Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy That Makes You Switch Phone Plans
Transcript
- Lucas: You walk into a phone store, or you open a carrier's website, and you see three plans. Basic. Plus. Premium. And the middle one — call it Plus — it costs almost as much as Premium, but it gives you way less. It's not a mistake. That middle tier is a decoy, and it's doing exactly what the carrier wants. Luna: So the Plus plan is the one nobody in their right mind would pick, but its real job is to make the Premium plan look like a good deal? Lucas: Exactly. And this isn't just phone plans. It's everywhere — SaaS products, cable bundles, cinema popcorn sizes. But the wireless industry is probably the most aggressive user of this tactic, and the numbers are pretty wild. One major carrier told analysts a few years ago that when they rolled out a three-tier structure with a clear decoy middle, uptake of the top plan went from roughly 20 percent to nearly 50 percent. Luna: That's a massive swing. And I want to talk about why it works, but first — Lucas, this show itself is a kind of subscription, right? We don't have tiers, but we do have listeners who keep it going. Lucas: Yeah. A handful of people chip in monthly at buy me a coffee dot com slash fexingo, and that's literally what pays for making these episodes. No ads, no investors, just listeners who find the conversations useful. Luna: And if you've ever used a pricing insight from this show in your own work, that's the channel where you can return the favor. It's small, it's voluntary, and it keeps the whole thing ad-free. Lucas: Right. So back to the decoy. The formal name in behavioral economics is 'asymmetric dominance.' That was coined by Dan Ariely and his colleagues in a famous study with The Economist in the early 2000s. Luna: I remember that one. They offered three subscription options: web-only for 59 dollars, print-only for 125, and print plus web for 125. The print-only was the decoy — nobody wanted it, but it made the combo deal look like a steal. Lucas: Exactly. And when they removed the decoy from the test group, most people picked the cheapest option. With the decoy, the majority went for the premium bundle. That's the effect in a lab. But the phone carrier example is that effect in the wild, with real money. Luna: So how did the carrier set up their tiers? What made the middle option so clearly a decoy? Lucas: The basic plan gave you, say, 5 gigs of data for 40 bucks. The Plus gave you 10 gigs for 60 dollars. And the Premium gave you unlimited data for 70 dollars. So for just ten dollars more than Plus, you get unlimited. The Plus plan is dominated by Premium on price per gig — it's actually worse on both dimensions if you value data. Luna: Right, because the basic plan at least is cheap. The Plus plan is the worst of both worlds: more expensive than basic, worse value than premium. So it's a pure decoy. Lucas: And that's the key. A decoy only works if it's clearly inferior to one option on a meaningful dimension, and not clearly better than the other. It creates what psychologists call a 'comparison set.' The customer's brain goes: well, I'm not going to pick Plus. But between Basic and Premium, Premium now seems reasonable because it's only ten bucks more than the bad option. Luna: But doesn't that only work for new customers? What about people who already have a plan — do they fall for it too when they upgrade? Lucas: The data suggests it works on upgrades too, but less powerfully. Existing customers have a reference price — what they currently pay. The decoy effect is strongest when there's no prior anchor. That's why carriers love the three-tier display on their website: it's the first thing a new visitor sees. Luna: So it's a first-impression play. And it's not just phone carriers. I've seen this in software too. A lot of project management tools have a 'Team' plan that's basically just 'Pro' but with fewer features and almost the same price. Lucas: Right. And the decoy doesn't have to be a middle tier. Sometimes it's a high-end 'enterprise' plan that's deliberately overpriced to make the 'pro' tier look affordable. But the middle decoy is the most common because it exploits the compromise effect — people like to avoid extremes. Luna: But here's what I wonder: do customers eventually catch on? I mean, after a few years of seeing the same three plans, don't they wise up and ignore the decoy? Lucas: There's some evidence that repeated exposure does weaken the effect, but carriers have a trick for that: they change the tiers slightly every year or two. Adjust the data amounts, rename the plans, reshuffle the prices. The decoy effect is context-dependent, so if the context changes, the effect resets. Luna: So it's a moving target. Keep the structure, change the numbers. That's kind of sneaky. Lucas: It's marketing. The question is whether it's deceptive. Most regulators consider it acceptable as long as the pricing is transparent — you can actually get the decoy plan if you want. It's not a bait and switch. It's just using psychology to steer choice. Luna: But the decoy plan itself is often barely functional, right? I mean, the Plus plan with 10 gigs for 60 — that's a terrible deal. Is it ethical to offer a plan that you know nobody should buy? Lucas: That's a fair question. And I think the line is drawn at whether the decoy is genuinely available and delivers what it promises. If the 10-gig plan works fine, it's just a bad deal. The customer is free to choose. The issue would be if the decoy were phantom — unavailable or intentionally broken. That's fraud. Luna: So the decoy has to be real. And it has to be priced such that it's clearly inferior on at least one attribute. In the phone example, the attribute was data per dollar. Lucas: Right. And you can test whether your decoy is working by removing it. If removing the middle tier causes a big shift toward the cheapest option, your decoy is effective. Some companies actually A/B test this: they run a two-tier version against a three-tier version and measure the revenue lift. Luna: And what's the typical lift? You mentioned the carrier saw uptake go from 20 to 50 percent on the top plan. Is that typical? Lucas: It's on the high side, but not unheard of. A meta-analysis of decoy studies found an average increase of about 15 to 25 percentage points in preference for the target option. But it varies hugely by category and by how obvious the decoy is. Luna: So the decoy has to be obvious enough to be rejected, but not so obvious that it feels manipulative. There's a sweet spot. Lucas: Exactly. If the decoy is too extreme — say, 1 gig for 90 dollars — it might actually backfire because customers feel insulted. The best decoys are just bad enough to make the target look good, but not so bad that they're laughable. Luna: I want to get practical. For someone listening who runs a small business or a SaaS product, how would they actually build a decoy tier? Lucas: First, decide what you want to sell. That's your target. Then create a decoy that is inferior to the target on a key dimension — usually price per feature or price per unit. The decoy should be close in price to the target but much worse in value. Then have a third option that is the 'good value' cheap option, so the target becomes the reasonable middle. Luna: And what dimension do you use for the comparison? Is it always price per something? Lucas: Not always. Sometimes it's feature count, or speed, or storage. The key is that the decoy is dominated on at least one attribute that customers care about. If they don't care about data, the decoy won't work. Luna: So you have to know what your customers value. Which means market research first, decoy design second. Lucas: Right. And you have to test. The decoy effect is robust, but it's not universal. Some customer segments are more rational or more price-sensitive and may not respond. The only way to know is to run a controlled test. Luna: One more thing — the decoy effect works best when the options are presented simultaneously, not sequentially. If customers see one plan at a time, the comparison is gone. Lucas: Great point. That's why the three-column table is so powerful. It forces a simultaneous comparison. The brain can't help but compare. And the decoy, sitting there as a reference point, subtly shifts the evaluation of the other two. Luna: So the lesson for anyone selling anything: if you want people to pick the premium option, give them a decoy that makes it look smart. Just make sure it's real. Lucas: And test it. Because the decoy that works for one audience might fall flat with another. But when it works, it's one of the most cost-effective pricing moves you can make.