Latest / The CMO Podcast with Fexingo: Marketing Leadership, Budgets, and Executive Strategy / How Decoy Pricing Drives Consumer Decisions
Transcript
- Lucas: So you're sitting down to choose a streaming plan—basic, standard, or premium. Basic is 10 bucks, standard is 15, premium is 20 with 4K. Most people pick standard. But what if they add a fourth option: 4K-only no HD for 18 bucks? Suddenly premium looks like a steal, and more people buy it. That's decoy pricing, and it is one of the most quietly powerful tools a CMO can use. Luna: And the classic example everyone cites is The Economist's old subscription offer. Do you remember the exact numbers? Lucas: Exactly. It was a study from Dan Ariely's 'Predictably Irrational.' The Economist offered three options: web-only for 59 dollars, print-only for 125, and print plus web for 125. The print-only option was a decoy—it made the combo look like a bargain. When they removed the decoy, most people chose the cheapest web-only. The decoy shifted preferences dramatically. Luna: And that's the core idea: a third option that is asymmetrically dominated. It's worse than one of the options on every dimension, so it pushes people toward the more expensive option. For a CMO, that's a way to boost average order value without actually changing the price of the target product. Lucas: Before we go deeper—this show is ad-free by design, and it stays that way because listeners who find value choose to support it. If these marketing conversations have sparked something you've actually used, you can throw a few dollars in the tip jar at buy me a coffee dot com slash fexingo. That link is always there, no pressure. Luna: Yeah, it's a small way to keep the conversation independent. And honestly, we don't have to sell anything in between the insights. Lucas: Alright, back to decoys. The real trick is that decoys work best when the target option is clearly superior—not just cheaper, but better value. In the streaming example, the 4K-only decoy lacks standard definition, so the premium tier that has everything looks like the smart choice. Luna: But isn't there a risk of annoying customers who feel manipulated? Some people might see through it and resent the brand. Lucas: Absolutely. If the decoy is obviously useless, it can backfire. That's why good decoys have a plausible reason to exist. For instance, a SaaS company might offer a small business plan that's missing a key feature—like analytics—that the mid-tier includes. The decoy isn't garbage; it's just not the best fit for most buyers. Luna: So it's about creating a choice architecture that guides, not tricks. I think of it like a menu engineering in restaurants: you put a high-margin item next to a slightly cheaper one to make the cheaper one feel like a deal. Lucas: Right. And decoys aren't just for subscriptions. They work in physical products too. Take microwave popcorn: a small bag for 3 dollars, a large for 7, and a medium for 6.50. The medium is a decoy—it's almost as expensive as the large but gives you less. Suddenly the large feels like a better deal, and you buy it even if you didn't plan to. Luna: That's a concrete example I can picture. So as a CMO, how do you test whether a decoy is effective? You can't just guess. Lucas: You run A/B tests on your pricing page. Show one version with just two tiers, and another with a decoy. Measure conversion rates and average revenue per user. The decoy should increase uptake of the most profitable tier without tanking overall conversion. If it does, you've got a winner. Luna: And there's a nuance: decoys work better when the options are presented simultaneously, not sequentially. If people see the decoy only after picking a tier, it doesn't influence them. Lucas: Exactly. The order matters. Also, decoys are most powerful when the customer is uncertain about their preferences. If someone knows exactly what they want—like a die-hard fan who only wants the cheapest—no decoy will move them. But for the undecided, it's a nudge. Luna: So who's using this well right now? Can you name a brand that's doing it subtly? Lucas: I'll point to a SaaS company like Calendly or Notion. They have a free tier, a pro tier, and a team tier. The pro tier might be priced close to team, but with fewer seats. That makes the team tier seem like a no-brainer for groups. They don't scream 'decoy,' but the structure does the work. Luna: That's smart because it also serves real segments: solo users, power users, teams. Each tier has a legitimate audience, but the pricing steers you toward the one that maximizes lifetime value. Lucas: One more layer: decoys can also be 'phantom'—options that exist but are never meant to be chosen, like how movie theaters have a giant popcorn bucket for 10 dollars, a large for 7, and a medium for 6.50. Nobody buys the giant, but it makes the large look reasonable. Luna: But isn't that a bit manipulative? If you never intend to sell the giant, why list it? Lucas: It's a gray area. Most regulators don't care unless there's fraud—like if the giant is listed but never in stock. But from a branding perspective, if your customers feel tricked, you lose trust. So the best practice is to make sure the decoy is a real option, just not the most attractive one for most buyers. Luna: That's a good rule of thumb. Now, let's talk about the role of the CMO: should they own pricing, or is that a finance decision? Lucas: Historically, pricing sat with finance or product. But more and more, CMOs are taking ownership because pricing is a signal of value. If you change your price, you change your brand perception. The CMO should at least have a seat at the table when pricing tiers are designed. Luna: I'd argue they need to lead the research. Marketing knows the customer's willingness to pay better than anyone. So if you're doing a value-metric pricing—like per-seat, per-usage—the CMO should be the one testing the decoy effect on usage tiers. Lucas: Exactly. And the decoy doesn't have to be a product tier. It can be a payment term. For example, a monthly subscription at 15 dollars, an annual at 120 dollars—but then a third option: annual with a free gift card. The free gift card is a decoy that makes the annual feel more generous. Luna: That's a clever twist. I'm thinking about how this applies to B2B. In enterprise sales, you often have multiple packages, but the procurement team compares them all. Does decoy pricing work when the buyer is a committee? Lucas: It can, but you have to be careful. In B2B, the decision is more rational and analytical. However, decoys still work because of anchoring. If you show a premium package at 100k, a standard at 60k, and a lite at 55k, the standard looks much better. The lite is the decoy—it's only 5k cheaper but missing key features. Luna: So it's about setting a high anchor first. That's a classic principle: the first number you see influences everything after. So a CMO launching a new product might want to introduce a high-priced edition first, then a mid-tier, then a decoy that's close to the mid but worse. Lucas: Right. But there's a catch: if your brand is known for being affordable, a high anchor might confuse people. It has to fit your positioning. A luxury brand can pull it off; a value brand might lose credibility. Luna: Good point. Now, I've also seen decoys used in fundraising—like donation tiers. A charity might list $50, $100, $250, where $100 is the target and $250 is the decoy. For a donor, $100 feels generous but not excessive. Lucas: Exactly. And in that case, the decoy serves a social good: it increases the total donation amount, which helps the cause. So it's not inherently evil. It's a tool. The ethics come down to intent and transparency. Luna: Let's wrap with a practical tip. If a CMO wants to start using decoy pricing next quarter, what's the first step? Lucas: Audit your current pricing page. Identify the option that has the highest margin or the highest customer lifetime value. Then design a decoy that is slightly less attractive on features or price, but close enough to push people toward that high-margin option. Test it with a small segment. Luna: And measure not just conversion but also satisfaction. If after the change, your net promoter score drops, you might have pushed too hard. The decoy should feel like a helpful guide, not a trap. Lucas: That's the bottom line. Decoy pricing, when done right, respects the customer's intelligence while gently steering them toward a choice that benefits both them and the business. It's a science and an art. Luna: And as always, the best CMOs test, learn, and iterate. Thanks for joining us on The CMO Podcast. Lucas: If you want to see how decoy pricing plays out in your own industry, start with a simple experiment. You might be surprised how much it moves the needle.