There was a poll conducted through (my) LinkedIn about how much will you pay when you are on a date at a restaurant. (see in the picture below). The results have come out as expected. Let’s know the reason behind this from both unit (restaurant) and consumers’ perspective.
Perspective of Units (restaurants)
The primary goal of any unit or an organization is to get maximum profits out of a business. The restaurant provides 4 services and out of these 4 they have to get the optimal profit. So, which ones are those?
The dinner @ $250
The dinner @ $275
Why? Because the dinner @ $100 has a less profit margin (as compared to others) and dinner @ $325 requires a lot of resources from the restaurant itself. (Theory of Optimum Utilization of Resources)
They also made an interesting choice of Dinner @ 250 which is very close to Dinner @ 275 and far away (in terms of monetary) from Dinner $100. So, to make sure they get the best profit result, they put up a ‘Decoy’ called ‘Best Seller’ next to the Dinner @ 275.
According to the poll, the restaurant gets a 50% sales from those two choice that was getting them the optimal profit.
Perspective of the Consumer
Economics is built on the assumption that consumers are rational. Rational means (logic and sense) but we tend to forget that theories are mere assumptions. We as humans are rational and irrational (depending upon the situation).
Consumers that read the poll understood that it’s anyway a high-end restaurant, the food is great, I can eat all of the 4 choices and thus, buys the Dinner @ $100. It was rational to buy Dinner @ $100
But still, larger number of people (50%) chose Dinners @ $250 and $275 even when all the products are of awesome quality and there is no restriction.
Why? Again, because of the decoy that is ‘Best Seller’. That let’s you believe psychologically that food in the $250 range has been tried, tested and loved by others.
Concept of Relativity
There is a term coined by Prof. Dan Ariely in the book Predictably Irrational called ‘Relativity’
Relativity is a fundamental observation that most people don’t know what they want unless they see it in context. We don’t know what kind of racing bike we want until we see a champ in the Tour de France ratcheting the gears on a particular model. We don’t know what kind of speaker system we like until we hear a set of speakers that sounds better than the previous one.
We don’t even know what we want to do with our lives—until we find a relative or a friend who is doing just what we think we should be doing.
Everything is relative, and that’s the point. And once you see the decoy effect in action, you realize that it is the secret agent in more decisions than we could imagine.
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