Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy Effect And Your Monthly Subscription
Transcript
- Lucas: Let’s talk about the moment you realize your pricing page isn’t a menu of options for customers. It’s a trapdoor. Most business owners think they’re giving people a choice between good, better, and best. But what they’re actually doing is engineering a scenario where the best option feels like the only rational move. This is the core of the decoy effect, and it’s not just academic theory anymore. Luna: Right, because if I’m selling software, I don’t want someone buying the cheap plan. I want them to upgrade. So I add a middle plan that makes the expensive one look like a bargain? Lucas: Exactly. And here is the nuance most people miss. The decoy isn’t just a random third option. It has to be asymmetrically dominated. That means it’s strictly worse than the target option in every way, but only slightly worse than the competitor option. If it’s too obviously bad, nobody looks at it. If it’s competitive, it cannibalizes your high-ticket item. It has to be just fragile enough to break the other comparison. Luna: So it’s less about adding value and more about manipulating perception. Like putting a $300 watch next to a $500 watch so the $500 one doesn't seem crazy. Lucas: Precisely. Let’s look at a concrete example from a B2B project management tool. They had two plans: Basic at fifty dollars per month and Pro at two hundred dollars per month. Conversion was flat. Then they added a Plus plan at one hundred and ninety-five dollars per month. It offered everything in Pro, plus maybe one minor feature like extended data retention. Nobody bought Plus. But Pro sales jumped forty percent. Luna: Wait, so the Plus plan didn’t even need to be good? It just needed to be close to Pro? Lucas: It needed to be the perfect foil. Before Plus existed, the jump from fifty to two hundred felt steep. You were comparing apples to oranges. Once Plus appeared at one hundred and ninety-five, the brain stops comparing fifty to two hundred. It starts comparing one hundred and ninety-five to two hundred. Suddenly, for five dollars more, you get the same core features. The gap shrinks. The risk evaporates. Luna: That’s terrifyingly efficient. But does this work outside of software? What about physical products or services? Lucas: It works everywhere human beings make choices under uncertainty. Think about coffee chains. You have a small for three dollars, a large for six dollars. Add a medium for five dollars and fifty cents. Now the large feels like a steal compared to the medium. The medium is the decoy. It’s priced high enough to make the large look reasonable, but low enough to exist. It’s a structural trick, not a product innovation. Luna: I feel like I’ve been tricked by this at least once this week. Probably when I chose the bigger popcorn size at the movies. Lucas: You probably have. And movie theaters are masters of this. The medium popcorn is often only twenty percent cheaper than the large. The marginal cost of filling the bucket is pennies. But the psychological gain is massive. They know you’ll pick the large because the medium feels like a bad deal. It’s not that you want more popcorn. It’s that you don’t want to feel foolish. Luna: So the key is making the lower option feel inadequate without being insulting. If the decoy is too bad, people just stick to the cheapest safe option. Lucas: Spot on. If the decoy is clearly inferior, you trigger loss aversion in reverse. People retreat to safety. The sweet spot is when the decoy offers eighty percent of the value of the target for ninety percent of the price. It creates a tension that can only be resolved by upgrading. You’re not selling features; you’re selling relief from cognitive dissonance. Luna: But what happens if customers see through it? Doesn’t that backfire? Do people resent being manipulated? Lucas: Most people never see through it because it relies on relative comparison, not absolute value. Humans are terrible at judging absolute worth. We’re great at judging difference. When you frame the choice as a comparison between two similar items, the brain switches to heuristic mode. It saves energy. Only a tiny fraction of consumers do the math. And those who do usually justify the purchase anyway because they genuinely prefer the premium features. The manipulation is subtle enough to be invisible. Luna: So it’s less about lying and more about guiding attention. You’re highlighting the right comparison. Lucas: Exactly. You’re curating the context. In behavioral economics, this is called choice architecture. By arranging the options in a specific order and price relationship, you influence the outcome without restricting freedom of choice. The customer still chooses. They just choose the way you anticipated. It’s ethical persuasion, provided you aren’t hiding terms or misleading on features. Luna: Where should we go next with this? Is there a risk of overcomplicating the offer? Lucas: There is a real risk. If you have four or five tiers, you create analysis paralysis. The decoy effect requires exactly three options. Two to compare, one to distort the comparison. Add a fourth, and the brain gives up. It defaults to the cheapest or the most familiar. Simplicity is the enemy of complex pricing structures. You have to keep it tight. Luna: So three is the magic number. Not two, not four. Three. Lucas: Three is the limit of working memory for simple comparisons. When you add a fourth variable, the cognitive load spikes. Customers stop evaluating value and start avoiding pain. They want to leave the page. So you test rigorously. Run an A/B test with two tiers. Run another with three. Measure the lift in average order value, not just conversion rate. Sometimes conversion drops slightly, but profit skyrockets. That’s the trade-off. Luna: I want to pause here for a second. These conversations about pricing and psychology are incredibly useful for anyone running a business or side hustle. Lucas: They really are. And supporting this show directly helps us dig into these details rather than skimming the surface. 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: It’s a small contribution that lets us keep producing deep dives like this one. Thanks for keeping the lights on. Lucas: Back to the mechanics. Let’s talk about the placement of the decoy. Does it matter if it’s listed first, second, or third? Luna: I assume position matters. If I put the decoy last, people might already have decided on the first option. Lucas: Position matters, but dominance matters more. However, research shows a recency bias. If the decoy is the last thing you see before the call to action, it’s fresher in working memory. But if you list them left to right, the middle position often draws the eye first due to reading patterns. You want the decoy adjacent to the target. If the target is on the right, put the decoy in the middle. If the target is in the middle, put the decoy on the left. Luna: So visual proximity reinforces the mental comparison. They need to sit next to each other. Lucas: Yes. Don’t scatter your pricing across different pages. Keep them visible simultaneously. Scrolling destroys the comparative frame. If I have to scroll down to see the premium option, I’ve already made a decision about the basic option. I’m locked in. Horizontal layouts work best for this specific tactic. Luna: What about the language used in the tiers? Should the decoy have a name that sounds impressive? Lucas: Never give the decoy a name that competes with the target. Call the target 'Pro' or 'Enterprise'. Call the decoy 'Plus' or 'Standard'. You want the decoy to sound like a step up, not a step ahead. If you call the decoy 'Ultimate', you confuse the hierarchy. The naming must reinforce the positioning. The target must sound like the destination. The decoy is just a bridge. Luna: So the naming convention is part of the trap. It guides the expectation before they even look at the price. Lucas: Absolutely. Language primes the brain. If you label the decoy 'Advanced', people expect advanced features. When they see it lacks the killer feature of the target, they feel cheated. If you label it 'Plus', the expectation is lower. The shortfall feels smaller. It’s a delicate balance of managing expectations. Luna: This feels like it could go wrong if the decoy actually has some useful features. What if people buy it? Lucas: If people buy the decoy, you failed. The decoy must be unattractive enough that no one buys it, but attractive enough to shift the comparison. If it sells, it means you’ve created a new market segment, not a decoy. You’ve accidentally launched a successful mid-tier product. That’s fine, but it’s not the decoy effect anymore. It’s just good product segmentation. The decoy must die on the vine. Luna: So it’s a sacrificial lamb. Its only purpose is to make the other options look better. Lucas: Correct. It absorbs the traffic that would have gone to the cheap option and redirects it to the expensive one. Or it absorbs the traffic that would have stayed on the cheap option by making the cheap option look stingy. It serves both directions. It’s a pressure valve for your pricing structure. Luna: How do you measure if it’s working? Beyond just looking at total revenue? Lucas: Look at the distribution of sales. Before the decoy, you might have seventy percent on Basic and thirty percent on Pro. After the decoy, you might see ten percent on Plus, sixty percent on Basic, and thirty percent on Pro. Wait, that’s not right. You want the Pro share to grow. So maybe twenty percent on Plus, twenty percent on Basic, and sixty percent on Pro. The key metric is the lift in the target segment. If the target segment grows while the decoy stays near zero, you’ve won. Luna: And if the decoy gets sales, you adjust the price or features until it becomes unappealing again. Lucas: Exactly. Iterate quickly. Raise the price of the decoy slightly. Remove a nice to have feature. Make it just a little more painful to click buy. You are tuning the trap. It’s a dynamic process, not a set-it-and-forget-it strategy. Luna: It sounds like it requires a lot of testing. Most small businesses don’t have that kind of bandwidth. Lucas: True. But you don’t need enterprise-level resources. You can do this manually. Talk to your sales team. Ask why prospects hesitate. Look at your support tickets. Are people asking for features that are missing from the basic plan? Those are gaps you can fill in a decoy. Use the data you already have. You don’t need new tools, just a clearer view of your current options. Luna: So the insight comes from listening to customers, not just guessing at numbers. Lucas: Always. The best pricing strategies are rooted in customer reality. The decoy is just the lens that focuses that reality into a profitable outcome. Without understanding what customers value, the decoy is just noise. With understanding, it’s a scalpel. Luna: Do you think this will evolve as AI handles more of the comparison shopping? Lucas: Interesting question. AI agents might strip away the emotional framing. If an algorithm compares specs purely, the decoy effect weakens. But humans are still pulling the trigger. Even if an AI recommends the optimal choice, the human has to approve the payment. And humans are influenced by presentation. As long as there is a UI, there is a chance for manipulation. The game just shifts to how AI interfaces display information. Luna: So the battlefield moves from the webpage to the API response. Still relevant. Lucas: Still very relevant. The underlying psychology hasn’t changed. We still fear missing out on value. We still seek rationalization for spending. The decoy effect exploits that gap between logic and emotion. And that gap isn’t going away anytime soon. Luna: One final thought. If you’re designing your pricing page today, what’s the first thing you should check? Lucas: Check if you have a clear target. If you don’t know which option you want people to buy, you can’t build a decoy. Define the winner first. Then build the loser around it. Everything else is decoration. Luna: Define the winner. Build the loser. Simple framework, powerful result. Lucas: Exactly. Try it on your next update. See if the trap snaps shut. And let us know how much revenue moved.