Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How The Economist's Three-Tier Pricing Made the Middle Option Most Popular
Transcript
- Lucas: So you have probably seen a pricing page with three tiers labeled Basic, Standard, Premium. The middle one is almost always the one they want you to buy. There is a classic case from The Economist that illustrates exactly how that works. Luna: Right, the internet subscription offer from the early 2000s. I remember reading about that. Did they actually run it as a real experiment? Lucas: They did, and the results were striking. But before we dive into that, I want to mention something. If you are someone who actually tunes into these pricing conversations regularly, this podcast stays ad-free because a small group of listeners chip in monthly through buy me a coffee dot com slash fexingo. It is not a big ask — just being transparent that the support funds the research behind episodes like this one. Luna: Yeah, and it is nice knowing there is no sponsor influence. It keeps the advice honest. Lucas: Exactly. So back to The Economist. In the early 2000s, they offered three subscription options: a web-only subscription for fifty-nine dollars, a print-only subscription for one hundred twenty-five dollars, and a print plus web subscription also for one hundred twenty-five dollars. Luna: Wait, the print-only and the print plus web were the same price? That seems like an obvious decoy. Lucas: Right, and that is the genius of it. The print-only option exists not to sell — it is there to make the print plus web combo look like a bargain. When you see that you can get both print and web for the same price as just print, the combos value jumps out. Luna: So the decoy anchors your perception of the bundle. I bet the majority picked the hundred twenty-five dollar combo. Lucas: Exactly. When researchers ran this as an experiment, about eighty-four percent of participants chose the print plus web option. Only sixteen percent chose the web-only. And zero percent chose the print-only. Luna: That is a massive skew. So the decoy effectively killed the print-only option and made the bundle the obvious winner. Lucas: It did. And notice the web-only at fifty-nine dollars was cheaper, but because the decoy was there, the bundle felt like a steal at one twenty-five. The principle is called the Goldilocks effect — humans tend to avoid extremes and pick the middle option. Luna: So if you design your tiers so the middle one is the one you want to sell most, you can influence choice without forcing anything. Lucas: Precisely. And it works because the decoy makes the target option look superior in value. The economist case is taught in business schools to this day. But let us look at a more recent example — Spotify. Luna: Spotify has a free tier, a premium individual at ten dollars, and a student discount at five. That is not exactly three tiers with a decoy. Lucas: True, but look at the student tier. It is basically the same as premium but cheaper. That acts as a decoy to make the full-price premium feel reasonable — you might think, well, I am not a student, so ten dollars is the fair price. Luna: I see — so the student option anchors the premium as a standard price, not a rip-off. Lucas: Right. And many SaaS companies use a three-tier structure where the cheapest is too limited, the most expensive is overkill, and the middle is the sweet spot. Take a project management tool like Monday.com — their Basic, Standard, and Pro tiers are designed exactly that way. Luna: So what happens if you remove the decoy? Does the middle still win? Lucas: That is a great question. Researchers have tested offering just two options — the web-only at fifty-nine and the bundle at one twenty-five — and the preference shifts. More people choose the cheaper option because there is no contrast to make the bundle shine. Luna: So the decoy is essential to the effect. Without it, people default to the lowest price. Lucas: Exactly. And that is why you see this pattern so often in subscription pricing. It is not about offering choice for choices sake — it is about framing the preferred option as the rational middle ground. Luna: But does it always work? I have seen some companies try it and fail — customers get suspicious. Lucas: It can backfire if the decoy is too obviously useless. For example, if you offer a product with ten features for ten dollars, then a version with the same ten features for twenty dollars, and then a version with fifteen features for thirty dollars, the middle decoy feels insulting. The key is to make the decoy seem like a genuine but inferior option. Luna: So the decoy must have some real value, even if it is overpriced. Like the print-only Economist subscription — some people genuinely wanted just the print edition. Lucas: Right. The decoy should appeal to a small segment, but its main job is to highlight the bundle. If no one would ever choose it, the trick becomes transparent and trust erodes. Luna: That makes sense. So for someone designing a three-tier plan, what are the practical steps? Lucas: First, identify your target option — the one you want most customers to buy. Then design a lower tier that is clearly inferior — maybe missing key features. Then design a higher tier that is overpriced or has niche extras. The target sits in the middle, looking like the balanced choice. Luna: And the pricing of the premium tier should anchor the target as fair. If your target is fifty dollars, the premium could be eighty, making fifty feel reasonable. Lucas: Exactly. And a word of caution: avoid making the price differences too small. If the tiers are ten, twelve, and fourteen dollars, the decoy effect weakens because the increments are too linear. The gap between the lower and target should be noticeable, and the gap between target and premium should be even larger to make the target pop. Luna: So the economist used a gap from fifty-nine to one twenty-five — that is more than double. Then the premium was same price as the decoy? Actually, the decoy was one twenty-five, the target same. That is unusual. Lucas: It is a special case where the decoy and target are the same price. That works because the decoy offers less for the same money, so the target becomes the obvious better deal. More commonly, you see ascending price tiers where the middle is slightly higher than low but significantly lower than high. Luna: Like a meal delivery service: six dollars per serving, nine dollars, and twelve dollars. The middle is the seller. Lucas: Exactly. And the nine dollars looks good because the six dollar option might be missing extras, and the twelve dollar option is too fancy. The key is that the value proposition improves with price, but the middle offers the best value per dollar. Luna: So the Goldilocks effect relies on customers actually doing that mental calculation. Do you have any data on how much this can boost conversion? Lucas: One study by Dan Ariely showed that adding a decoy to a two-option set increased the share of the target option from about forty percent to over seventy percent. That is almost a doubling of preference. For The Economist, the decoy shifted the bundle choice from maybe forty percent to over eighty percent. Luna: That is a massive lift. No wonder companies use it. But I worry about ethics — is it manipulative? Lucas: It is a gray area. As long as the options are real and fairly priced, it is considered persuasive design, not deception. But if you create a decoy that is intentionally useless just to nudge, you risk customer backlash. The best approach is to offer genuine options that cater to different needs, and structure the tiers so the best value naturally emerges. Luna: So transparency matters. The Economist decoy was a real subscription — some people preferred print only. That was honest. Lucas: Exactly. And that is why the example endures. It is a masterclass in how to present choices so the customer feels smart choosing the one you want them to. Luna: Alright, so next time I see three tiers, I will look for the decoy. Lucas: And you will know exactly why the middle one probably costs what it does.