Pete's Behavioral Insights and Theories - The Decoy Effect

Introduction

• Topic: The Decoy Effect in pricing strategies
• Companies Using It: Starbucks, Apple, McDonald's
• Purpose: Trick customers into spending more by offering a decoy option
• Subscription Request: Encouragement to subscribe to Pete's channel

Example: Watermelon Seller

• Scenario: An old man sells watermelons at $3 each or 3 for $10
• Young Man’s Realization: Points out he bought 3 watermelons for $9 instead of $10
• Seller’s Strategy: Using the Decoy Effect

Explanation of the Decoy Effect

• Definition: A slightly worse option (decoy) makes the target option more attractive
• Dan Ariely’s Economist Example:
  • Subscription Options:
    1. Web-only: $59
    2. Print: $125
    3. Print + Web: $125
  • Two-option Scenario: Majority prefer the cheaper web option
  • Three-option Scenario: Majority prefer the print + web option due to decoy

Other Examples of the Decoy Effect

Apple’s MacBook Pro

• Original Options: $1500 vs $2000 laptop
• Third Option (Decoy): A $1700 laptop similar to $2000 one but with worse storage
• Result: Makes the $2000 laptop seem more attractive

Starbucks Coffee

• Options: Tall, Grande
• Third Option (Decoy): Venti, larger and more expensive
• Result: Grande seems more appealing

McDonald's Value Meals

• Strategy: Grouping items in a value meal makes buying items separately a decoy
• Outcome: Value meals look more appealing than individual components

Creating a Decoy in Business

Steps:

1. Start with Two Options: Pick two in the same category
2. Preferred Option: Decide which one should be favored
3. Introduce the Decoy: A slightly worse option in one key feature

Non-pricing Applications of the Decoy Effect

Human Attractiveness

• Experiment: Slightly uglier versions of faces changed perceptions of attractiveness

Politics

• Example: George Bush vs. Donald Trump
• Result: Bush’s approval ratings increased with Trump as a decoy

Final Thoughts

• Watermelon Example Revisited: Highlighting the hidden third option of buying three individual watermelons
• Advice: Check out an article on defending against the decoy effect
• Upcoming Topic: Psychology of racism
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