Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $20 Bottle of Wine Explains the Decoy Effect
Transcript
- Lucas: You walk into a wine bar. The list has three bottles: a house red at $20, a reserve at $35, and a premium Cabernet at $55. Which one do you pick? Luna: If I'm being honest, I'd probably go for the $35 reserve. Not the cheapest, not the priciest — feels like the sweet spot. Lucas: Exactly. And that's not an accident. That $55 bottle isn't really there to sell. It's a decoy — designed to make the $35 bottle look like the smart choice. Luna: So the expensive bottle is basically a wingman for the middle option. Lucas: That's the decoy effect in a nutshell. And it works because we don't evaluate prices in a vacuum. We compare. Give people two options — a cheap one and a mid-range one — and they might balk at the mid-range. But introduce a third option that's clearly overpriced, and suddenly the mid-range looks like a deal. Luna: It reminds me of something I read about The Economist's subscription pricing. They famously had three tiers: web-only for $59, print-only for $125, and print plus web for $125. The print-only option was clearly a decoy to make the combo look amazing. Lucas: Dan Ariely made that experiment famous. When students saw only the $59 web and the $125 combo, most picked the web option. But when the $125 print-only decoy was added, the majority switched to the combo. The decoy didn't just sit there — it actively shifted preference. Luna: And the crazy part is that the decoy never sells. It's literally designed to fail. Lucas: Right. And look — this show exists because listeners find these concepts genuinely useful. A small group of you actually chips in monthly through buy me a coffee dot com slash fexingo, and that's what keeps these episodes ad-free and coming every day. So if you've ever used one of these pricing tactics in your own work, that's the reason we can keep drilling into them. Luna: Yeah, it's a pretty direct line. Someone listening right now might be the reason this episode exists. Lucas: So that $55 Cabernet on the wine list — it's not random. The sommelier put it there knowing almost nobody would buy it. Its job is to make the $35 bottle the hero. Luna: What's interesting is that the decoy doesn't have to be more expensive. It can also be a slightly inferior version of the target product. Lucas: That's the 'asymmetric dominance' part. The decoy is dominated by the target on at least one dimension — price or features — but it's not dominated by the other option. So the target emerges as the clear winner. Popcorn at movie theaters is a classic example: a small for $4, a medium for $6.50, and a large for $7. The medium is the decoy — almost the same price as the large, but way less popcorn. So you feel smart buying the large. Luna: And the small exists just to make the medium look reasonable. Which then makes the large look like a steal. Lucas: Exactly. Three tiers create a ladder. Your brain climbs it and stops where the value feels highest. And that's why almost every SaaS product now uses three pricing tiers. The middle one is usually the target. Luna: I've seen that with project management tools. The basic plan is $10 a month, the pro is $25, and the enterprise is 'contact us.' That 'contact us' is a decoy — it signals that the pro plan is affordable and transparent. Lucas: Exactly. The 'contact us' tier is a price anchor with no fixed number. It makes the $25 plan feel safe. And companies like Apple use this constantly. Think about the iPhone lineup: the older model at a discount, the flagship at the top, and the 'pro' model that's just expensive enough to push people toward the flagship. Luna: So the pro model is actually a decoy for the regular flagship? Lucas: In some years, yes. Especially when the pro model has a feature that most people don't need — an extra camera lens, a titanium frame — but the price gap is small. The regular flagship looks like the rational choice. And the older model? That's there to anchor you to a lower price point, so the flagship feels like a step up. Luna: It's layered. There's a decoy within a decoy. Lucas: The decoy effect is most powerful when the options are easy to compare. If the dimensions are fuzzy — like 'quality' or 'style' — it's harder to pull off. But when you have clear numbers, it's almost foolproof. Luna: That's why wine lists work so well. People compare price and maybe a rating or region. The decoy just needs to be worse on both fronts than the target. Lucas: There's a famous experiment at a movie theater concession stand. Researchers offered small popcorn for $3 and large for $7. Most people bought small. Then they added a medium for $6.50. Suddenly, most bought large. The medium was a decoy — nobody bought it, but it redirected choice. Luna: That's a 40-point swing. Just by adding an option nobody wanted. Lucas: And it's not just about adding a decoy. Sometimes removing one can boost sales. A study on a subscription service found that when they removed the middle tier, sales of the highest tier actually increased. Because without the decoy, the highest tier became the clear value leader compared to the cheap option. Luna: So decoys aren't always in the middle. They can be at the top or bottom, depending on what you want to sell. Lucas: Right. The key is knowing which product you want to be the 'target.' If you want to sell the premium option, make the decoy a slightly cheaper version that's missing a key feature. If you want to sell the mid-range, make the decoy a high-priced option that's only marginally better. Luna: I wonder how often companies mess this up. Like, they accidentally create a decoy that cannibalizes their target. Lucas: It happens. If the decoy is too attractive, it becomes the target. That's why you need to test. The classic mistake is making the decoy too close in value to the target. It should be clearly inferior on at least one dimension. Luna: So a bad decoy is one that someone might actually buy. Lucas: Exactly. A good decoy exists to be ignored. It's a ghost product. It shapes the choice without being chosen. Luna: That's a great phrase — 'ghost product.' Lucas: And the beauty is that it doesn't require deception. You're not lying about your prices. You're just structuring options in a way that aligns with how human brains naturally compare things. Luna: It feels ethical as long as the decoy isn't a trap. Like, if someone actually wants the $55 wine, it should be good wine. Lucas: Exactly. And most sommeliers would tell you that the $55 bottle is genuinely excellent — just not three times better than the $20 one. The decoy effect works because prices are nonlinear with value. Luna: So next time I see three tiers, I'll try to spot the decoy. And then probably still fall for it. Lucas: That's the thing — knowing about the decoy effect doesn't fully immunize you. We're wired for comparison. But it does make you a better marketer. And a more deliberate buyer. Luna: I'd love to see a real-world case where a company removed a decoy and saw what happened. Did anyone actually test that? Lucas: There's a well-known case from a wine retailer. They had three price tiers: $20, $35, and $55. They removed the $55 decoy for a month. Sales of the $35 bottle dropped by 30 percent. Customers shifted to the $20 bottle. The decoy was actively lifting the mid-tier. Luna: Thirty percent. That's massive for a single change on a shelf. Lucas: It shows how fragile our preferences are. The same bottle of wine — same taste, same label — sells differently depending on what's next to it. Luna: That's both fascinating and a little unsettling. Lucas: It's the job of a good pricing strategist to understand that fragility and design around it. Not to trick people, but to help them find the option that genuinely meets their needs — which, more often than not, is the one you wanted to sell anyway. Luna: So the decoy is really a nudge, not a shove. Lucas: Exactly. And the best decoys are invisible. You don't notice them because you're too busy feeling smart about your choice.