Decoy effect pricing strategy

The decoy effect describes how, when we are choosing between two alternatives, the addition of a third, less attractive option (the decoy) can influence our perception of the original two choices. Imagine that you want to buy an Apple product. Let’s think about the new iPad model presented by Apple. You have iPads with 3 different memory sizes and additional features. Let’s assume that the first iPad with 16 GB of memory costs $229, the second with 32 GB of memory costs $299, and the third with 64 GB of memory costs $399. The second option which is offered for $299, also has its own extra features. However, you can also pay an extra $100 for the model with 64GB of memory but no extra features. You can think that buying the second option is more reasonable and worth your money. So very few people will choose the first option with 16 GB. Even fewer people will buy the third phone with 64GB of storage. As a matter of fact, phones with 16 and 64 GB of storage are used to make the second option's extra features seem more attractive. In marketing, the influence or change in the choices is called “decoy”. The decoy effect is also called the “attraction effect”.
The decoy effect can be defined as a consumer's inclination to noticeably switch between two other options when introduced a third one. According to American marketing professor Joel Huber, the decoy effect is mainly used by marketing companies to influence consumers’ choices in a way that they will hardly notice. But this effect can be observed in many areas. For example, 11 years ago, the price structure in the advertisement of “The Economist” magazine attracted the great interest of psychologist and economist Dan Ariely. He conducted two experiments on one hundred students to observe the effect of this price structure on consumers. This was the case with the advertising of the magazine. The magazine offered 3 types of subscriptions. First, online subscription through economist.com. Subscribers received a link to the magazine’s articles from 1997 on the Internet for 1 year. The price of a 1-year online subscription was $59. In the second option, users got only the print version of “The Economist” magazine articles for 1 year. The price of this option was $125. The third option was the subscription to both the online and print versions of “The Economist” for 1 year. In other words, with a combo effect. The price of this offer was also $125. In Dan Ariel’s first experiment, the magazine is presented to the students as an ad. The results were as follows: Only 16% of the students chose the first option, the other 84% chose the combo option. Nobody chose the second option which is only the print version. Seeing this, Dan canceled the second option in the second experiment. The results were very interesting. During this test, 68% of the students chose the first option, the subscription to the online version of the magazine, while the remaining 32% chose both the print and online subscriptions. Students actually chose a more expensive, likely less logical third option when given the decoy option as a second option, even though they needed the first option more.The results of the test actually show us how the decoys affect our choices, and cause us to make irrational decisions subconsciously. By adding decoys to a range of products, companies can influence our decisions more than we imagine and lead us to spend extra money on the products we buy without even realizing it. The first example of Apple above was actually a decoy effect used by the Apple company. The interesting thing is that being aware of this effect is not enough to prevent it. Because the main part of how the decoy effect works is the feeling that the choice we make makes sense to us. As interesting as it sounds, when we are under the influence of the decoy effect, the reason we buy the expensive product is because we think that the decision we made is logical. In other words, decoys give us a reason for our choices and make us feel convenient for the decision.
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Great video, that you!

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Thanks!