The decoy effect is a phenomenon in which consumers tend to change their purchasing preferences when presented with a third choice. In other words, the customer is clear that they prefer cheaper option A, over the more expensive B. However, they usually change their mind when a third option appears between the two. Neuromarketing studies have found this effect to be one of the most influential cognitive biases to apply in an e-commerce business. We explain how it works using several key examples and how you can integrate it into your pricing strategy.
How the decoy effect works
One clear example of the decoy effect is popcorn at the cinema. When there are only two options, a large or a small bag, the customer will conclude that the large one is very expensive and that they do not want that much popcorn. They will be buying based on their needs.
Small popcorn → $5.00 Large popcorn → $6.50
However, when a third price appears between the two, the decision changes. Why?
Small popcorn → $5.00 Medium popcorn → $6.00 Large popcorn → $6.50
The new price, the decoy, will cause most customers to opt for the highest-priced product, even if they don’t need it. It makes them believe that they are winning, that they are making a better buy. This is a psychological pricing strategy because its success is based on consumers' interpretation of prices, rather than on the real value of products.
For it to work, the price difference between the two most expensive options must be less than the others, almost negligible. In addition, the decoy, the product with a less consistent price, must be physically next to the item you want to sell. This is simple for e-commerce businesses, as offering different prices on the same landing page is enough. In short, you should make the customer believe that the decoy product is not cost-effective compared to the most expensive option.
Which products can you apply it to?
The decoy effect is effective for the sale of products that are very similar but have slightly different features, such as the quality, the manufacturing process, or, as in the case of popcorn, the volume.
Service businesses can also use the decoy effect, especially online, when it comes to subscriptions or cloud space acquisition. You can look at Spotify as an example, which, together with the individual subscription for $9.99, offers a duo plan for two people for $13.99, and a family plan for six people for $16.99. The small price difference compared to the service provided will make most couples choose the family plan, even if they don’t need it. This formula is also widely used in online newspapers and consumer magazines. In this way, companies’ income and profits will gradually increase.
The negative side to note is that the decoy effect conditions consumers when choosing. The main risk is that if it is poorly done, consumers are aware of the tactics employed. Then it can negatively impact the brand image of an e-commerce site or company.
How to use the decoy effect on your e-commerce site
- Try to offer three options, not more. Including more alternatives can complicate and slow down the decision-making process.
- Don’t forget that the brain always tends to go to the middle choice in a set. On this basis, assess where you want to physically place both the decoy and the most expensive product in your e-commerce site or physical store.
- Place an unattractive decoy to convince buyers to opt for the optimal option for the brand.
To start using the decoy effect you can review your pricing strategy and determine which products would be suitable. In turn, it is advisable to study competitors’ prices and whether they have psychological pricing tactics to increase their sales volume. This way, you can anticipate their moves and optimise your profits. You can use automated competitor price monitoring tools to help.