The decoy effect in marketing can be defined as a phenomenon whereby consumer choices between any two products are influenced when a third product, the ‘decoy’ is introduced. This third product is ‘asymmetrically dominated’ option to influence a consumer’s choice. This decoy is priced in a way that it completely rejects one of the options under consideration, and makes your choice much clearer for the other option (Samradni, 2020).

This is a question worth asking: Do we really decide for ourselves when we buy something?

In Dan Airley’s famous TED talk, “Are we in control of our own decisions?”, he describes an ad from The Economist outlining their latest subscription packages. Here’s what they offered:

• Online subscription: $59
• Print subscription: $125
• Online and print subscription: $125

It’s so crazy, ain’t it? You could get the print only subscription and the online and print subscription for the same price. Why would they even offer that? That’s what Airley thought also. He reached out to the folks at The Economist, but he never got a straight answer from them.

To answer this for himself, he decided to run his own study with 100 MIT students. He gave them the pricing packages outlined above and asked which one they would want to buy. When all three options were there, students chose the combo subscription as it was the best deal, right? But when he removed the “useless” option (the print subscription for $125), the students preferred the cheapest option.  It turns out that middle option wasn’t that useless after all. It actually gave students a frame of reference for how “good” the combo deal was and enticed them to pay more for that deal.

Let’s take a look at this illustrative example:

That’s so familiar, ain’t it? This must have reminded you of Starbucks. 

In the first options, you would probably choose the small size because it’s cheaper. However, in the second set with 3 options, you are more likely to consider the large size because the price is reasonable.

This is how decoy effect operates. It describes how price comparisons between products affect choice. When there are only two options, and they’re priced “fairly,” people make decisions according to personal preference.

But, if there’s a third choice that’s overpriced compared to the first two options, it changes how people consider all options. The third option is a “decoy” choice. The decoy’s purpose is to change perceptions of the other options, not to sell necessarily.

In the case of Starbucks, its classic three-tiered sizing structure is a dead giveaway. Starbucks employs this pricing strategy so that customers choose the size that provides the most profit to the company.

In some sense, we could say that our buying decisions are irrational.  Decoy effect can be a good strategy when used well in your marketing effort.