Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How Decoy Pricing Makes You Pick the More Expensive Option
Transcript
- Lucas: There is a pricing trick so effective that if I described it to you in the abstract you would swear it could never work on you. And yet it works on almost everyone, every single time. Luna: Okay, I'm intrigued. What's the trick? Lucas: It's called the decoy effect. And the classic demonstration comes from a 2015 experiment run by The Economist. They offered three subscription tiers: a digital-only version for $59, a print-only version for $125, and a print plus digital bundle also for $125. Luna: Wait — the print-only and the print plus digital were the same price? That makes the print-only look completely pointless. Lucas: Exactly. That's the decoy. The print-only tier exists for one reason: to make the bundle look obviously superior. And it worked. When only the digital and the bundle were offered, most people picked the cheaper digital option. But with the decoy print tier in the middle, 84% chose the bundle. Luna: So the decoy didn't even need to sell. It just needed to be there. Lucas: Right. And the effect is real, it replicates across categories. A 2015 study at Stanford showed that when people chose between a cheap e-reader and an expensive one, adding a third option — a slightly more expensive e-reader with fewer features — pushed 40% more people to the expensive one. Luna: So the decoy is the 'ugly sibling' that makes the target look like the wise choice. Lucas: That's exactly the metaphor. Behavioral economists call it asymmetric dominance. The decoy is dominated by the target — worse on price or features or both — but it's not dominated by the competitor. So when you compare, the target suddenly dominates the decoy and your brain shortcuts to 'this is the best value.' Luna: And the competitor — the cheap option — doesn't dominate the decoy, so it looks weaker by comparison. Lucas: Precisely. The decoy is designed to be worse than the target but not clearly worse than the cheap option. That asymmetry is what shifts preference. And it's incredibly subtle. Most people never notice the decoy's role. Luna: I want to zoom in on a real case. You mentioned an indie filmmaker using this — what did they do? Lucas: This is from a 2023 case study by a pricing consultant working with a documentary filmmaker who was selling a digital download for $15 and a DVD for $25. The DVD was the premium option, but it wasn't selling well. People saw the digital as good enough. Luna: Classic problem. The cheaper option looks too rational to pass up. Lucas: Right. So they introduced a decoy: a deluxe DVD set with extra behind the scenes content for $35. Suddenly the $25 DVD looked like a bargain. Sales of the DVD jumped from 22% of orders to 54% within two weeks. The decoy only sold 8% of orders. Luna: So the decoy barely sold, but it completely changed the perception of the middle option. Lucas: Exactly. The decoy made the $25 DVD seem like the smart middle ground. And the filmmaker increased average order value by 31% just by adding one tier that almost nobody bought. Luna: That's the beauty of it — the decoy doesn't need to be popular to be profitable. It just needs to make the target option look better. Lucas: And that's a key principle: the decoy's job is not to be chosen. Its job is to be compared. So when you design a decoy, you want it to be clearly inferior to the target on a dimension the target is strong on. Luna: Like making the decoy slightly more expensive but with fewer features, or the same price but less value. Lucas: Right. And the decoy works best when the target and the cheap option are hard to compare directly. If the digital download and the DVD are both intangible in some way, your brain struggles to pick. The decoy gives your brain a shortcut. Luna: So the decoy effect is strongest when the decision is ambiguous or when the customer is price-sensitive but not sure what to value. Lucas: Yes. And that's why subscription services love this. Think about SaaS pricing pages: you'll see a Basic tier, a Pro tier, and an Enterprise tier. Often the Enterprise tier is priced so high that the Pro tier looks like a steal. That Enterprise tier is a decoy. Luna: I've definitely seen that. Enterprise at $999 a month, Pro at $299 — and Basic at $99. The Enterprise decoy makes Pro look reasonable. Lucas: And most companies will tell you Enterprise is for large teams, but they know the pricing itself is doing the work. They don't need to sell many Enterprise plans for it to be worth it. The decoy effect is driving conversions on the Pro plan. Luna: But there's a fine line between smart pricing and manipulation. When does it cross into unfair territory? Lucas: I think the line is transparency. If the decoy is a real product that some customers genuinely want — even if few buy it — it's fine. But if the decoy is a fake tier, priced only to make something else look good, that feels deceptive. The Economist's print-only tier was a real product. The filmmaker's deluxe set was real. Luna: But doesn't the effect work even when customers know about it? I remember a study where they told participants about the decoy effect before the choice, and it still shifted preferences. Lucas: That's the spooky part. A 2018 paper in the Journal of Marketing Research found that even when people were explicitly warned that a decoy might be present, the effect persisted. Awareness doesn't immunize you. Luna: So the decoy effect is almost like a cognitive illusion. You can know it's happening and still feel the pull. Lucas: And that's why it's so powerful for marketers. But it's also why we should be careful. If you're a startup founder designing your pricing page, ask yourself: is my decoy a real option that serves someone, or is it purely a manipulation tool? Luna: That's a good ethical rule. Let's talk about how to implement it practically. What are the steps? Lucas: First, identify your target option — the one you most want people to buy. It should be your highest-margin or strategically most important tier. Then find a cheap option that competes with it. The decoy should be worse than the target on the most valued dimension. Luna: And that dimension has to matter to your customer. If they don't care about that feature, the decoy won't work. Lucas: Exactly. The decoy must highlight a dimension your target is strong on. It's not about making the decoy look bad in general — it's about making the target look good by comparison. So if your target has more storage, the decoy should have less storage but cost the same or more. Luna: And you need to test it. What works in one market might not work in another. Lucas: Absolutely. A/B test the decoy against a two-tier setup. Measure not just conversion rate but average revenue per visitor. The decoy might lower the overall conversion rate if it confuses people, but raise revenue because more people pick the expensive tier. Luna: So the metric isn't just 'did they buy?' but 'how much did they spend?' Lucas: Right. And one more thing: the decoy effect is weaker when the target and the cheap option are already very different. If the cheap option is obviously inferior, you don't need a decoy. The decoy is most useful when the two main options are close in perceived value. Luna: That's a great insight. So the decoy breaks the tie in favor of the target. Lucas: Honestly, if these pricing strategies have saved you even a few minutes of head-scratching, or if you've used one of these ideas in your own work, that's exactly the kind of moment that makes this show worth doing. Keeping it ad-free and honest matters to us, and listener support is what makes that possible. If today was worth a coffee to you, you know the link — buy me a coffee dot com slash fexingo. No pressure, just a small way to say this was useful. Luna: Yeah, I love that. It's a small gesture that keeps us independent. And honestly, every coffee helps us keep digging into these stories. Lucas: So back to the decoy effect. The key takeaway is that decoys don't just work on other people. They work on you. So next time you see a three-tier pricing page, take a moment to ask: which option is the decoy? Chances are, it's the one you never consider buying. Luna: And if you can't spot the decoy, you might be it. Lucas: That's a perfect closing line. Thanks for listening to The Pricing Marketing Podcast. We'll see you next time.