Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Price Decoy Makes the Middle Option Look Irresistible
Transcript
- Lucas: Imagine you walk into a movie theater and you see three popcorn sizes: small for $3.50, medium for $6.50, and large for $7.00. Luna: And you probably think, 'Who buys the medium? For fifty cents more you get the large.' That's the point. Lucas: Exactly. That medium size is a decoy. It's not there to sell — it's there to make the large look like a steal. And it works because of what behavioral economists call the decoy effect, or asymmetric dominance. Luna: We've touched on anchoring a lot in past episodes. But the decoy is a specific trick where you add a third option that's clearly worse than one of the other two on some dimension. Lucas: Right. And the classic example — and I promise we're going to dig into this — is the Economist subscription offer that Dan Ariely made famous in his book Predictably Irrational. Back in the early 2000s, the Economist ran this ad: digital-only subscription for $59, print-only for $125, and print plus digital for also $125. Luna: Just seeing that now, my brain goes, 'Why would anyone buy print-only when print plus digital is the same price?' And that's the whole mechanism. Lucas: Here's something some listeners might not know — a handful of them actually chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what keeps this show ad-free and lets us spend time on these deep dives. Luna: Yeah, it's a small group, but it makes a big difference. We don't have advertisers pulling the strings, so we can talk about exactly what we find interesting — like why a decoy works. Lucas: So back to the Economist. Ariely ran a test. He gave one group of MIT students the three-option set: digital $59, print $125, print+digital $125. A second group saw only the two real options: digital $59 and print+digital $125. Luna: And the results were dramatic, right? With the decoy, most people picked the print+digital bundle. Without it, most went for the cheaper digital option. Lucas: Exactly. In the two-option group, 68 percent chose the digital subscription at $59. Only 32 percent chose the bundle at $125. But when the decoy — the print-only at $125 — was added, the numbers flipped: 84 percent chose the bundle, and only 16 percent chose digital. Luna: That's a massive swing. And the decoy itself never gets chosen — it's basically unsellable on its own. But it reshapes the choice so the target option becomes the obvious winner. Lucas: The term in academic literature is 'asymmetric dominance.' The decoy is dominated by the target on one attribute — in this case, both print-only and print+digital cost $125, but the bundle gives you more. So the target dominates the decoy. But the decoy isn't dominated by the competitor in the same way. The digital option is cheaper, so it's still a different trade-off. Luna: So the decoy makes the target option seem superior on a relative basis, even though the absolute value hasn't changed. Lucas: Right. And this isn't just theory. You see it everywhere. Take subscription tiers for software as a service companies. A common setup: Basic at $10 a month, Pro at $25, and Enterprise at $50. But sometimes you'll see a Pro Plus at $30 that has fewer features than Enterprise. That's a decoy to push people to Enterprise. Luna: Or think about movie theater popcorn again. The medium is priced so close to the large that the large feels like a no-brainer. But the theater doesn't lose money — the profit margin on popcorn is huge, so selling you the large at a slight discount still makes them more money than if you'd bought the small. Lucas: There's a classic experiment from the 1990s by psychologists Itamar Simonson and Amos Tversky. They offered students two choices: a low-priced pen and a nicer pen. Then they added a third option — a pen that was slightly worse than the nicer pen but priced the same. The share of people choosing the nicer pen jumped significantly. Luna: So the decoy doesn't have to be a bad product. It just has to be clearly worse on at least one dimension than the one you want to sell. Lucas: Exactly. And here's a nuance: the decoy works best when people are uncertain about their preferences. If you're a popcorn fanatic and you know you want the large no matter what, the decoy doesn't matter. But if you're on the fence, it nudges you. Luna: That's why decoys are so common in subscription services — where the value of features is often fuzzy. Most people don't know exactly how many hours of streaming they'll use, so a decoy tier can push them to a higher plan. Lucas: One word of caution though. If the decoy is too obvious — like a digital-only plan that costs the same as a bundle with less — it can feel manipulative. Consumers are getting savvier. Some companies have faced backlash for 'deceptive' pricing tiers. Luna: So the line is between a helpful nudge and a sleazy trick. What's your take on where that line is? Lucas: I think it comes down to transparency. If the decoy is a real product that has a legitimate audience — like someone who genuinely prefers print-only — then it's a valid option. The problem is when the decoy is purely theoretical, like a plan no one would ever buy. Luna: Right. The Economist's print-only subscription probably did have some loyalists. So the decoy wasn't fake. It was just structured in a way that revealed a better deal. Lucas: Another important point: the decoy effect isn't just about adding a third option. The order matters. If you put the decoy first, it anchors people differently than if it's last. And the price spacing matters too. If the decoy is too cheap, it undermines the target. If it's too expensive, it might push people to the cheapest option. Luna: So you really have to test it. What works for a subscription box might not work for a car dealership. Lucas: Exactly. Let's talk about a less obvious application: the decoy in negotiations. Say you're selling a service for $1000. You could also offer a stripped-down version for $800 and a premium version for $1200. The $800 version might be the decoy to make the $1000 seem like the 'sweet spot.' Luna: That's a classic Goldilocks pricing strategy. And it works because people avoid extremes. Lucas: Right. The decoy effect is closely related to the compromise effect — where people choose the middle option to avoid feeling like they're being extreme. But the decoy is different because it's designed to be dominated, not just intermediate. Luna: One last thing I want to touch on: the decoy in digital pricing where the 'free' option is the decoy. Like a freemium app where the free tier is so limited that the paid tier looks incredibly valuable. Lucas: That's a great point. In that case, the free tier acts as a decoy for the basic paid tier. But it's a bit different because the free tier isn't dominated — it's just low quality. Still, it works on the same principle of contrast. Luna: And that's why so many SaaS companies have three tiers: Free, Pro, and Enterprise. Often the Pro is the target, and Free is the decoy that makes Pro look generous. Lucas: Exactly. So to sum up: the decoy effect is a powerful tool when used honestly. The key is to create a choice set where one option clearly dominates another on a meaningful dimension, making the target option stand out. But always test it, and always make sure the decoy has some real value — otherwise you risk eroding trust. Luna: And the next time you see three popcorn sizes, you'll know exactly what's happening. Lucas: Exactly. Thanks for listening, and we'll see you next time.