An extra penny spent? A lot more than that!
When rational consumer behaviour is put to test, and the most important assumption of economics fails, that’s when the decoy effect comes into play!
A consumer stepped into a McDonald's store to have small-sized fries priced at $1.39 knowing that this was his utility-maximising choice. McDonald's introduced new medium-sized french fries priced at $1.79. What did the “rational” consumer choose now? Large fries (priced at $1.89) are worth only 10 cents more than medium fries and thus, he is forced to reconsider his choices. With a 40 and a 10-cent difference between the two options, paying 10 cents extra doesn’t seem like a huge ordeal. He ends up buying the large-sized french fries and at the moment, this choice provides him with maximum utility. What just happened? The Decoy effect fooled the “rational” consumer!
What caused a change in the preferences of a rational consumer? The consumer was stern that his utility will be maximised when he consumes small-sized french fries but the company tricked him by introducing a decoy, the medium-sized fries! The 10-cent difference between medium and large influenced the consumer to go for the large size, the target. He walks out of the store blindfolded with a smile.
The attraction effect can be witnessed in almost all industries now. From extra dollars being spent on a Starbucks grande to defending your choice for buying an expensive iPhone pro max, the decoy is everywhere.
One less dollar in your pocket!
Though the decoy effect is a friend of the companies, it’s phoney for the consumers. It induces consumers to spend more. A consumer, most of the time chooses an expensive product when a decoy is present. This sometimes shakes the entire budget of the consumer and everything the consumer had planned for a specific time period.
Let us prove this using a hypothetical example. You have a normal iPhone 14 and a Pro Max model, what is the model you’re going in for? An iPhone 14 would be a preferred choice as stated by a number of rational consumers. What happens when a Pro model comes into the picture priced at a level that is much more than the 14 model and a little less than the Pro Max model? Sales for the Pro Max variant increase as a result of the introduction of the decoy, and surveys give out the same result. You intended on spending less and ended up exceeding your budget but you’re satisfied. Does the satisfaction last long? When you can no longer afford AirPods because of your choice to purchase iPhone pro max, you won’t be satisfied in the long run. Thus, the decoy posing a threat to rationality takes the trophy here. A trade-off has been made, you decided to invest your dollars in the Pro Max model instead of spending them on the iPhone 14 model and the AirPods.
The decoy effect demands the consumer to make tradeoffs between the goods in the picture and does it actually have the consumer leave the store with his optimal bundle? A may in the short run and a may not in the long.
Chase two things, lose the one! The phoney has done its job. The choice that you thought was optimal was advantageous for you, not optimal. Only at that particular moment with a constrained budget, the large popcorn bucket provided maximum satisfaction. In fact, having to justify one’s choice increases the decoy effect, as the focus of the decision is shifted from a selection of good options to a choice of good reasons for selecting that option.
A may or may not story
If a customer goes to a Starbucks store for the first time, the decoy effect will work on him. But if a person knows that a tall frappuccino is his satisfactory drink, he won’t be affected by the prices and hence the decoy effect fails here. When a consumer prioritizes quality over price, or the consumer is loyal to a brand, all that effort made into pricing the products pays back nothing.
An eye on ‘the target’
Where should the decoy be placed? A number 1, 2 or 3? For the decoy to work, the dominant relationship between it and the target product needs to be obvious. Let’s take an example of this. A TV manufacturing company has priced a 24-inch LED at $356, a 32-inch LED at $442 and a 36-inch LED at $467. Interpreting the simple definition of the decoy effect, we know the consumer’s dollars are going in for the 36-inch LED. But what if there was a 28-inch LED priced at $409 in place of a 32-inch, what would have been the ultimate choice? a 24-inch LED would be the optimal choice here. The decoy is introduced to increase the sales of the target but the target varies in both these cases, Situation A is created to maximize the sales of the 36-inch LED whereas the target in situation B is the 24-inch LED.
For Decoy to play its part as a friend and a phoney, the companies need to know about the customers and have the target product marked.
Can you win your rationality back? No game is played with just a single team! The definition says that a rational consumer wants to be satisfied while spending less. The answer’s in the definition itself! A list of sorted priorities may help the consumer to avoid walking out of the store after being fooled by the phoney. The play here revolves around the preferences of the consumer.
If I know, a small coke is enough to satisfy my thirst, the presence of the decoy won’t affect my choices. I will be satisfied with my choice because I haven’t been fooled by the phoney for an extra penny. The decoy effect boosts the sales of the companies but at the cost of the utility obtained in the long run by the consumer. Is the trade-off worth the chaos?
Author : Mananpreet Kaur Uppal
Illustration By: Chiranshi Dua