Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a 199-Dollar TV Anchor Makes You Buy the 700-Dollar Model
Transcript
- Lucas: You walk into an electronics store. To your left, a 32-inch TV for $199. To your right, a 75-inch model for $1,200. And right in front of you, a 55-inch 4K set for $700. Luna: Classic three-tier display. I bet most people walk out with that $700 model. Lucas: Exactly. But here's the thing — that $199 TV isn't there because the store expects to sell many of them. It's a decoy. Its only job is to make the $700 option feel like the reasonable middle ground. Luna: It's funny, because if you removed that cheap TV, the $700 set suddenly looks expensive next to just the $1,200 one. The decoy reshapes the whole comparison. Lucas: And this is something we see all the time on the show — price anchoring works when you have a reference point. But the decoy effect is a specific variant where the anchor isn't just a high price, it's a deliberately inferior product at a low price. Luna: Yeah, and retailers know exactly what they're doing. If these marketing insights have ever changed how you shop, I'll just say — a couple of dollars a month genuinely keeps these conversations going, ad-free and independent. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Absolutely. It's listener support that lets us dig into stuff like this without any sponsor pressure. So — back to that $199 decoy. Lucas: The classic study on this was by Dan Ariely, who showed that when you offer a subscription plan — web-only for $59, print-only for $125, or print plus web for $125 — people overwhelmingly pick the combo. That $125 print-only option is a decoy. Luna: It makes the combo look like a steal, even though the $59 web-only might be all you need. Lucas: Right. Now apply that to the TV wall. The 32-inch at $199 has a smaller screen, likely lower resolution, maybe no smart features. It's a bare-bones product. The 75-inch at $1,200 is a luxury. The 55-inch at $700 is right in the sweet spot — better quality than the cheap one, but not as extreme as the premium. Luna: So the $199 TV isn't meant to sell. It's meant to make you feel smart for spending $700. Lucas: Exactly. And it works. A 2019 study in the Journal of Marketing Research found that adding a decoy option increased sales of the target product by 15 to 30 percent, depending on the category. For electronics, it's especially powerful because specifications are hard to compare directly. Luna: I remember reading about a wine store experiment. They had a $20 bottle, a $45 bottle, and a $90 bottle. Most people bought the $45. Then they added a $120 bottle — and sales of the $90 jumped. Lucas: That's the asymmetric dominance effect in action. The decoy is dominated by the target — meaning the target is better on every dimension that matters. In the TV example, the 55-inch is bigger and better quality than the 32-inch, but not as expensive as the 75-inch. So it dominates the decoy on value. Luna: But what if the cheap TV is actually decent? Some people might buy it. Lucas: And some do — that's fine. The store still makes a sale. But the margin on a $199 TV is razor-thin. The margin on that $700 model is probably two to three times higher. So even if they sell a few cheap ones, the profit lift from the decoy effect more than compensates. Luna: So the retailer is betting that most people will compare and upgrade. Lucas: Yes. And they design the display to encourage that comparison. The cheap TV is often placed at eye level, with a bright price tag. The premium model is off to the side. The target product is front and center, with a salesperson nearby. Luna: I've also seen stores use a 'good, better, best' labeling system. That's basically the same psychology, but spelled out. Lucas: Exactly. 'Good' is the decoy, 'better' is the target, 'best' is the premium option. And often 'better' has the highest margin, because it's the one most people choose. Luna: But doesn't this only work if the decoy is clearly inferior? What if the cheap TV has a feature the mid-range one doesn't? Lucas: That's a good point. The decoy has to be dominated — worse on key attributes like screen size, resolution, or smart features. If it has a unique advantage, it becomes a legitimate competitor, not a decoy. That's why retailers carefully choose which model to discount. Luna: So the decoy is always the lowest-end model, heavily discounted. Lucas: Often, yes. But sometimes the decoy is a premium model that's overpriced. Think of a $4,000 TV that's only slightly better than a $2,500 one. That $4,000 option makes the $2,500 look like a bargain. Luna: So the decoy can be at either end of the price spectrum. Lucas: Exactly. The key is that it changes the relative value perception. And this isn't just for TVs. It works for mattresses, headphones, software plans — anything where you have a product line. Luna: I've seen it with streaming services too. A basic plan for $9, a standard for $14, and a premium for $20. The $9 plan is so limited that the $14 feels like the smart choice. Lucas: And the company knows that. They deliberately make the basic plan unattractive. It's not about selling the basic plan — it's about making the standard plan look like the rational option. Luna: Is there any risk? If customers feel manipulated, could it backfire? Lucas: There is a risk. If the decoy is too egregious — like a TV that's clearly not fit for purpose — customers might feel tricked and walk away. But most retailers calibrate it carefully. The decoy is still functional; it's just not the best value. Luna: So it's a fine line between a decoy and a rip-off. Lucas: Exactly. And the best decoys are ones that don't feel like decoys at all. They feel like legitimate options that happen to be less attractive. Luna: I want to go back to that $199 TV. How do retailers decide on that specific price point? Lucas: Often they use psychological pricing — $199 feels significantly cheaper than $200, even though it's only $1 less. And they set it low enough that the $700 model seems like a big jump in quality for a reasonable price increase. Luna: So the price gap matters too. Too small, and people might stick with the cheap one. Too large, and they might go for the premium. Lucas: Right. Research suggests that the optimal price ratio between the decoy and the target is about 1:3 or 1:4. So a $199 decoy works well with a $700 target, because $700 is roughly three and a half times the decoy. That feels like a meaningful upgrade without being a stretch. Luna: And the premium option is then set at about double the target, to make the target look even better. Lucas: Exactly. So the whole display is mathematically tuned. It's not random. Retailers test these price points extensively. Luna: So next time I see a cheap TV next to a mid-range one, I'll know I'm being nudged. Lucas: And hopefully, you'll make a more deliberate choice. The decoy effect is powerful, but awareness is the best defense. Luna: Or you could just buy the cheap one if that's all you need. Lucas: Absolutely. The decoy only works if you assume more expensive means better. Sometimes a 32-inch TV in a bedroom is perfectly fine. Luna: So the real takeaway is to ask yourself: what do I actually need, not what looks like the best deal relative to the decoy. Lucas: That's the core of smart shopping. And for marketers, the lesson is that you can shape that comparison to guide customers toward your most profitable product.