Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How Decoy Pricing Pushes You to the Expensive Option
Transcript
- Lucas: So imagine you walk into a movie theater and you see three popcorn sizes. Small for three dollars, medium for six fifty, and large for seven. Luna: Right, the classic sized to sell the large setup. But does anyone actually buy the medium? Lucas: Almost nobody — and that's the point. The medium isn't there to sell. It's a decoy. It makes the large look like a steal because you're getting way more popcorn for just fifty cents more. The small anchors the price floor, the medium exists only to push you to the large. Luna: So the decoy isn't meant to be chosen. It's meant to change how you evaluate the other options. Lucas: Exactly. The formal name is the 'decoy effect' or 'asymmetric dominance effect.' A classic demonstration comes from a 1982 experiment by Dan Ariely — actually, it was originally done by a researcher named Joel Huber, but Ariely made it famous in his book 'Predictably Irrational.' He showed people three subscription options for The Economist. Luna: I remember this. It was web-only for fifty-nine dollars, print-only for one hundred twenty-five, and print plus web for one hundred twenty-five. Lucas: Exactly. When the print-only option — the decoy — was present, most people chose the print plus web bundle. But when the decoy was removed, and it was just web-only versus print plus web at the same price, people split roughly evenly. The decoy completely shifted preference. Luna: Because the print-only option was clearly worse than the bundle — same price, less value. It made the bundle look obviously superior. So the decoy doesn't just add an option; it reframes the choice. Lucas: Right. And this isn't just a lab curiosity. You see it everywhere in SaaS pricing tiers. Think about a typical software plan: Basic at ten dollars a month, Pro at twenty-five, and Enterprise at fifty. Enterprise might have features that Pro doesn't, but the pricing gap between Pro and Enterprise is huge — often more than double. The real decoy? Often the Basic plan is so stripped down that it makes Pro look like the sensible middle. Luna: Or sometimes the Enterprise plan is the decoy — priced so high that Pro looks reasonable. I've seen that too. Lucas: Absolutely. It depends on which option you want to sell. If your target is the premium tier, you put a decoy below it that's slightly cheaper but much worse. If your target is the mid-tier, you might put a decoy above it that's overpriced and makes the mid-tier feel like a smart compromise. Luna: Let's talk about a real product launch. When Apple introduced the iPhone X in 2017, they priced it at nine hundred ninety-nine dollars. Then they kept the iPhone 8 at six hundred ninety-nine. But they also kept the iPhone 7 around at four hundred forty-nine. Was the iPhone 7 a decoy? Lucas: I'd argue yes, in part. The iPhone 7 anchored a lower price, but it also made the iPhone 8 look like a meaningful upgrade — better camera, wireless charging. And then the iPhone X seemed like the ultimate choice. The 7 served as a decoy to drive people toward the 8 and X, but especially the X, because the price jump from 7 to X was so large that the 8 felt like the reasonable middle. Luna: But here's a question: do customers eventually figure out the decoy? I mean, if you go to the same theater every week and see the medium popcorn that nobody buys, don't you start ignoring it? Lucas: That's a great point. There's a concept called 'decoy fatigue.' In a 2024 study published in the Journal of Marketing Research, researchers found that when people repeatedly encounter the same decoy, they learn to ignore it after about three exposures. The effect weakens. So decoys work best for one-off or infrequent purchases — a theater visit, a new subscription, a first-time car buy. For recurring decisions, you need to rotate your pricing structure. Luna: Or use a different type of decoy. There's also the 'ghost decoy' — an option that's mentioned but not actually available. Like a hotel website that shows a suite for five hundred dollars, but when you click, it's sold out. Then the three-hundred-dollar deluxe room seems like the best option. Lucas: Right, that's a variant. But ghost decoys can backfire if customers feel manipulated. There's a fine line between a smart nudge and a deceptive practice. The FTC has actually looked into drip pricing and bait and switch, which are adjacent. Decoys per se aren't illegal, but if you're using a product you never intend to sell, you're in murky ethical waters. Luna: So how do you design a decoy ethically? Like, what's the rule of thumb? Lucas: I think the key is that the decoy should be a legitimate product that some people actually buy — even if it's a small percentage. In The Economist study, a few people did choose the print-only option, maybe because they preferred print. It's not a phantom. It's just asymmetrically dominated. That's honest because the value comparison is real. Luna: That makes sense. And if we're talking about actually using this in a business, what's a concrete example of a well-designed decoy today? Lucas: One that I like is from the meal-kit company HelloFresh. They have a two-person plan and a four-person plan. But they also offer a 'veggie' box that's priced similarly to the two-person classic but with fewer meals. The veggie box acts as a decoy for someone who's undecided between classic and premium — it makes the classic look like better value because you get more meals for the same price, unless you specifically want vegetarian. Luna: So the decoy targets a specific segment — vegetarians — but for the general customer, it pushes them to the classic plan. Smart. Lucas: Exactly. And that's the art: you design a decoy that serves a real niche but also alters the choice context for the majority. It's not a trick; it's structuring the decision to highlight the value you want to sell. Luna: Let's pivot a little. These pricing conversations often spark something practical for our listeners — I know when I've used an anchor or a decoy in my own shopping, it's changed how I think about value. If today's episode gave you a useful lens, the reason we can keep this show ad-free is listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep the conversation going without sponsored interruptions. Lucas: Yeah, we really appreciate that. And if you're building a pricing page this week, maybe test a decoy — but test it honestly. See if it actually improves conversion or just confuses people. Luna: Alright, back to the decoy effect. One area where it gets really interesting is charitable giving. I've seen donation tiers like: ten dollars plants ten trees, twenty-five dollars plants thirty trees, fifty dollars plants one hundred trees. The middle option seems weak — only thirty trees for twenty-five dollars — so it pushes you to the fifty-dollar tier. Is that a decoy? Lucas: It can be, but it's a bit different because the 'value' isn't just trees — it's also the feeling of generosity. The decoy might be the twenty-five-dollar tier, which gives fewer trees per dollar, making the fifty-dollar tier look like a better deal. But if the charity's goal is to raise more money, the decoy works. However, some donors might do the math and feel manipulated, which hurts long-term trust. Luna: So you need to be careful with decoys in contexts where trust is paramount. For a one-time donation, maybe it's fine, but for recurring donors, transparency matters more. Lucas: Right. And that's why I think the best decoy strategies are the ones that are subtle enough to feel natural. Like the Economist example — it didn't seem like a trick because the print-only option has a real audience. The decoy effect is about framing, not deception. Luna: One more example: I was looking at a SaaS tool recently — a project management app. Their tiers were: Free, Pro at twelve dollars per user per month, and Business at twenty-five dollars. The Free tier was very limited, so it pushed you to Pro. But between Pro and Business, the difference was mainly reporting and advanced permissions. For most small teams, Pro was enough. So the Business tier was essentially a decoy to make Pro look affordable. Lucas: Classic. And the Business tier probably had a very low uptake, but it served its purpose. The key metric there isn't how many Business subscriptions you sell — it's how many Pro subscriptions you sell because of the Business tier's presence. Luna: So when you're designing tiers, you should track not just which plan people choose, but also the conversion rate from the pricing page with and without the decoy. A/B test it. Lucas: Absolutely. And one more nuance: the decoy doesn't have to be a separate product. It can be a feature, a price anchor within a single product, like a 'premium' add-on that's priced just slightly below the full upgrade. For example, Spotify's individual plan at ten dollars, then a student plan at five, and a family plan at fifteen. The student plan is a decoy for the individual plan if you're not a student — it makes the individual look like a fair price. Luna: But if you're a student, the decoy works in your favor — you get a discount. So it's also a segmentation tool. Lucas: Exactly. The best decoys often serve dual purposes. They segment the market and nudge the non-target segment toward your preferred option. Luna: Final thought: is there ever a case where you shouldn't use a decoy? Like, when the product is already a commodity and price is the only differentiator? Lucas: Yeah, in pure commodity markets, decoys are less effective because the value is one-dimensional — price per unit. If you're selling gasoline, a decoy tier doesn't help because customers only care about the cost per gallon. Decoys thrive when there are multiple attributes to compare: features, quality, convenience, status. Luna: That's a good rule. If your product has at least two meaningful dimensions — like price and features — you can build a decoy that highlights the trade-off. Lucas: Right. And if you're thoughtful about it, decoys can be a win-win: the customer feels smart about their choice, and you sell more of your target product. The key is to make the decoy real and useful for someone, even if it's a minority. Luna: I think that's a solid takeaway. Next time you see a three-tier menu, pause and ask: which one is the decoy? Lucas: And then ask if it's your decoy or theirs. Thanks for listening — we'll be back next time with another pricing puzzle.