Let’s say you’re trying to decide where to dine tonight – and you’re in the mood for Mexican food.

Your spouse says, “I heard about a new place the other day. Supposedly, it has handmade tortillas and chiles rellenos that are to die for. The only problem is, it’s about a 30-minute drive from here.”

You’re hungry right now. So your spouse offers another option: “There’s our old standby, Don’s Tex Mex. It’s right down the street. But, as you know, the food’s only average.”

You’re torn between your growling belly… and a desire for those handmade tortillas.

And then your spouse pipes up again, “I just remembered that restaurant we went to last month. Remember how good the salsa was? But… it’s about 45 minutes away.”

Suddenly, the 30-minute drive to the new place with the handmade tortillas doesn’t seem so bad.

It happens all the time – where the introduction of a third option suddenly makes one of your earlier options look better. It sounds irrational. And it is. But it’s such a common phenomenon, it even has a name. It’s called the “decoy effect.”

Marketers often take advantage of the decoy effect. Consider the following scenario…

You’re at the movies, and you’re thirsty. So you go to the concession counter to get a soda. The small size is $3.00. The large size is an outrageous $5.00. But then the person behind the counter points out that it is only 50 cents more than the medium size. Suddenly, the large size seems like a better deal.

That’s the decoy effect.

In his New York Times best-seller, Predictably Irrational - The Hidden Forces That Shape Our Decisions, Dan Ariely describes an interesting study he conducted with students at MIT’s Sloan School of Management. The study was based on a clever bit of “decoy-effect” pricing in an ad he found for a subscription to Economist magazine:

Offer A: Internet-only subscription for $59

Offer B: Print-only subscription for $125

Offer C: Print-and-Internet subscription for $125

“I read these offers one at a time,” writes Ariely. “The first offer seemed reasonable. The second option seemed a bit expensive, but still reasonable. But then I read the third option: a print and Internet subscription for $125. I read it twice before my eye ran back to the previous options.”

At this point, Ariely asked himself the same question you may have asked yourself when presented with a similar Good-Better-Best pricing model: “Who would want to choose the ‘Better’ option [print delivery only - Offer B] when both the ‘Good’ [Internet delivery only - Offer A] and ‘Better’ options could be purchased at the same $125 price [Offer C]?”

Good question.

In my own marketing experience, I’ve found that the decoy offer – Offer B in this Good-Better-Best pricing model – influences my prospects to have a strong bias toward Offer C (the “Best” option). 

When Ariely presented a group of 100 MIT students with the three subscription options from the Economist ad, the same thing happened. Though some selected Offer A, most went with Offer C. None of them selected Offer B, the decoy.

So he wondered what would happen if he removed Offer B. After all, since no one had selected it, it shouldn’t make any difference, right?

Not exactly…

When he presented another group of 100 MIT students with just two options – Offer A [Internet-only for $59] and Offer C [the Internet-print combo for $125], 68 of them chose Offer A and only 32 chose Offer C. Which makes the “decoy-removed” version of the ad far less profitable than the one the Economist actually ran.

I’ve split-tested the traditional “Good-Better-Best” model against the decoy model myself.  

In the traditional model, Good = $X, Better = $Y, Best [Good + Better] = $Z.

But over and over again, the winning model looked like this: Good = $X, Better = $Y, Best [Good + Better] = $Y.

How can you use the decoy effect to make your offers stronger, more appealing, and more profitable? Start testing today.

[Ed. Note: Alex Mandossian knows a thing or two about marketing. He has generated over $233 million in sales for his clients. And in the past three years, he increased his own revenues from $1.5 million to $5 million. You can get Alex's advice and practical marketing tips for info-publishers, small-business owners, and entrepreneurs for free at AlexMandossianToday.com.

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This entry was posted on Friday, December 19th, 2008 at 5:10 am and is filed under Marketing/Internet .