates the independence of irrelevant alternatives axioms under the learnings of decision theory.

Let’s go back to our previous paradigm. We covered mango iced tea, and popcorn. What did these have in common? Let’s take a look at some other examples of the Decoy Effect in action.

Decoy Effect and Decoy Pricing Examples in Marketing

While determining the monthly subscription prices, Spotify also created packages for user needs and benefited from the decoy effect. You must have seen the similarity of the prices of Duo and Family packages. It is a method frequently used, especially in newspaper and magazine subscriptions. Even if you are reading newspapers or magazines on the digital medium, you are persuaded to give 50 cents by creating a third option, as the “digital + weekend paper” option seems quite advantageous.

Our $125 reference point product offers 1000 watts and nine accessories. For $36 less than the cheapest option, we can get just four accessories and 100 watts more power. By spending $24, we can get three additional accessories and 200 watts more power to the reference product. The choice is more or less clear here.

This example is from Apple. Apple, in particular, includes the same strategy on its product comparison pages on its site.

For more examples, watch Duke University faculty member behavioural economist Dan Ariely’s Ted talk.

How to Boost Sales with Decoy Effect Marketing Strategies

Decoy pricing and strategies will doubtless be extremely influential for your eCommerce site. Here are some ways in which your business can take advantage of this phenomenon.

Offer three choices. Including more options can complicate and overburden the decision making process, diminishing the decoy effect in return. When consumers are presented with more choices, they may end up making a rash decision and choose the item you don’t desire.
Do not make the decoy option too appealing. You should be using the decoy effect to convince buyers into making the choice you desire. In many cases, the choice you desire is not the decoy. The decoy should have a price that is relatively close to the most expensive third alternative, but with a relatively better value than the cheaper ones. If you feel like the decoy seems slightly absurd, that is natural; that is how it is supposed to look!
Consider the middle bias. Given that three choices are displayed on the website or shelf, you should remember that buyers have a tendency to go with the middle option, disregarding the value. You might want to display the desired choice in the middle of the array, instead of creating a price centred arrangement.

Through such techniques, you can power your eCommerce site and use eCommerce psychology to boost your sales. Discover how Segmentify implements such psychological principles into their feature catalogue to help eCommerce businesses excel and reach their full potential.