Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Single Priced Option Shapes Your Choices
Transcript
- Lucas: So there's a project management SaaS, called it a tool for remote teams, and they had two plans: a free one and a single paid tier at nine dollars a month. And the conversion rate from free to paid was hovering around two percent. Then they added a third tier at nineteen dollars a month, positioned above the nine-dollar plan. And within a quarter, conversions jumped to two point six percent. Luna: Wait, so they didn't change the nine-dollar plan at all? They just added a more expensive option and more people bought the nine-dollar one? Lucas: Exactly. That's the decoy effect in action. The nineteen-dollar plan wasn't necessarily a seller — it was an anchor that made the nine-dollar plan look like a bargain. It's the same reason you see three popcorn sizes at the movies, and everyone picks the medium. Luna: But the medium is usually the one they want you to pick, right? So the large is the decoy. Lucas: Right. And it works because our brains are terrible at judging absolute value. We don't ask, 'Is this worth nine dollars?' We ask, 'Is this worth nine dollars compared to the other options?' The decoy gives us a relative frame. Luna: So what makes a good decoy? Is it just any higher-priced option? Lucas: Not quite. A good decoy is asymmetrically dominated. That's the technical term — it means it's clearly worse than the target option on some dimension, but not worse enough to be obviously inferior to everything. In the SaaS case, the nineteen-dollar plan had maybe one extra feature, but it was priced so far above the nine-dollar plan that the nine-dollar tier suddenly felt like a steal. Luna: So the decoy is designed to be a sacrifice, not a serious contender. Lucas: Right. And the key is it has to be dominated by the target. So if the nine-dollar plan has the same features as the nineteen-dollar plan but costs less, that's a clean comparison. The decoy makes the target look strictly better. Luna: But isn't that kind of manipulative? I mean, you're basically tricking people into buying something they might not want. Lucas: That's a fair pushback, and it's a real ethical question. But the counter is this: the decoy doesn't make people buy something they don't want. It helps them choose between options they already have. The nine-dollar plan was always there. The decoy just makes the value of that plan more visible. It's like putting a spotlight on a feature that was already in the product. Luna: But the spotlight is on the 'relatively good' option, not necessarily the one that's best for the customer's actual needs. Lucas: That's true, and it's why the best decoy strategies are tied to real customer segments. If the nine-dollar plan genuinely serves a specific type of user, then highlighting it with a decoy is just good marketing. The problem is when you use a decoy to push people toward a plan that's overpriced for what it delivers. Luna: So what's the practical takeaway for someone who runs a business and sets prices? How do you build a tier structure that works? Lucas: First, you need to know what your customers actually value. You can't just invent a decoy out of thin air. Look at your feature usage data, ask your sales team what questions come up most. Then create three tiers: a basic, a premium, and a decoy that's close to the premium but clearly worse. Luna: And the decoy should be priced close to the premium? Or further away? Lucas: Usually you want the decoy to be close to the target in price, but with fewer features. That way the target looks like the sweet spot. If the decoy is too close to the basic tier, it might cannibalize sales from the target. Luna: So you're saying the decoy should be a 'premium-lite' that's overpriced for what it offers? Lucas: Exactly. Think of it as the trap tier. It exists to make the premium tier look reasonable. And if a few people actually buy the decoy? That's fine, it's still revenue. But the real money is in the premium. Luna: What about free plans? We've talked about those as anchors before. How do they fit into the decoy framework? Lucas: The free plan is a different kind of anchor. It doesn't dominate anything, but it sets the baseline of zero. So when you put a paid plan next to free, the paid plan has to justify its price. The decoy effect works best when there are at least two paid options, because the free plan isn't a great referee. Luna: So free plan, basic paid, premium paid, and maybe a decoy above that? That's four tiers. Is that too many? Lucas: Four can work if they're clearly differentiated. The risk is choice overload. You want the decoy to be obviously dominated, not just another option. If customers can't tell the difference between the decoy and the premium, the effect breaks down. Luna: I remember a study about wine tasting. When the sommelier pointed to a more expensive bottle first, people rated the next one as better value, even if it was the same wine. Lucas: That's a classic example. The first price anchors your expectation, and then the second price feels like a relief. It's the same logic as the decoy, but with just two options. The first one is the anchor, the second is the target. Luna: So you don't always need three options. Sometimes just two with the right framing can do the trick. Lucas: Right. And that leads to an important point: you should always test. What works for one audience might not work for another. We've seen cases where adding a decoy made no difference, and cases where it backfired because customers saw it as a cynical upsell. Luna: Any examples of that backfiring? Lucas: There was a fitness app that added a 'lifetime' plan for three hundred dollars, positioned above its annual plan at sixty dollars. The idea was to make the annual look cheap. But users didn't see it that way. They saw the lifetime plan as a one-time cost that was actually a better deal over time. So a bunch of people bought the lifetime plan, and the company had to honor it. They lost revenue in the long run. Luna: Ha, so the decoy was too attractive. It became the target. Lucas: Exactly. The decoy has to be worse on a meaningful dimension. If it's actually a better deal for some customers, it's not a decoy anymore. You have to be careful about the value calculus. Luna: So what should you do after you've set up your tiers? Just set and forget? Lucas: No way. Pricing is a living thing. You should review your conversion data monthly. Look at which tiers are getting the most clicks, which ones are getting the most purchases. If your decoy is getting more sales than your target, you've mispriced something. Luna: And it's also a good idea to talk to your customers. Ask them why they chose the plan they did. That qualitative feedback can be gold. Lucas: Absolutely. And one more thing: the decoy doesn't have to be a separate plan. You can use a 'starting at' price as an anchor, or show a crossed-out list price. Those are all decoys in a sense. Luna: We've covered a lot of those in past episodes though. Today it's really about the tier structure itself. Lucas: Right. And I think the key insight is this: pricing is about perception, not just cost-plus. The decoy effect is a tool to shape that perception, but it has to be used honestly. The goal isn't to trick people, it's to help them see the value you're already providing. Luna: And if you're a customer listening, the takeaway is to be aware. When you see three options, ask yourself: is the middle one really the best for me, or am I just being anchored? Lucas: That's a great self-check. And on the business side, use the decoy to serve your customers better, not to exploit them. There's a fine line, and the best brands walk it with transparency. Luna: Alright, so let's say I've got a pricing page. What's the first thing I should do to test this on my own product? Lucas: Start with a simple A/B test. Take your existing two-tier structure, add a third tier that's clearly dominated by your target, and run it for two to four weeks. Measure conversion rates and revenue per visitor. But don't just look at the aggregate. Segment by traffic source, by device, even by time of day. Sometimes the decoy works for one segment but not another. Luna: And if it doesn't work? You've just wasted a couple of weeks and some design work. Lucas: Not a waste. You've learned that your customers don't respond to that frame, and that's valuable too. Plus you've caught it early, before you rolled it out to everyone. Luna: True. It's all about iteration. Lucas: Exactly. And that's the thing about pricing psychology — it's not a one-size-fits-all formula. It's a set of principles you adapt to your audience. The decoy effect is powerful, but it's not a silver bullet. Luna: Before we wrap, I want to mention something. We keep this podcast free and without ads, and that's a choice we're able to make because of a few listeners who've supported us. If you've gotten value from these conversations, and you've used an idea at work or even just explained it to a friend, you can support us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo, all lowercase. It's not a subscription, just a one-time thing if you feel like it. No pressure. Lucas: Yeah, and it genuinely helps us keep the lights on and the episodes coming without turning to sponsors. Appreciate anyone who's ever considered it. But now, back to pricing — I was thinking we could dig into a specific example of how a company used the decoy effect to change their entire market position. Luna: Like a company that actually repositioned their brand by changing their tiers? Lucas: Exactly. There's a project management tool that started as a free-for-life product, and they struggled to get any revenue. So they introduced a paid tier, but it wasn't selling. Then they added a premium tier with a concierge onboarding service at ten times the price. Suddenly the middle tier started selling because it looked reasonable compared to the premium. Luna: Was that the decoy effect, or was it the premium tier actually adding value? Lucas: The premium tier did add value — the onboarding service was genuinely useful for large teams. But the key was that most customers didn't need it. So the presence of that premium tier made the middle tier feel like the practical choice. It was a natural decoy because it served a different segment. Luna: So the decoy doesn't have to be a dummy. It can be a real product that just happens to appeal to a smaller segment. Lucas: Exactly. That's the most ethical and effective way to use it. You're not creating a fake option; you're offering a range that covers different needs, and the anchor helps people find the right one for them. Luna: That makes sense. It's not manipulation; it's clarity. Lucas: Right. And that's the takeaway for today: design your pricing tiers to reflect real customer segments, and use the decoy effect to guide people toward the option that's genuinely best for them. When you do that, you build trust and you increase revenue at the same time. Luna: Next episode, maybe we can talk about how to price the decoy itself. What's the right price difference between the target and the decoy? Lucas: That's a great topic. We'll save that for next time. For now, just remember: pricing is a story you tell your customers, and the decoy is a narrative device. Luna: Alright, that's a wrap for today. Thanks for listening, everyone.