Natural human behaviour, resulting from the decoy effect, is often exploited in pricing decisions and also deciding the volumes of the product to be introduced in the market. Companies introduce a third variant of a product which acts as a decoy to increase affinity of consumers towards the product which the company actually wants to sell. Also as a result, companies are also successful to push customers, who usually tend to buy the cheapest product, towards a more expensive product.
The Psychology behind Decoy Effect and how Marketing Managers use it to their benefit
Let’s try to understand it by a simple example where, say, you would like to buy a new MP3 player.
First and foremost, we identify the core proposition in the product. Say in case of MP3 players it may be: the storage capacity and the price – and then play around these two core offerings.
In the image below we have a proposition for two players. When put forward with the below choices, some consumers will prefer A for its greater storage capacity, while others will prefer B for its lower price.
Now let’s add a new MP3 player to our product proposition. MP3 Player C is more expensive than both A and B and has more storage than B but less than A.
The addition of another product i.e. MP3 Player C – which buyers probably avoid (they can pay less for a model with more storage) – causes MP3 Player A, the dominating option, to be chosen more often than when we only had two choices. Because A is better than C in both respects, while B is only partially better than C, more consumers will prefer A now than before. MP3 Player C is the decoy product that will increase sales of A.
Now the point is that the company’s focus model is MP3 Player A and not C. The volumes of C in production will be low and will be positioned as a premium or flagship model whereas MP3 player A will be their hero or best-seller model.