[Kwerks - #14] Medium popcorn is always value for money!
That's what they make you think
Metrics Impacted: Revenue | Customer Satisfaction
Type: B2C and B2B
Previous tip: Why Hotstar has only 2 subscription plans (All tips here)
Recommendation: Give your customers the option to choose from different choices, while still making profits.
What is the Decoy effect?
The decoy effect states that "when choosing between two different options, the addition of a third option will change the perspective of the first two ones."
Consider you're in a line to buy some popcorn in a movie theater. You see that the small costs 150; medium is 200, and large is 400. The small popcorn isn't worth much for 150, and the large one is too expensive. So you end up buying the medium popcorn because it's a much better deal than buying the small one.
This effect is primarily used by companies to "nudge us" into spending much more than we actually need.
Why it works?
The major reason why the decoy effect works is because it is invisible. Usually, nudges are implemented by providing an incentive for good behavior or punishing for a bad one. But decoy effect is used to nudge by changing the environment or situation to push us in the desired direction.
Behavioral economics states that "Even though people think they are making decisions rationally, in reality, they are unaware of the factors that influence their choices".
This effect is also based on the loss aversion theory, which describes that people prefer not to lose something than gain it. Therefore it causes people to pick the target object (medium popcorn) as we are targeted more on the disadvantages of not choosing that option.
How to implement it?
Have at least 3 options for your customers. Don't go over 5 though (beware of choice overload)
Select one target item. Make sure it's popular with your customers.
Create a decoy product and price it close to your target item.