Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a 1000 Dollar Decoy Sells a 300 Dollar Watch
Transcript
- Lucas: So last week, a friend of mine sent me a link to a new watch brand. Not a big name, just a Kickstarter thing. And the pricing page had three options: a 300-dollar model, a 500-dollar model, and a 1,000-dollar model. Luna: Classic three-tier. And I'm guessing the 1,000-dollar one was there to make the 300 look reasonable? Lucas: Exactly. But here's what caught my eye — the 1,000-dollar watch was almost identical to the 500-dollar one, just with a different strap and a slightly better movement. The 300-dollar watch was simpler, but still good quality. The whole setup was textbook decoy pricing. Luna: Right. The 1,000-dollar option isn't meant to sell. It's the anchor. It makes the 500-dollar one seem like a smart compromise, and the 300-dollar one feel like a bargain. Lucas: And I think that's worth digging into for episode 70, because decoy pricing is one of those things that sounds obvious once you hear it, but the execution is surprisingly subtle. A lot of companies get it wrong. Luna: Before we go deep — and I know we say this a lot — if these marketing conversations have ever helped you think about pricing differently, or maybe even saved you from buying the wrong tier, the way we keep this show ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Just a small way to say this content matters to you. Lucas: Yeah, it genuinely makes a difference. And it keeps us independent. So, let's get back to that watch brand. Lucas: The brand in question is called 'Horizon' — fictional, but the numbers are real. They launched on Kickstarter with three tiers: the 'Horizon Classic' at 300 dollars, the 'Horizon Sport' at 500, and the 'Horizon Elite' at 1,000. Luna: And the Elite was the decoy. But how do you know for sure? Maybe they genuinely thought someone would buy it? Lucas: Well, the specs told the story. The Elite had a sapphire crystal and a Swiss movement, but the case was the same as the Sport. The Sport had a standard mineral crystal and a Japanese movement — still solid. The Classic had a basic movement and no date window. So the Elite added maybe 200 dollars in real cost, but the price gap was 500 dollars. Luna: So the decoy's role isn't just to be expensive — it's to create a clear, unfavourable comparison with the target option. Lucas: Exactly. The target — the one they want to sell — is the Sport at 500. The decoy is the Elite at 1,000. And the 'competitor' is the Classic at 300. Without the Elite, you'd compare the Classic and the Sport directly. The Classic is cheaper, so you might just pick that. But throw in the Elite, and suddenly the Sport looks like a great deal — you get the same case, a better movement, and you're saving 500 bucks vs. the Elite. Luna: It shifts the reference point. The Classic is no longer the baseline — the Elite becomes the baseline, and everything else is a discount. Lucas: Right. And this isn't just watches. software as a service companies do this all the time. Take a project management tool — they'll have a free tier, a pro tier at 15 dollars a month, and a business tier at 50 dollars. The business tier might have advanced features that 90 percent of users don't need, but it makes the pro tier feel like a sensible upgrade from free. Luna: I've seen that with a note-taking app I use. The free version is fine, but the pro is 5 dollars a month. Then there's a team plan at 15 dollars per user. I'm a solo user, so the team plan is irrelevant — but it makes pro feel cheap. Lucas: The classic case study is from Dan Ariely's experiments. He showed people subscription options for The Economist: web-only for 59 dollars, print-only for 125, or print plus web for 125. The print-only option was a decoy — it made the print plus web look like a no-brainer. Luna: And when he removed the decoy, people's preferences shifted dramatically. Suddenly, most went for the web-only option. The decoy didn't just nudge — it flipped the majority choice. Lucas: That's the power. And the key insight is that the decoy must be asymmetrically dominated. That's the academic term — it means the decoy is clearly worse than the target on at least one important dimension, but not completely dominated on all. In the watch case, the decoy was worse on price but better on movement and crystal. So it's not a 'dud' — it's a trade-off. Luna: If the decoy were just a ridiculously overpriced version with no extra value, would it still work? Lucas: Surprisingly, yes — to a point. Even a 'phantom' decoy, one that nobody would buy, can shift preferences. But the effect is stronger when the decoy has some genuine appeal. That's why luxury brands often have a 'halo' product — a flagship that's expensive and aspirational. It elevates the entire brand, and then the mid-tier items sell better. Luna: So for the watch brand, the Elite wasn't just an anchor — it was also a halo. Even if nobody bought it, it made the brand seem more prestigious. Lucas: Exactly. And that's the subtlety. The decoy works on two levels: first, as a reference point in the immediate comparison; second, as a signal of quality for the entire line. If you only have two tiers, the top one is just 'the expensive one.' But with three, the top one is 'the premium one,' and the middle one becomes 'the smart choice.' Luna: Let's talk about a real-world example that's more recent. I was looking at a meal-kit service last week. They had a 'starter' plan at 8 dollars per serving, a 'family' plan at 10 dollars, and a 'premium' plan at 14 dollars. The premium offered organic ingredients and a wine pairing option — something I didn't care about. But it made the family plan feel like a better value per serving. Lucas: And did you buy the family plan? Luna: I actually did. I went in thinking I'd get the starter, but the premium made the family plan look like a deal. And the family plan had more variety anyway. Lucas: That's the decoy at work. And notice how it doesn't feel manipulative — it feels like a logical choice. That's the hallmark of good pricing architecture: it aligns the customer's self-interest with the seller's goal. Luna: But there's a risk. If customers catch on, they might feel tricked. Do you think that backfires? Lucas: It can, if it's too transparent. But in practice, most people don't think about it. Even when you explain decoy pricing, the effect still works. I've seen studies where participants were told about the decoy before making a choice, and they still chose the target more often. The bias is that strong. Luna: So awareness doesn't inoculate you? Lucas: Not completely. It reduces the effect, but doesn't eliminate it. Partly because the decoy changes the context of the decision. You're not just comparing prices — you're comparing value propositions. And once that comparison is set, it's hard to unsee. Luna: Let's go back to the watch brand. If you were consulting for them, how would you optimize that pricing page? Lucas: I'd test different decoys. Maybe a version where the Elite is 800 instead of 1,000 — still higher than the Sport, but closer. Or a version where the Elite has a feature the Sport lacks, like a titanium case. That would make the comparison more asymmetric. Luna: You'd want to test the price gap between target and decoy too, right? Lucas: Absolutely. If the decoy is too close to the target, it might cannibalize sales. If it's too far, it loses its anchoring power. There's a sweet spot — usually around a 40 to 60 percent premium. In this case, 1,000 versus 500 is exactly a 100 percent premium, which is actually on the high side. But it worked because the decoy had genuine value. Luna: I want to ask about a different industry: cars. Car dealerships often have a base model, a mid-trim, and a fully loaded version. The fully loaded one is often a decoy, right? Lucas: Often, yes. Especially for luxury brands. The base model might be stripped down, the mid-trim adds leather and a sunroof, and the top trim adds a sports package and premium audio. The top trim is usually priced 30 to 40 percent above the mid-trim, but the incremental cost to the manufacturer is maybe 10 percent. So they make a good margin on the top trim if anyone buys it, but its real job is to make the mid-trim look reasonable. Luna: And the base model is the 'competitor' — the one you might default to if you're price-sensitive. Lucas: Exactly. And this structure works because it exploits what behavioral economists call 'extremeness aversion.' People avoid extremes — they don't want the cheapest because it feels cheap, and they don't want the most expensive because it feels wasteful. So they pick the middle. That's the decoy's cousin, by the way — the 'compromise effect.' Luna: Right. The decoy is a specific case of that, where you deliberately create an extreme to push people to the middle. Lucas: And the middle doesn't have to be the middle in terms of price. It can be the second-cheapest, or even the most expensive, depending on what you want to sell. If you're a premium brand, you might put the decoy at the bottom — a stripped-down version that makes the mid-tier look luxurious. Luna: I've seen that with headphones. A brand had a budget pair at 30 dollars, a mid-range at 80, and a premium at 150. The budget one had poor reviews, so it served as a decoy — it made the 80-dollar pair seem like the smart choice. Lucas: That's a great example. The decoy doesn't have to be the most expensive. It just has to be the one that makes your target look best. And the target can be any tier you want to push. Luna: So for the watch brand, they chose the 500-dollar Sport as the target. But what if they wanted to sell more Classics? Lucas: Then they'd restructure. They could put a decoy below the Classic — say, a 'budget' model at 200 dollars with a plastic case and no warranty. That would make the Classic look premium by comparison. Or they could position the Classic as the middle option by adding a cheaper decoy and a more expensive one. But that's four tiers, which gets complicated. Luna: Four tiers can work, but usually the decoy effect is strongest with three. Too many options overwhelm people, and they might defer the decision. Lucas: Exactly. There's a famous jam study — when a store offered 24 varieties, only 3 percent bought. When they offered 6 varieties, 30 percent bought. Choice overload kills conversion. So three tiers is often the sweet spot: one decoy, one target, one competitor. Luna: Let's bring it back to the listener. If you're a small business owner setting prices, what's the one takeaway? Lucas: The one takeaway is: don't just list your products. Create a comparison. Introduce a product you don't expect to sell many of, but that makes your best product look like a great deal. Test the price gaps. And make sure the decoy has at least one feature that justifies its higher price — even if that feature is aspirational. Luna: And don't be afraid to put the decoy above or below. Just make sure it dominates asymmetrically. Lucas: Right. And remember, the goal isn't to trick anyone. It's to help customers see the value you're offering. A well-designed pricing page is a service to the buyer — it simplifies a complex decision. The decoy is just a tool to highlight the best option. Luna: I like that framing. It's not manipulation — it's clarity. Lucas: Exactly. So next time you see a three-tier pricing page, ask yourself: which one is the decoy? And which one are they really trying to sell you? You might start noticing it everywhere. Luna: I already do. And it's kind of fun once you see the pattern. Lucas: It is. Alright, that's episode 70. Thanks for listening, and we'll see you next time.