Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy Effect In Your Daily Coffee Order
Transcript
- Lucas: I stopped counting the extra quarters I’ve dumped into my morning coffee over the last decade, but today I actually did the math on why I always end up with the large instead of the medium. Luna: And let me guess, the difference in actual coffee volume was negligible compared to the price jump? Lucas: Exactly. The chain uses what behavioral economists call the decoy effect, or asymmetric dominance. They place a medium and a large on the menu where the large offers significantly more value per ounce for only a tiny premium, making the medium look like a bad deal by comparison. Luna: So they are deliberately creating a losing option just to push you toward the winner they actually wants. Lucas: Right. And this isn't just about caffeine; it's about how businesses structure choice to manipulate your perception of value. Luna: If these marketing conversations have sparked something you've actually used in your own business model, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: It really does help keep the research sharp. Now, back to that coffee shop example because the mechanics here are fascinatingly simple. Luna: Tell me the numbers. What was the actual gap between the sizes? Lucas: Let's say the medium was four dollars and twenty-five cents for sixteen ounces, and the large was five dollars and fifty cents for twenty-four ounces. Luna: That is barely an extra dollar for almost half again the liquid. Lucas: Precisely. When you look at cost per ounce, the large becomes the obvious rational choice. The medium exists solely to anchor your expectation so the large feels like a steal. Luna: But doesn't the customer still think they are saving money rather than spending more? Lucas: That is the genius of it. You aren't feeling the pain of paying five dollars and fifty cents as much as you feel the relief of avoiding the perceived waste of the medium. The pain is shifted from the purchase decision to the regret of choosing poorly. Luna: So the business wins twice. They get a higher ticket size, and you leave feeling smart. Lucas: They get a higher ticket size, and you avoid the cognitive dissonance of buying a smaller amount for a similar price. It works because humans are terrible at calculating unit economics on the fly. Luna: Does this work in digital products too, or is it mostly physical goods? Lucas: It dominates digital products. Look at software subscription tiers. They often have a basic plan, a pro plan, and an enterprise plan. Luna: Where the pro plan is usually the one they want everyone to buy. Lucas: Spot on. The basic plan is intentionally limited—maybe no export features or low resolution downloads—to make the pro plan look incredibly robust. The enterprise plan is often priced high enough to be irrelevant for most, serving only to make the pro plan look reasonable. Luna: So the expensive tier is just there to make the middle tier look affordable. Lucas: Yes. If they removed the enterprise tier, some people might stick to the basic plan because the pro plan would seem too expensive relative to nothing. But with the enterprise tier floating above, the pro plan becomes the safe, logical center. Luna: It creates a false sense of moderation. You aren't going for the top, but you aren't settling for the bottom either. Lucas: Exactly. You are optimizing for the middle ground. And companies know that the middle tier often has the best margin profile because it captures users who are willing to pay more than the entry level but not willing to navigate complex enterprise contracts. Luna: What happens when the decoy is too obvious? Can customers see through it? Lucas: When it is too obvious, it can backfire. If the price gap is too wide, people start questioning the value proposition. They wonder why the medium is even there if it is such a bad deal. Luna: Then they might just reject the premise entirely and go buy a different brand. Lucas: Or they go home and make their own coffee. The key is subtlety. The decoy needs to be plausible. It needs to look like a real option until you start doing the unit math. Luna: So the trap is sprung only after you've already engaged with the product mentally. Lucas: Correct. Once you have decided you want the product, you are vulnerable to the framing of the options. That is when the price sensitivity drops. Luna: Are there other industries using this besides tech and coffee? Lucas: Streaming services are huge on this. You have a mobile-only plan, a standard plan, and a premium plan with four screens. Luna: The mobile plan is useless for anyone with a family watching TV together. Lucas: It is useless for almost anyone except students or single commuters. Its sole purpose is to make the standard plan look essential. Without it, the standard plan looks expensive. With it, the standard plan looks like the normal way to live. Luna: It redefines what normal consumption looks like. Lucas: It does. And that is powerful because it shifts the social norm. You start judging yourself if you don't have the standard plan, not because you need the features, but because the alternative looks ridiculous. Luna: That is a clever way to lock in retention. You aren't just selling access, you are selling membership to the mainstream. Lucas: Exactly. And the margins on those streaming tiers are structured so that the standard plan covers the content costs comfortably while the premium plan provides the profit cushion. Luna: So the decoy isn't just about getting you to click buy, it is about structuring the long-term profitability of the business. Lucas: It is. Because once you are on the standard plan, churn is lower. You are accustomed to the service. Moving back to the mobile plan feels like a downgrade in lifestyle, not just a savings tactic. Luna: It makes leaving feel like a loss rather than a gain. Lucas: Loss aversion kicks in. People hate losing status or convenience more than they like saving ten dollars a month. Luna: This seems like it applies to B2B sales too. How do they handle this? Lucas: In B2B, it is often about implementation fees or support packages. You might have a base software license, a license with basic support, and one with dedicated account management. Luna: Where the basic support is clearly insufficient for any serious company. Lucas: Yes. A six-month response time is not acceptable for most enterprises. So the basic support tier exists only to make the annual support package look like responsible risk management. Luna: They are selling peace of mind, not just a contract. Lucas: They are selling insurance against failure. And when the alternative is potential downtime, the price differential seems trivial. Luna: It reframes the cost from an expense to a safeguard. Lucas: Precisely. And that is the ultimate goal of pricing strategy. It isn't about being the cheapest. It is about controlling the frame through which value is evaluated. Luna: So if you control the frame, you control the decision. Lucas: You control the decision, and you maximize the revenue within that decision. It is efficient, ethical enough, and extremely effective. Luna: Until the consumer wakes up and realizes they were never shopping for value, they were shopping for validation. Lucas: Maybe. But until then, I will keep ordering the large coffee and pretending it is the rational choice.