Decoy Effect - How it influences some of our purchases - Examples

This is by far my favorite topic on behavioral economics/consumer behaviour and something that many marketers use with great results.

I will try to make it as interesting as possible, with as many examples as possible. So here is the first example..

* Which of the two orange circles is bigger?  Is it the right one? Let me help you, by definition decoy is a person or an object used for distraction.  In this example, the blue circles are the decoy, if you remove all the blue circles you will see that both orange circles have the same size!

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* And then its this example with an online advertisement (from Dan Ariely, Predictably irrational)

When consumers had two options, 68% of them chose the "economist.com" subscription and 32% the second and more expensive option.  If you say that they have a thousand clients; it translated to 80120 USD.

On the other hand, when a decoy appears which in this case is the "print subscription", subscriptions on the more expensive 3rd option rise! In numbers its 114400 USD which is more than 30000 USD difference!

Sum: The middle 125 USD makes the third option look cheaper by comparison forcing many consumers to choose the option that gives the company better income.

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*Look at this offer. Same operator same retailer same contract length, unlimited minutes and texts, both with 8GB of data and both phones are free with a 4G data BUT the second one is 5 pounds per month cheaper! 120 pounds in total.  Is that a mistake? Or is it intended to force you to buy the second one which is a very good option for them and will give them a good revenue?  Furthermore if you see the last option, same provider and retailer once again but 3GB less data with the same monthly cost. Mistake again or decoy? Who will buy the option of 5GB when he can pay the same for 8GB?

Sum:  Once again we compare with similar offers, and the "Bad" options force you to choose the "good" option which is the one that the retailers want to sell the most. If you do buy the decoy option it will only give bigger profit for the firm.

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* Lets say its summer and you planning for your holidays and the travel agent gives you two hotel options.  Hilton hotel and Holiday inn both full board(FB) for instance.   You know both are great and both have the same price.. In this case your decision to choose will be difficult. Then you have a third option(the decoy) Hilton hotel bed and breakfast(B&B) for the same price as the other two options.  By nature we compare things, and since you will have a similar option to hilton hotel to compare; its more likely that you will choose the Hilton Hotel FB in front of the Hilton Hotel B&B and even holiday inn FB.(Which most probably  will give to the travel agent a bigger commission!)

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Conclusion

So why does the decoy influence us? (The theory)
According to all consumer behaviour gurus the consumer Decision making process has a complex process which seems like this: Problem Recognition/Need Arousal --> Information search --> Evaluation of alternatives --> Purchase decision --> Post-purchase behaviour.

                              "The field of consumer behavior is, to me, the study of how our world is influenced by the action of  marketers." (Solomon, Consumer Behavior -1996)  

The evaluation of alternatives is in the decision making process, thus it influences the purchase behaviour!  A firm(and marketers) can force the sale of a particular product/service by adding a more expensive (decoy) product/service in their choices.

Do you have any good example?

If you like the examples and the decoy effect itself, then you should read this book: Dan Ariely - Predictable irrational.

Porter's 5 Forces, My Personal Experience

Hello! First of all, Happy New Year everyone! Today's post is about Porter's Five forces, and specifically the "Bargaining power of suppliers" which is very important factor for businesses and especially nowadays with the current Crisis.

Porter's Five forces is a framework analysis tool for new or existing firms that analyse the industry and business strategy development.  As you can see from the picture, the five forces are: Bargaining power of customers, bargaining power of suppliers, threat of new entrants, threat of substitute products and the Competitive rivalry within the industry. The second, "Bargaining Power of Suppliers" is the one that my personal experience is about.  But first some quick notes on that.  The supplier on a specific product have power over the firm when the product it sells doesn't have a competition or a substitute product.  Furthermore, when a supplier's customer is a small firm or unimportant, the supplier once again have the power over the customer, but on the other hand, when the customer is a big firm, it doesn't have much power because he needs the customer as the firm most probably gives a big income (example, Orphanides for those who know, just think of it, why did suppliers continue supplying the firm even when they didn't get paid?)

My personal experience.  My Father owns a printing company for almost ten years, and two years ago he decided to buy a new printer to print digital on rolled sticker paper.(avoiding the "traditional" procedure of the "RotoGravure".. Not writing to explain how printing works, the only thing I can say here is that it is more complicated, slower and more expensive! Digital made life easier!!!)  The printer that he bought is basically a good home laser printer modified to print, cut and roll at the same time.  So he made his calculations of whether he can print with competitive prices or not, and all calculations showed that the printer will give more profit and better prices to the customers.

So far so good.. What he didn't count on, is the alternative supplier for toner and paper. (the bargaining power of the supplier!) Because of the economical crisis or for any other reason, the supplier made a price rise several times, causing the rise of the expenses too.  If the supplier forces up the prices the firm will have to pay that difference causing less profit.

On the other hand, prices for supplies on the old rotogravure machines do rise but because of the competition, they are in a much better situation. (lots of ink suppliers, lots paper suppliers, lots of gravure cylinders suppliers and so on)

If it was a wine product, the company could have a vineyard and the supplier would not be necessary, but in this case, it is impossible to have an ink producer in Cyprus (the company have chip on the printer anyway), and the suppliers have some power over the company; they can change the price over time and the company will not have many options but to buy.  On the other hand, if there are many suppliers for the products that the company needs, (paper and toners) the company can change suppliers to force the competition among them to reduce the prices.  

Of course this is nothing new, we always knew that the more competitors the better prices we could have, but Porter's framework draws the five most important factors influencing the firm into one framework and this is my personal experience of how important this factor is.  In this case, all factors seem good and the decision to buy the printer seemed the best option but the inability to have power over the supplier can affect your firm.