Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Decoy Price Changes What You Pick
Transcript
- Lucas: So there's a classic pricing experiment that I think we've danced around on this show but never actually named. It's the one where people are choosing between a digital subscription and a print plus digital bundle, and the middle option — just the print edition — seems designed to fail. Luna: Oh, the Economist one. I remember that from a hundred behavioral econ decks. Lucas: Exactly. Dan Ariely made it famous. The offers were digital-only for fifty-nine dollars, print-only for a hundred and twenty-five, and print plus digital for a hundred and twenty-five. The print-only option is obviously inferior to the bundle — same price, less content. But when you remove it, people suddenly prefer the cheaper digital-only plan. The presence of that decoy shifts preference toward the more expensive bundle, even though nobody picks the decoy itself. Luna: So the decoy isn't there to be chosen. It's there to make another option look better. Lucas: Right. And that's the core of what's called the decoy effect, or the asymmetric dominance effect. You introduce an option that's clearly worse than one of the existing options — not worse in every way, but worse on the dimension people actually care about. And that makes the dominant option look like a steal by comparison. Luna: Give me a non-subscription example. Something I might see at the movies. Lucas: Cinema popcorn is a perfect one. You go to the counter and there are three sizes. Small, medium, large. The medium is, say, seven dollars, and the large is eight-fifty. The small is four-fifty. The medium is the decoy — it makes the large look like a tiny step up in price for a significantly bigger bucket. Most people who would have bought a small now buy the large, because the medium feels like a ripoff. Luna: And the theater doesn't care which one you pick — the margin on all of them is enormous. They just want you to trade up. Lucas: Exactly. The decoy doesn't need to sell. It just needs to reframe the choice so the target option — the one with the best margin — feels like the rational pick. That's why you see it in software tiers all the time. Think of a SaaS company with a basic plan at ten dollars, a pro plan at twenty, and an enterprise plan at forty. The pro plan is the target. The enterprise plan is the decoy that makes pro look reasonable. Luna: But doesn't that risk annoying people who actually want a simple choice? I mean, sometimes I just want the small popcorn and not the whole theater upgrade. Lucas: It can backfire if the decoy is too obviously absurd. The trick is to make it credible — something a real segment might consider, even if it's not the best deal. A decoy that's laughably bad can erode trust. People feel manipulated. So there's a design discipline here. Luna: So how do you design a good decoy? What's the rule of thumb? Lucas: The decoy should be dominated by your target option on the key attribute — usually price per unit or value per dollar — but it shouldn't be dominated by the other option. In the Economist example, the print-only decoy is dominated by the bundle on value, but it's not worse than the digital-only on content format. It's a print magazine, which some people might want. That makes it a legitimate choice for a niche, even though it's irrational for most. Luna: So it has to be plausible, not just a straw man. Lucas: Exactly. And there's another subtlety: the decoy works best when the comparison is easy. If you have multiple attributes — price, features, quality — the decoy can confuse rather than guide. Simplicity is your friend. That's why it works so well with popcorn: the only real difference is size. Luna: I also think about coffee shops. You know, small, medium, large. Sometimes the medium is almost the same price as the large, and the small is barely cheaper. I always end up with a large. Lucas: That's the decoy working on you without you noticing. The prices are engineered so the large feels like the value pick. A small might be two-fifty, a medium three-fifty, and a large three-seventy-five. The medium is the decoy — it pushes you to the large for just twenty-five cents more. The shop makes more per ounce, and you feel like you got a deal. Luna: But at some point, doesn't the customer catch on? I remember when I noticed that the medium and large were almost the same price, I started feeling a little annoyed. Lucas: That's the risk. If the price gap is too small, the decoy can feel insulting. There's a sweet spot. You want the target option to be clearly better, but not so obvious that the decoy seems like a trick. The best decoys are the ones people never consciously register as a decoy. They just feel good about their choice. Luna: So is there a way to use the decoy effect ethically? Or is it always a bit manipulative? Lucas: I think there's a spectrum. On one end, you're helping people make a better decision by highlighting a genuinely good option. On the other, you're exploiting cognitive biases to extract more money. The difference is whether the decoy is based on real value differences or just pricing games. If the large popcorn really is a better deal per ounce, then showing a medium that's overpriced can be a way to steer people toward value. That's not unethical — it's good menu design. Luna: But if the medium is just there to make the large seem cheap, even though the large is also overpriced... Lucas: Then you're in murkier waters. And it can hurt your brand in the long run. There's research showing that when people feel manipulated, they're less likely to buy again. So the decoy is a short-term tool, not a long-term strategy. Luna: I wonder if the decoy effect works in B2B pricing too. Like, when I'm looking at enterprise software, I see three tiers all the time. Is that the same thing? Lucas: Absolutely. B2B buyers are humans too. The decoy effect works in any context where there's a comparison. But in B2B, the decoy is often a premium tier that's priced to make the middle tier look like a bargain. For instance, a CRM with a basic plan at twenty dollars per user, a professional plan at forty, and an enterprise plan at eighty. The enterprise plan might include features that most teams don't need, but it makes the professional plan look like a sweet spot. Luna: And that's why so many software companies have that 'most popular' tag on the middle tier. Lucas: Exactly. The tag is just reinforcing what the pricing structure is already doing. The decoy does the heavy lifting; the badge just makes it explicit. Luna: So what's a real-world example where the decoy backfired? I feel like every pricing tactic has a horror story. Lucas: There's a famous case with a wine shop. They had a cheap bottle and an expensive bottle, and they added a mid-priced bottle that was actually closer in price to the expensive one. The goal was to boost sales of the mid-priced bottle, but instead, it confused customers so much that they just bought the cheapest one. The decoy failed because it wasn't clearly dominated by the target — the prices were too close together, so the comparison didn't yield a clear winner. Luna: So the decoy needs to be clearly worse, not just slightly worse. Lucas: Right. If the decoy is too similar, it just adds noise. People can't tell which is the better deal, so they default to the safest — often the cheapest — option. The decoy effect is powerful, but it's also fragile. You need the right conditions. Luna: I also think about how we talk about this on the show. We're teaching people to notice these tricks. Does that make them less effective? Lucas: There's research that says once people learn about the decoy effect, they can resist it — but only if they're paying attention. In real life, we're often multitasking, making quick decisions, and the decoy works precisely because it bypasses careful reasoning. So even informed consumers fall for it from time to time. Luna: So it's not about being smarter, it's about being more mindful. Lucas: Exactly. And that's why I think it's a great topic for the show. We're all consumers, and understanding this stuff helps us make better choices — or at least feel less manipulated when we don't. Luna: Yeah, I've already caught myself thinking about that popcorn setup differently. Speaking of the show — if today's conversation sparked a new way to look at pricing, and you've ever gotten value from what we do, that's what keeps this going. If it's worth a coffee to you, the link is buy me a coffee dot com slash fexingo. Lucas: And no pressure at all — we're just glad you're here. But it does help us keep the episodes ad-free and focused on the actual substance. Luna: Right, so back to decoys — one more thing I'm curious about. How do you test if a decoy is actually working? Lucas: A/B testing is the gold standard. Show one group the two-option menu and another group the three-option menu, and see how the share of choice shifts. If the target option gains share without hurting overall conversion, your decoy is working. If it just confuses people and lowers total sales, you need to rethink it. Luna: And do you have a favorite decoy in the wild? Something you see and just appreciate the craft? Lucas: I'm a fan of the movie theater popcorn, honestly, because it's so clean. Three sizes, the middle one is almost the same price as the large, and the small feels like a rip-off. That's classic decoy design. But my all-time favorite is the classic software tier where the middle tier is clearly the target, and the top tier is just there to make it look good. It's elegant because it's so common — you see it everywhere, and it works. Luna: It's kind of beautiful in a way, if you ignore the manipulation. Lucas: It's a reminder that pricing isn't just about numbers — it's about psychology, design, and understanding what people value. And the decoy effect is one of the most elegant tools in that toolkit. Just remember to use it responsibly.