Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy Effect How a Third Option Drives Your Choice
Transcript
- Lucas: Let's start with a simple question. You walk into a movie theater and the popcorn counter offers three sizes: small for three dollars, medium for six-fifty, and large for seven dollars. Luna: Right — and almost everyone picks the large, because it feels like you're getting almost double the popcorn for just fifty cents more. Lucas: Exactly. But here's the thing — the medium size is a decoy. It's priced so close to the large that it makes the large look like a no-brainer. No one actually buys the medium; it's there to push you toward the most profitable option. Luna: So the theater doesn't care if they sell any mediums. They just want you to see the large as a bargain compared to the medium. Lucas: That's the decoy effect in a nutshell. It's also called the asymmetric dominance effect. You present three options — one is clearly worse on price or value — and suddenly the most expensive or most profitable option becomes the rational choice. Luna: There's a famous experiment by Dan Ariely from his book Predictably Irrational. Do you remember the one with The Economist subscriptions? Lucas: Classic. Ariely showed people 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: And the print-only option is a decoy. Nobody in their right mind would pay the same price for less value. So almost everyone chose the print plus web combo. Lucas: When Ariely removed the print-only decoy, the preference flipped. People went for the cheaper web-only option. The decoy completely changed what people thought was the best deal. Luna: So the decoy doesn't just influence choice — it can double your average transaction value. Lucas: Right. And this works because humans don't evaluate prices in a vacuum. We compare. The decoy gives us a reference point that makes one option look dramatically better. Luna: You see this all the time in subscription pricing. Spotify, for example, offers Individual for ten bucks, Duo for thirteen, and Family for sixteen. The Duo is a decoy — it's only three dollars less than Family, but Family gives you six accounts instead of two. Lucas: Exactly. Most people probably don't need six accounts, but the Duo makes the Family plan feel like a steal. So they upgrade. And Spotify gets higher average revenue per user. Luna: But is it always ethical? I mean, you're essentially tricking people into spending more. Lucas: That's a fair question. I'd argue it's ethical as long as the decoy is a real product that someone might actually want. The medium popcorn is a real option — some people buy it. But if you create a phantom option that exists only to be a bad deal, that starts to feel manipulative. Luna: There's a fine line between nudging and deceiving. The FTC has looked at this in cases like subscription cancellations and drip pricing. Lucas: Right. But for most marketers, the decoy effect is a legitimate tool for simplifying choice. It helps customers feel confident they made the best decision — and that confidence reduces buyer's remorse. Luna: Let's talk about how to build a decoy in your own pricing. What's the rule of thumb? Lucas: First, identify the option you want to sell most — that's your target. Then create a decoy that's slightly less attractive on value but priced close to the target. The decoy should make the target look like the obvious winner. Luna: So if your target is a premium plan at thirty dollars, you might offer a basic plan at fifteen, a so-called 'value' plan at twenty-nine that's basically the basic plan with one extra feature, and then your premium at thirty. Lucas: Exactly. The value plan at twenty-nine is the decoy. Nobody buys it, but it makes the premium at thirty feel like a huge upgrade for just one dollar. Luna: Another pattern is the 'good-better-best' model. The 'good' is the decoy if it's overpriced relative to features. Lucas: Yeah, but you have to be careful. If the good option is genuinely good value, it becomes the preferred choice and the decoy fails. The decoy has to be clearly worse on a key dimension — usually price per unit or features per dollar. Luna: What about services? Can you use a decoy for consulting or coaching packages? Lucas: Absolutely. Imagine a consultant offers three packages: Bronze for two thousand dollars — just a strategy session. Silver for five thousand — strategy plus implementation support. Gold for five thousand five hundred — all of Silver plus monthly check-ins for a year. Luna: So Silver is the decoy — it's priced almost the same as Gold but with way less value. And Bronze anchors the low end. Lucas: Exactly. Most clients will pick Gold because it feels like a steal compared to Silver. The consultant gets a higher-value engagement, and the client feels like they outsmarted the system. Luna: I've seen this work in SaaS too. A tool might have a free tier, a pro tier at ten dollars a month, and a business tier at twenty. But then they add an 'enterprise' tier at fifty that's just the business tier with phone support — it makes the business tier look affordable. Lucas: Right. And the enterprise tier might actually be sold to large companies, so it's not a pure decoy. But for the small business customer, it serves as a decoy to push them to the business plan. Luna: One thing that trips people up: the decoy has to be visible. If customers don't see all three options side by side, the effect disappears. Lucas: Great point. The decoy effect relies on simultaneous comparison. That's why it works so well on pricing pages and menu boards. But if you're selling a custom quote, you can't use it as easily. Luna: So the takeaway for a marketer today: audit your pricing tiers. Are you leaving money on the table because you only have two options? Could a third, strategically placed decoy push people to your most profitable plan? Lucas: Exactly. And test it. Run an A/B test with and without the decoy. Measure conversion rate and average order value. The numbers will tell you if it's working. Luna: One last thing — any pitfalls to watch for? Lucas: Yeah. If your decoy is too obviously a decoy, customers may feel manipulated and lose trust. Also, if your pricing is too complex, people get overwhelmed and walk away. Simplicity still wins. Luna: So use the decoy sparingly, keep it real, and always prioritize clarity. Lucas: Well said. Next time you're at a movie theater, look at that popcorn menu. You'll never see it the same way again.