Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $50 Bottle of Wine Explains Tiered Decoy Pricing
Transcript
- Lucas: So you walk into a mid-range Italian place. White tablecloths, but paper over them. The wine list arrives — three pages, maybe forty bottles. And you do what most people do: you flip to the middle of the list and scan the prices. Luna: Right. And there's almost always a bottle priced at around fifty dollars, another at seventy-five, and then something in the triple digits. Lucas: Exactly. And that fifty-dollar bottle — the cheapest one on the page — is almost certainly a decoy. It's not there because the restaurant expects to sell many of them. It's there to make the seventy-five-dollar bottle feel like a safe, sensible upgrade. Luna: So you're saying the low price isn't a deal — it's a trap. Lucas: In the best possible sense, yes. It's a classic three-tier decoy structure. You have a cheap option, a mid option, and a premium option. The cheap one exists to push people toward the mid. The premium one exists to anchor the entire range upward. And the mid option — the seventy-five-dollar bottle — is where the restaurant makes its real margin. Luna: And that's true even though the premium bottle might have a higher percentage markup on paper? Lucas: Right. The premium bottle might be marked up three times wholesale, same as the mid. But the mid sells ten times as many units. So the profit per customer is highest on the mid option, and the decoy is what herds people there. Luna: I've heard this called the compromise effect. When you're unsure, you pick the middle option because it feels like a balance between extremes. Lucas: Exactly. And the wine list is a perfect laboratory for it, because most customers don't know enough about wine to have a strong preference. They're looking for social signals — 'I don't want to look cheap, and I don't want to look extravagant.' The middle option signals: I know enough to spend reasonably. Luna: Yeah. And if today's episode is sparking ideas you've actually used — maybe you've noticed this at a restaurant yourself — these conversations are what keep the show going. The way we stay ad-free is listener support. If it's been useful, you can find us at buy me a coffee dot com slash fexingo. Lucas: Appreciate that. And it's a small thing that makes a big difference. So back to the wine list: the fifty-dollar decoy bottle — what is it, usually? Some generic Italian red that the restaurant buys for maybe ten or twelve bucks wholesale. They're not losing money on it, but they'd rather sell you the seventy-five-dollar bottle, which costs them maybe eighteen. Luna: So the markup on the cheap bottle is four to five times, and on the mid it's about the same. But the decoy's job isn't to be profitable — it's to steer. Lucas: Right. And it works because of anchoring. When you see a hundred-and-twenty-dollar bottle at the top of the page, the seventy-five-dollar bottle looks modest. And the fifty-dollar bottle looks like a bargain — but one you'd feel awkward ordering on a date or a business dinner. So you compromise up. Luna: How big is the effect? Do you have numbers on how many people choose the middle? Lucas: Studies on the compromise effect — including one by Itamar Simonson, who did the classic work on this in the late 80s — found that when you add a decoy option, the share of people choosing the target option can jump from about thirty percent to over sixty percent. In a restaurant context, I've seen data from a wine distributor that said when a list has a clear three-tier structure, the middle tier accounts for about seventy percent of bottle sales. Luna: Seventy percent. That's massive. Lucas: And the decoy accounts for maybe ten percent. The premium accounts for twenty. But that premium bottle is still important — it's the anchor that makes the mid feel reasonable. If you only had two options, say fifty and seventy-five, the seventy-five would feel expensive. Add a hundred-and-twenty, and seventy-five becomes the sensible choice. Luna: So the premium bottle's job isn't to sell. It's to shift the perception of value for everything below it. Lucas: Exactly. And restaurants know this. Some sommeliers I've spoken to say they design the list with three price points per varietal or region. For a Napa Cabernet, they'll list one at sixty, one at ninety, and one at a hundred and forty. The ninety-dollar bottle is the target. The sixty is the decoy — often a wine they know is overpriced for its quality, but it doesn't matter because they don't expect to sell much of it. Luna: Doesn't that risk alienating knowledgeable customers? Someone who actually knows wine might just buy the sixty-dollar bottle because they know it's good. Lucas: That's a real risk, and it's why you see variations. Some restaurants use a 'reverse decoy' — they put a very expensive bottle first, then a mid, then a cheap one. But the structure is the same. The key is that the decoy must be inferior in a way that's obvious to the target customer. For wine, that could be a lesser-known region, a previous vintage, or a less prestigious producer. The knowledgeable customer might still buy it, but the casual diner sees 'fifty dollars' and thinks 'I'd look cheap.' Luna: So the decoy has to be clearly less attractive on some dimension, not just price. Lucas: Right. In the classic popcorn experiment — the one where you offer small, medium, and large — the medium is only slightly cheaper than the large, so almost everyone picks large. But that's a different decoy: the medium is the decoy making the large look like a steal. In wine, the cheap bottle is the decoy making the mid look safe. Same logic, different implementation. Luna: And this works outside restaurants too. software as a service companies use the same thing. Basic, Pro, Enterprise. The Basic plan is often deliberately underpowered — maybe only one user or limited storage — so the Pro plan looks like the obvious choice. Lucas: Exactly. I looked at a project management tool recently. Basic was free for one user, Pro was twelve dollars per user per month, and Enterprise was twenty-five with a minimum of ten seats. The Basic plan was a decoy — nobody on a team of five is going to use a single-user plan. Pro was the target. Enterprise existed to make Pro look cheap. Luna: And the per-user price of Enterprise is actually lower than Pro if you do the math — twenty-five versus twelve, but with a minimum commitment. So it's a different kind of decoy. Lucas: Right. It's a quantity decoy. The per-unit price is lower, but the total cost is higher. That's a common variation. Coffee shops do it too — a small coffee is two-fifty, medium is three, large is three-fifty. The small is the decoy. The medium is the target. The large exists to make the medium look reasonable. Luna: I've seen that. And the margin on the medium is usually the best because the cost of coffee is negligible. The upsell is almost pure profit. Lucas: Yeah. So the three-tier structure is everywhere once you start looking. But there's a subtlety: the decoy only works if the customer perceives a real trade-off. If the cheap option is genuinely good enough, the decoy fails. That's why wine lists work so well — most people can't judge quality, so they use price as a proxy. If the cheap bottle tasted identical, everyone would buy it. But the social risk makes the decoy effective. Luna: So the decoy exploits uncertainty and social pressure. Lucas: Yes. And that's why it's so powerful in categories where quality is hard to assess: wine, perfume, hotels, consulting services. Anywhere the customer is unsure, the decoy nudges them toward the option with the highest margin for the seller. Luna: I'm curious — do customers ever catch on? If you go to the same restaurant repeatedly, you might notice the fifty-dollar bottle is always there but never sold. Lucas: Some do. But restaurants rotate their lists. And the decoy bottle might actually sell — to the occasional customer who genuinely wants a cheap bottle and doesn't care about social signals. But that's fine for the restaurant. They still make a profit on it. The decoy doesn't have to sell zero — it just has to sell less than the target. Luna: So the strategy is robust. Even if a few savvy customers game it, the majority still behave predictably. Lucas: Exactly. And that's the beauty of behavioral pricing. It doesn't require every customer to fall for it. It just needs to shift aggregate behavior by a few percentage points to be hugely profitable. Luna: Alright, so next time I'm handed a wine list, I'm going to look for the decoy. But I also might just order the fifty-dollar bottle and own it. Lucas: And that's the informed consumer move. But the restaurant still wins — you're paying fifty dollars for a bottle they bought for twelve. The decoy structure doesn't hurt you; it just doesn't nudge you. Luna: True. And knowing the structure is half the battle. I think a lot of listeners will start seeing this pattern everywhere now. Lucas: That's the hope. Once you see the decoy, you can make a more deliberate choice — whether that means buying the decoy, the target, or the premium. But at least it's your choice, not the restaurant's. Luna: Yeah, and that's really what pricing psychology is about — understanding the architecture so you can navigate it. Lucas: On that note, thanks for listening. We'll be back next week with another angle on the pricing strategies you encounter every day.