Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How the Decoy Effect Steers Your Wallet
Transcript
- Lucas: The Economist once tested three subscription tiers: online-only for 59 dollars, a print-only option for 125 dollars, and a print plus online bundle also for 125 dollars. That middle one was a decoy—it was strictly worse than the bundle. And the result? The bundle became the most popular choice by far. Luna: Right, because who would pick the print-only for 125 when you can get print plus digital for the same price? The decoy makes the bundle look like a no-brainer. Lucas: Exactly. That's the decoy effect, or asymmetric dominance. You add an option that's obviously worse than one of the others, and it shifts people's preference toward that now-dominant option. No rational person would choose the decoy, but its mere presence changes the comparison. Luna: It's a classic example from Dan Ariely's 'Predictably Irrational.' But how common is this in real-world pricing today? Lucas: Incredibly common. Think about movie theater popcorn: they offer small, medium, and large. The medium is often priced very close to the large, making the large seem like a great deal. But in many theaters, the small is the decoy—it's so expensive per ounce that the medium looks reasonable, even though you might have originally wanted the small. Luna: So the decoy doesn't have to be a literal inferior product; it can be a pricing structure that frames another option as the sweet spot. Lucas: Yes. And companies use it in digital services too. Take Apple's iCloud storage: they offer 5GB free, 50GB for 99 cents, 200GB for 2.99, and 1TB for 9.99. Which one seems like the best value? Often the 200GB plan, because compared to the 1TB at 9.99, 2.99 for 200GB feels cheap. But the 1TB serves as a decoy for heavy users, and the 50GB plan can be a decoy pointing up. Luna: So the decoy isn't always the worst option; sometimes it's the most expensive one that makes the middle look smart. Lucas: Exactly. And Spotify uses a similar trick with its three tiers: free with ads, Premium for 9.99, and a Student plan for 4.99. The student plan is legit, but note that the free tier acts as a decoy to make Premium seem worth the money—because you get all those features and no ads for only 9.99. Without the free tier, Premium's price feels steeper. Luna: That's a good point. The free tier is basically a stripped-down version that highlights what you're missing. It's the decoy for the paid plan. Lucas: Yes. And it's not just consumer goods. Software companies like Adobe use it in subscription bundles. They offer a single-app plan, the full Creative Cloud suite, and maybe a student discount. The full suite at 54.99 a month makes the single-app plan at 20.99 seem reasonable, even if you only need Photoshop. But the decoy is the suite—priced high to make the single app feel like a bargain. Luna: So it's about controlling the reference point. The customer doesn't know the absolute value of a product; they judge it relative to other options. Lucas: Exactly. The decoy effect preys on our inability to evaluate value in a vacuum. And the most powerful decoys are those that don't even get chosen. They just sit there, altering the context. Luna: Is this ethical? I mean, you're intentionally creating a choice that's meant to be unattractive just to sell another option. Lucas: That's the big debate. Critics call it manipulation, because it exploits cognitive biases. Supporters say it's just good design—you're helping customers see the best option by providing a clear comparison. The key is whether the decoy is a real product that someone might want, or a fake option just to manipulate. In The Economist's case, the print-only option was arguably a real product for a niche audience. But in many cases, decoys are purely strategic. Luna: And regulators are starting to look at this. In Europe, there's scrutiny on 'dark patterns' in digital pricing, which could include decoy tactics. Lucas: Right. The line gets blurry when the decoy isn't a real option, like a subscription tier that nobody would buy just to make another look good. But for now, it's widespread. And knowing about it doesn't make us immune—we're still influenced by the context of choices. Luna: Well, at least now we can spot it. So what's the takeaway for businesses? Lucas: If you're setting a pricing structure, don't just line up options by cost. Think about which one you want to sell most, then design a decoy that makes that target look superior. That could be a more expensive premium option, or a stripped-down basic version. The decoy should be just close enough to the target to create a clear comparison. Luna: And for consumers, the biggest defense is to consciously decouple your choices from the context. Ask yourself: if this decoy didn't exist, would I still pick this option? That's harder than it sounds. Lucas: It is. But even being aware of the trap helps. The more you practice, the less likely you'll fall for it. Luna: Speaking of awareness, I think it's worth mentioning that we try to keep these conversations clean and independent. We don't run ads on the podcast because we believe honest business thinking shouldn't be interrupted. If that resonates with you, supporting us at buy me a coffee dot com slash fexingo helps keep it that way. Lucas: Yeah, it's a small way to ensure we can keep digging into pricing tactics without any outside influence. And we appreciate it. Luna: Anyway, back to the decoy: we've seen how it works in subscriptions, popcorn, and software. But there's one more example I find fascinating. Lucas: What's that? Luna: Cinema loyalty cards. In the UK, Odeon has a Limitless card for 17.99 a month, but they also offer a premium version for more. The basic card is the target, and the premium acts as a decoy to make the basic seem affordable. But the interesting part is that they created a 'student' decoy that's even cheaper, making the basic look full-featured. Lucas: That's clever. And it shows the decoy effect is everywhere once you start looking. I bet the next time you pay for anything, you'll notice the menu structure differently. Luna: I guarantee it. And for those of you who want to share a decoy you've spotted, we'd love to hear about it. Until next time.