Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $3 Coffee Explains the Decoy Effect in Pricing
Transcript
- Lucas: So let's start with a coffee shop menu. You walk in, and you see three sizes: small for three dollars, medium for four-fifty, and large for five-fifty. Which one do you pick? Luna: I'd probably go medium. It feels like the sweet spot. Lucas: Exactly. And that's not an accident. That middle option is often the one the shop wants you to buy. But here's the twist — what if the menu only had small and large? Suddenly, the jump from three dollars to five-fifty feels steep, and more people might pick small. Luna: Right, the medium anchors you into thinking you're getting a deal. Lucas: That's the decoy effect in action. It's a pricing strategy where you introduce a third option that's deliberately less attractive, making one of the other options look like a much better value. The classic study on this comes from Dan Ariely, who showed people subscription options for The Economist. Luna: Oh, this is the one with the print-only, web-only, and print plus web, right? Lucas: Exactly. In his experiment, he offered three choices: 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. That print-only option is the decoy — it's priced the same as the combo, but you get less. Suddenly, the combo looks like a no-brainer, and most people picked it. Luna: And when he removed the decoy, people overwhelmingly chose the cheapest option. Lucas: Right. Without the decoy, the web-only option becomes the default. That's the power of adding a third option that's not meant to sell — it's meant to steer you toward the higher-margin choice. Luna: So how do companies actually design that decoy? Is there a formula? Lucas: There's a rough one. The decoy should be asymmetrically dominated. That means it's worse than the target option in some way — usually price or features — but not worse than the other option in the same way. For example, a medium coffee might be same price as large but smaller, but it's still bigger than small. That makes large look like a steal. Luna: So the decoy doesn't have to be the cheapest or the most expensive. It just has to make the target look better. Lucas: Exactly. And it works because humans don't evaluate options in isolation — we compare. If you give people two choices, they weigh pros and cons. Add a third that's clearly worse than one of them, and that one suddenly seems like the obvious winner. Luna: I've seen this in action with movie theater popcorn. The small is, say, five dollars, the medium is seven-fifty, and the large is eight. The medium is practically the same price as large, so everyone grabs large. Lucas: That's a classic example. The medium is the decoy there — priced close to large but with significantly less popcorn. It makes the large look like a bargain, even though it's the highest-priced item. Theaters know that the marginal cost of more popcorn is almost nothing, so they'd rather upsell you to large. Luna: And you feel smart for getting the 'deal'. Lucas: Exactly. The decoy effect is powerful because it flips the frame from 'is this worth it?' to 'which is the best deal?' And once you're in comparison mode, you're more likely to spend more. Luna: Is there a risk? Like, if the decoy is too obviously bad, do people catch on? Lucas: There is a risk of backlash if customers feel manipulated. But when it's done well, it feels natural. The key is that the decoy must be a realistic option — something someone might actually buy, even if few do. If it's a blatant rip-off, it can erode trust. Luna: So you need to make the decoy look like a legitimate product, just not the best value. Lucas: Right. And that's why companies often bundle features or sizes that seem reasonable at first glance. Take software tiers. A basic plan at ten dollars, a pro plan at twenty, and an enterprise plan at fifty. The pro plan might be the target, and enterprise is the decoy that makes pro look affordable. Luna: I've noticed that with Spotify. They have individual, duo, family, and student plans. The duo is often priced just a bit less than family, but with half the accounts. It makes family look like a great deal for couples. Lucas: Exactly. And Spotify recently adjusted their pricing tiers — I think back in 2024 — where they added a basic tier without audiobooks. That created a new decoy dynamic. The old premium plan became the target, and the new basic tier made premium look more valuable for just a couple bucks more. Luna: So the decoy doesn't have to be a physical product. It can be a plan or a bundle. Lucas: Exactly. And it's used everywhere — from subscription boxes to car models. A car dealership might offer a base model, a mid-range, and a fully loaded version. The fully loaded one is the decoy that makes the mid-range look reasonable, even if it's still expensive. Luna: I'm curious about the numbers. How much can it actually lift sales? Lucas: Studies show that adding a decoy can increase sales of the target option by twenty to thirty percent. In some controlled experiments, it's even higher. But it depends on the context and how well the decoy is designed. Luna: So it's not a magic bullet, but a solid tactical tool. Lucas: Right. And it works best when the target option has higher margins than the cheaper one. You're not just shifting sales — you're shifting them to a more profitable product. Luna: That makes sense. And on that note, I want to take a quick moment to mention something we don't do often, but it feels right here. If these marketing conversations have sparked something you've actually used — maybe you tried a decoy pricing test at work, or you just started noticing menus differently — that's exactly what we hope for. And listener support is what keeps this show ad-free and independent. If you'd like to chip in, it's buy me a coffee dot com slash fexingo. No pressure, genuinely. But it helps us keep doing episodes like this. Lucas: Yeah, and honestly, we love hearing from listeners who've tried things we talk about. It's what makes this fun. Anyway, back to the decoy — let's talk about one more case that really drives it home. Luna: Sure, what do you have? Lucas: Think about a subscription box for, say, beauty products. They might offer a monthly box for twenty dollars, a three-month box for fifty dollars, and a six-month box for ninety dollars. The three-month box is the decoy — it's priced at about sixteen-sixty per month, while the six-month is fifteen per month. That small difference makes the six-month look like a no-brainer, even though you're committing to more. Luna: And the monthly box is the cheap option, but the decoy steers you to the highest commitment. Lucas: Exactly. And for the company, locking in six months of revenue is huge. The decoy effect doesn't just shift choice — it shifts customer lifetime value. Luna: So if you're a marketer or a founder, the lesson is: don't just offer two options. Think about what third option could make your target choice irresistible. Lucas: Right. And test it. The decoy effect is well-documented, but it's not a guarantee. You need to know your customers and what they value. A decoy that works for coffee might not work for software. Luna: But it's a tool worth having in your pricing toolkit. Lucas: Absolutely. So next time you see three sizes, or three plans, ask yourself: which one is the decoy? And which one are they really trying to sell you?