The Decoy Effect in Sales And Marketing
Dec 29, 2019
The price of a product or service is one of the most important components in the marketing mix: Product, Price, Place, and Promotion. Therefore, a change in the price of a good is directly linked to a change in buying behaviors. The so-called decoy effect is a phenomenon in marketing/sales which is directly related to the "price" component of the marketing mix. The decoy effect occurs when the potential customer is confronted with a new pricing option that is asymmetrically dominated.
Let's assume we have to price options for a given product: Pricing option A and pricing option B. If we want to take advantage of the decoy effect, we introduce a new pricing option C. This pricing option is inferior in all of its traits to pricing option A. But in comparison with B, it has some inferior and some superior traits. This new decoy pricing option shifts the customer's focus to A (and away from B).
Let's have a look at an example. A pricing table of a power bank (a device to charge your mobile on the go) could look like this:
|Capacity||3.000mAh||2.000mAh||(higher = better)|
|Price||50 €||30 €||(higher = worse)|
In this case, some people tend to prefer product A with a higher capacity. Others don't need that much capacity and thus buy product B, as it comes with a lower price tag.
Side note: In this case, products A and B are goods of the same company. They don't compete with other company's products. But this example also works if we assume, that products A and B are sold by different (competing) sellers.
If we introduce a new pricing option, the decoy option, things change quite a lot:
|Capacity||3.000mAh||2.000mAh||2.500mAh||(higher = better)|
|Price||50 €||40 €||55 €||(higher = worse)|
In this example, we want to increase sales of product A. And it works! Most customers will prefer product A instead of B or C.
But why does this phenomenon work? It is actually quite simple. The asymmetric pricing of the decoy option shifts the customer's focus the decoy option - mainly because it looks weird and the customer expected different characteristics of the decoy option. Then, the decoy effect acts as a comparison base to the remaining options A and B. So, instead of comparing A directly to B, the customer compares A to C and B to C.
But what do we have to change, if we'd like to increase sales of product B instead of A? Again, we can take advantage of the decoy effect:
|Capacity||3.000mAh||2.000mAh||1.500mAh||(higher = better)|
|Price||50 €||40 €||45 €||(higher = worse)|
And again - we tried to create good traits for our target product (which is product B). If you compare A to D, A only has the capacity advantage. But B compared to D has the capacity and price advantage. That's why B is the likely choice for a customer. Due to the customer's unawareness to compare A to B, the latter wins.