Beware Of The Decoy Effect When Shopping

Thinking of buying something and edging towards the slightly-more-expensive-but-has-more options choice? Be careful: you might be falling for the decoy effect.

The decoy effect is not a new concept, but I was reminded of it during the very entertaining keynote by Paul Fenwick at Linux.conf.au today. Fenwick noted that research consistently suggests that consumers offered a choice between (for example) a $59 Internet-only subscription and a $125 print subscription will generally opt for the Internet-only option. If, however, there's a choice between a $59 Internet-only, a $125 print-only, and a $129 print and Internet combined, more people will choose the priciest option. The $125 middle ground exists to make the $129 deal look cheaper by comparison, not as a serious choice.

How can you use this in practice? If you're presented with a range of pricing options, examine them carefully and don't make speedy decisions. A practical example: if you buy an iPhone 4S outright, you can choose between a 16GB model ($799), a 32GB model ($899) and a 64GB model ($999).

64GB iPhones have often been the first to sell out at launch. Some of that might reflect a genuine need for lots of media storage, but some of it reflects the decoy effect: people figure that the extra memory on the 64GB model is a bargain, compared to the different between the 16GB and 32GB models. In practice, I bet Apple is not paying anywhere near that amount for the extra storage — but it is successfully persuading more people to buy a $999 phone rather than a $799 one.


Comments

    I think all three of the iphones are over priced to begin with. My decoy effect says the 64GB is the least over priced of the three......but still over priced

    The decoy effect is a very real and valid thing, the print/internet subscription part is so very true, but the iphone example is a poor one.

    A sandisk 64GB micro SD card will still set you back ~$150.
    Sure apple will be making a decent profit on the flash memory, but thats what companies do. They sell things for a profit. An extra $200 on top of an $800 device to get 4x the storage is not too outrageous.

    Especially if you look at some worse examples in apple's catalogue. Like how much they charge for build to order ram upgrades. When you can buy the ram from OWC for a quarter the price and install it yourself in 10 minutes.

    The fact that iphone's don't have a memory expansion slot so you are forced to buy the most expensive model just incase you are going to need the extra space in the future is a valid point, but really is a different issue.

    i've not seen anyone who uses more than 32GB at once yet.

      Actually, Correction. I've filled the 64GB one. Had to prune apps.

        Why would you need two prune apps? Constipation perhaps?

    ... there is no "decoy effect" with the Apple phone example.
    The price difference between the categories are identical - $100, a perceptually linear effect.

      There is a decoy effect wtih the apple. The $799 model with 16GB, $899 for 32GB (twice that of the $799 model) but for a bit more, $999 you get 64GB ( Four times that of the $799 model). So whilst the price difference between models is that same hundred dollars, the percived value of more storage is more exponential, doubeling every price point.

        correct, the decoy effect involves the introduction of a inferior 3rd option to increase preference for a higher priced option.

      If the $999 option was 48GB instead of 64GB, you would be correct.

      However, while the price increases linearly the storage available increases exponentially.

      If you want more on the psychology behind this, look up Dan Ariely's talk on TED:

      http://www.ted.com/talks/lang/en/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html

      or better yet read his book _Predictably Irrational_.

    I dumped my *entire* music library onto my iPhone, it used up 41gig. In practicality I don't use half of it often, but I like the variety. If you are not a large iPod user, unless you want lots of videos on there I'd go with the 16gig as the speed of the A5 cpu is the same, as is the camera and all other major functions. I agree, that Apple devices are a great example of a decoy effect, in the sense that there are people who will say "oh, you just got a 16gig one" as though this makes any difference other than storage. Which varies from user to user. I know people who have never put music on their phone. They would be seriously working to fill 64gig with (quality) apps. Also with macbook pros, if you are typing/facebooking then get a macbook air, you don't need the processing grunt that digital video does. "but it has 'pro' in the name" .. /facepalm

    It's got me more than once. Really hard to shake.

    If they had removeable storage they could not get away with these price differentials, Just saying.

    There's also something to do with 3 choices regarding not going back on your first choice in case your first choice was right due to intuition.. I forget what it is called now.. but it got its name from a TV gameshow. You have 3 choices of doors, with potential prizes behind. You make a choice but before you are shown behind the door, the game's host opens one of the other doors to show you that there's no prize behind that one (they know where the prize is of course).. and almost everytime people will stick with their original choice.. but statistically, it is better to switch. Weird but true.

      It's the Monty Hall problem.

        http://math.ucsd.edu/~crypto/Monty/montybg.html

    Fast food meal combos are the same... you're a little hungrier than what a small meal will provide, but the large is only 50c more expensive than the medium, so you go the large...

    At $799 for a 16GB iPhone 4S a buyer is paying $49.94 per GB.

    If you upgrade to the 64GB model you get an extra 48GB for an extra $200.

    So those extra gigabytes are costing you $4.17 per GB, which is a substantial reduction.

    I find that it's a similar story with car insurance in that $10,000 of cover might cost you $650 for the year, for example, however you can often increase the amount of cover quite substantially with only a minimal increase in the premium, i.e. $15,000 cover for $698. That would be $48 well spent in my books.

      Um, don't forget that there's a base price the covers other internals, case, screen, battery, packaging, shipping, labour, etc.

      This thing ain't just make of gigabytes and plastic.

        yes the overall cost of the phone obviously take into account the cost of materials etc to make it, but given that the only feature that changes between the 16, 32 and 64GB iPhone 4S models is the amount of storage, all other components considerations are rendered null for the sake of this comparison as they're constant across the models.

          Buy 16GB of storage for $799 and get the rest of the phone for free? Bargain!

          When consumers buy an iPhone, (I hope) they aren't buying just a storage device. Since storage isn't a separately-priced component, there's no fair way to calculate the price per GB while considering only one model. What you -can- do is compare the +$100/16GB of the 32GB model to the +$200/48GB of the 64GB model. That's $6.25/GB versus $4.17/GB, which isn't quite as "sensational" as your $49.94/GB figure.

            ....did you even read what I wrote??? If so your first line alone suggests you didn't actually understand it.

    Geez you izombies get defensive

      "izombies" - you destroyed your argument, if any. Name calling is so mature.

    Another example I think is Fuel prices - Unlead 92, 95, 98 Octane

      People seem to steer away from the 98 octane because of the higher price, however I find that for that higher price I get more km's off a tank. So not only does it balance out in term of cost & kms, but the higher octane fuel provide better performance and is actually better for the engine.

    I found this article explained it a bit better.

    http://www.psychologyofgames.com/2011/02/freezing-your-decision-making-synapses/

    This might be hard to shake, even slime mold falls for the decoy effect...

    http://rspb.royalsocietypublishing.org/content/278/1703/307.short

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