Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Single Decoy Price Changes Your Entire Choice
Transcript
- Lucas: Imagine you walk into a movie theater. You see three popcorn sizes: small for three dollars, medium for six-fifty, and large for seven dollars. Which one do you pick? Luna: I'm going large. That's only fifty cents more than the medium. Feels like a no-brainer. Lucas: Exactly. And that's the decoy effect in action. The medium isn't there to sell medium. It's there to make the large look like a steal. The medium is the decoy. Lucas: And you know, conversations like this—where we dig into real pricing mechanics—are exactly why listeners keep showing up. If these episodes have given you a framework you've actually used, a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that makes a big difference for us. Now, back to that popcorn—so the medium is priced to push people to large. But does it always work? Lucas: Not always, but when it does, it's powerful. The technical term is asymmetric dominance. The decoy is dominated by the target—the large is better in every way for just fifty cents more. But the decoy isn't dominated by the small; it's bigger and more expensive. So the comparison favors the large. Luna: Right. The small is the cheap option, but the decoy creates a reference point that makes the large look like the smart value choice. Lucas: Exactly. And this isn't just popcorn. There's a famous case from The Economist. They offered three 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 for one hundred twenty-five dollars. Luna: That print-only option at the same price as the bundle? That's the decoy. It makes the bundle look like you're getting web access for free. Lucas: Precisely. When they tested just the web and the bundle—no print-only decoy—most people chose the web-only. But with the decoy, the majority shifted to the bundle. Same price for the bundle, but the context changed the choice. Lucas: Now, in a more current context, I was looking at a SaaS product called SparkToro—a marketing audience research tool. Their pricing page has three tiers: Hobby at thirty-eight dollars a month, Pro at seventy-nine, and Premium at a hundred fifty-nine. The Pro tier is positioned right between them. Luna: And the Pro might be the decoy there. Compared to Premium, it's half the price with most of the features. But compared to Hobby, it's a big jump. So which one do they want you to pick? Lucas: In this case, I think Pro is the target. Hobby is the cheap option for individuals, but Pro offers the best value for teams. Premium is the decoy—it's much more expensive but doesn't add proportionally more value for most users. So Pro looks like the sweet spot. Luna: Interesting. So the decoy can be above or below the target, depending on what you're trying to sell. The key is that the decoy makes the target look better by comparison. Lucas: Right. The decoy should be clearly inferior in some dimension—price or features—so that the target emerges as the rational choice. But you have to be careful. If the decoy is too obviously a decoy, savvy customers might resent the manipulation. Luna: Yeah, I've seen that. Some subscription services have three tiers where the middle one is clearly a decoy, and people just pick the cheapest or the most expensive. It backfires if the decoy is too transparent. Lucas: Exactly. The decoy has to feel like a legitimate option, even if it's not the one you expect most people to choose. It needs to have a coherent value proposition, just not as compelling as the target. Lucas: Let me give you a concrete example from a B2B software company I worked with. They had a basic plan at ten dollars per user per month, a pro plan at twenty-five, and an enterprise plan at fifty. The enterprise plan had dedicated support and advanced analytics, but most small teams didn't need that. Luna: So the enterprise was the decoy? It makes the pro plan look like a balanced choice for teams that want more than basic but don't need the full enterprise. Lucas: Yes. And after adding the enterprise tier, pro plan conversions increased by about thirty percent. The basic plan still had its audience, but the decoy shifted the middle-tier adoption significantly. Luna: That's a big lift. But I wonder—does the effect wear off over time? If customers see the same decoy every time they renew, do they eventually see through it? Lucas: That's a great question. There's research suggesting that the decoy effect is most powerful on first exposure. Over repeated choices, people may develop a preference or learn to ignore the decoy. But in many cases, especially for infrequent purchases like a movie ticket or a software subscription you evaluate annually, the decoy can keep working. Lucas: Also, you can rotate decoys. Some companies change their pricing tiers periodically—adding a new middle option or adjusting features—to reset the context. Luna: That feels manipulative, but I guess it's no different from a store rearranging its shelves to highlight certain products. It's part of the game. Lucas: It is. And the ethical line is about whether the decoy represents a real option that someone might legitimately choose. If it's a phantom—a product you'd never actually deliver—that's deceptive. But if it's a real tier that serves some customers, it's just smart pricing architecture. Luna: Let's talk about when decoys fail. What's a situation where adding a decoy actually hurts conversions? Lucas: One common failure is when the decoy is too close in price to the target but offers much less value. Customers may get confused and choose the cheap option out of distrust. Or if the decoy is too expensive, it might anchor a high price that makes the target seem cheap—but if the target is still too expensive for the customer, they might just walk away. Lucas: Another failure mode is when customers have very clear preferences. If someone knows they want the cheapest option, a decoy won't sway them. Decoys work best when customers are uncertain about what they value. Luna: So the decoy effect is most powerful in situations of indecision. That makes sense. It's a nudge, not a shove. Lucas: Exactly. And that's why it's so common in subscription pricing. Customers often don't know exactly what features they need, so they rely on comparisons. A well-designed decoy can guide them to a higher-value tier for both them and the business. Lucas: I want to give a practical takeaway. If you're designing a pricing page with three tiers, map out the feature sets and prices. Identify which tier you want to be the target. Then check if the other two tiers make the target look good. The decoy should be dominated by the target on at least one key dimension—usually price per value. Luna: And test it. Run an A/B test with two tiers versus three. See if the decoy actually lifts conversions on the target. Because sometimes, simplicity wins. Lucas: Absolutely. The decoy effect is a tool, not a rule. But when it works, it's one of the most elegant pricing moves you can make. Luna: I'm already thinking about how I can apply this to my own side project. I have two tiers right now—basic and pro. Maybe adding a third 'premium' tier could push more people to pro. Lucas: Just be careful. Make sure the premium tier is something you could actually deliver, even if you don't expect many takers. And watch your data. If conversions on basic drop too much, you might be pushing people away instead of up. Luna: Good advice. So next time I'm at the theater, I'll know why I'm reaching for the large popcorn. It's not just hunger—it's pricing psychology. Lucas: And now you're in on the trick. Whether you use it or just recognize it, that awareness changes how you see every three-option menu.