DECOY EFFECT AND PRICING STRATEGIES:

The decoy effect is the phenomenon by which consumers will have a specific change in the
preference between two options when presented with a third option that is asymmetrically
dominated. The decisions made because of this decoy effect are subconscious and thus
companies use this to manipulate the consumers to spend more on their products. The infamous
examples of companies using the decoy effects to manipulate their consumers are McDonald’s,
Apple, Starbucks and Burger King. Let us understand this phenomenon through an experiment.

Scenario 1:
You are at a movie theatre and you are about to buy popcorn. There are two options available:
Regular Rs. 120/-
Large Rs. 249/-
You are most probable to choose the Regular option because Rs. 249/- for popcorn seems pricey.

Scenario 2:
You are at a movie theatre and you are about to buy popcorn. There are three options available:
Regular Rs. 120/-
Medium Rs. 229/-
Large Rs. 249/-
You are most probable to choose the Large option because it seems smart to pick Large for 249
when the Medium option is 229. After all, by just paying 20 more, you will get a grand upgrade.
You never paid attention to the Regular because you got carried away by the “Extra value” that
Large provides. As a consumer, you will feel accomplished because you made a “great deal”. But
from the marketer’s point of view, you chose the exact product that they wanted you to pick.

The options were always only “Regular” or “Large”. But to trick you into buying Large, a new
option “Medium” was introduced. But selling a Medium to you was never the target. It was used
as the “DECOY” (meaning Trap). The Medium option was the ‘Uglier twin’ of Large and because
it is asymmetrically dominated, you picked Large. Asymmetrically dominated means it is inferior
in all aspects with respect to one option (Large) but inferior in some aspects and superior in other
aspects with respect to the other option (Regular),

When you are faced with a tough decision between two very different options, your brain has
trouble evaluating which is better but when one of those is given a frame for comparison, a
middle option, it adds information that our brain didn’t have previously and we can make a quick
decision. This is the “Decoy Effect”.

Marketers have been using this for a long time in setting up the price of products. The entire
concept here is to create more value for the product that is the target.