Decoy effect: Why buying low is a bad decision

Reylito A.H. Elbo

Reylito A.H. Elbo

YOU want to hire a management consultant to facilitate a one-day workshop for your team. Consultant A offers a package rate of P200,000 while Consultant B dishes out a P150,000 proposal for the same topic. Which would you prefer? Obviously, Consultant B who has the lowest bid. It’s a no-brainer. In taking a closer look at the credentials of both consultants, however, you discovered that A has more than 30 years of corporate experience than B who has about 20 years.

That pushed you to seek other proposals, this time with Consultant C who offered P100,000 except that he has around 10 years of experience. Your boss and the budget manager recommended that you stick to C who has the lowest price.

You awarded the project to C, who turned out to be a disappointment. He came in 45 minutes late and blamed the Metropolitan Manila Development Authority for giving way to Highway Patrol Group to manage the constant heavy traffic in the region. But more than his flimsy excuse, he showed his unpreparedness. The session turned out to be boring for everyone. No workshop was done but more of a lecture-type presentation as he read from his equally unexciting slides. Further, he wasn’t able to answer many of the questions raised, and everyone went home with a long face.

Then you wonder what went wrong. Your first emotion draws you to blaming your boss and the stingy budget manager. But you stopped short, thinking that it was you who made the recommendation anyway. Looking back, you remember one important principle that you ignored from W. Edwards Deming (1900-1993) who admonished organizations “never to decide based on the price tag alone.”

For a long time, I tried to understand why people and organizations are blinded by the appeal of the lowest-bid principle. They forget the fact that in management consulting, you can’t simply make an apple-to-apple comparison of the consultants’ qualifications. More than this, there are many factors to be considered that may well include not only the years of the consultant’s experience but also the integrity, communication skills, training methodology, industry certifications, books published and word-of-mouth credibility, among other important things.

This issue came to me when I reviewed Decoy Effect. It is a marketing strategy where customers are offered three options or variants of the same product or service. In this case, there would always be an option that is “asymmetrically dominated”–meaning it is inferior in all respects, except for its low price.

Going back to our three consultants, C is asymmetrically dominated by the length of experience of A (30 years) and B (20 years), except that they offered the highest bid at P200,000 and P150,000 respectively. Now, here’s what we can probably suspect. How is it possible that either A or B has connived with C to offer the lowest price? Of course, it is possible.

Consultants A and B can lose the bid, but either one can shove C for a third offer so that anyone can earn at least a referral fee. Consultant C can win the bid, but either A or B can also earn some money. It’s a win-win for either A and C or B and C, if the client sticks to his penny-pinching character.

But what if the client pushes for a fourth or fifth consultant? Then, either A or B can manipulate the situation by looking for two or more joker consultants–probably, those superstar outliers who can charge as much as P300,000 to P400,000. In this case, who do you think will win the bid? This time, I’m betting for B who appears to present the most reasonable offer.

Do you want to influence the behavior of organizations when they try to hire management consultants? Try preaching about the reasonableness of your proposal by conniving with some friends in the consulting industry. After all, management consulting like politics is addition. There’s no such thing as stiff competition among friends. But no, that’s a wrong prescription.

I’m not saying that my consultant-friends are doing the Decoy Effect. Therefore, let’s not get too excited. Coincidences do happen. It’s not surprising when they finally happen. What would be surprising is if they never came to be.

Rey Elbo is a business consultant in human resources and total quality management. Send feedback to orfollow him on Facebook, LinkedIn, or Twitter for his random management thoughts.


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