26. What is a Decoy Effect?

You have been decoyed more times than you know!

I am changing my newsletter format.

I know your inbox is cluttered, and I don’t want to add to it.

All I want is a minute of your time.

From now on, I will compress my newsletter to around 200 words so that it takes you no more than 1 minute to read.

This week’s newsletter will discuss one of the most prevalent behavioral science practices - the Decoy Effect!

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What’s the common link between these product prices?

They all leverage decoy effects in pricing.

When consumers are presented with three choices and one of the options' goals is to influence them to choose between the other two options, it’s called the decoy effect.

This effect describes how when we are choosing between two alternatives, adding a third, less attractive option (the decoy) can influence our perception of the original two choices.

It is a behavioral nudge—a type of intervention that “steers” individuals towards making a certain choice by making very subtle changes to an environment or situation.

In decoy pricing, the items are priced “asymmetrically”—completely inferior to one option but only partially inferior to the other.

Apple uses this strategy extensively—it usually creates iPhones with a decoy price, making us feel we are getting a better deal with the highest-priced phone.

If you want to nudge your customers to take a specific action, consider creating a decoy choice deliberately designed to make the target option appear more appealing in value or quality. However, the choice should not be so extreme that it makes them question the legitimacy of your pricing.

You might wonder - is this ethical? Well, decoy pricing is quite prevalent and legal. As long as the decoy is not deceitful and genuinely aligns with customer preferences and needs, it is acceptable to use psychology to influence consumer choices.