Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $2,000 Mattress Makes a $600 Bed a Steal
Transcript
- Lucas: So you walk into a mattress store, and there's a $2,000 luxury mattress right next to a $600 one. The $600 one suddenly feels like a steal. That's not an accident — it's the decoy effect, and it's one of the most quietly powerful pricing tools out there. Luna: I've definitely felt that pull. It's like the expensive option makes everything else look reasonable. But is it really that simple? Lucas: It's simple in execution but sneaky in psychology. The decoy effect, sometimes called the asymmetric dominance effect, works because we rarely evaluate options in isolation. We compare. And when you add a deliberately unattractive option — the decoy — it can make one of the other options suddenly look far more appealing. Luna: So the decoy isn't meant to be picked. It's there to push you toward a specific choice. Lucas: Exactly. Take the classic example from Dan Ariely's work with The Economist. They offered three subscription options: online-only for $59, print-only for $125, and print plus online for $125. That middle option was a decoy — nobody in their right mind would choose print-only when you get the same price plus online. But its presence made the combined option look like incredible value. Luna: Right, and that decoy bumped sales of the premium option way up. It's a beautiful example. Lucas: And it works because our brains are wired to look for patterns and shortcuts. When we see a $2,000 mattress, our brain says, 'Whoa, that's expensive.' But then we see the $600 one, and it becomes the comparison point. The $600 mattress doesn't have to be objectively cheap — it just has to be cheaper than the anchor. Luna: So the decoy is really just a strategic anchor. It sets the range, and then everything else gets judged relative to it. Lucas: Precisely. And the fascinating thing is that this works even when people are fully aware of the trick. A few years ago, researchers ran a study where they told participants about the decoy effect before they made a choice. And guess what? It still influenced them. Luna: Really? Even knowing the trick, you still fall for it? Lucas: Yes. The theory is that the decoy doesn't just shift your preference — it actually changes how you perceive the value of the options. Once that $2,000 mattress is in your head, the $600 one feels like a bargain, no matter how rational you try to be. Luna: I guess that explains why I always end up with the medium popcorn at the movies. The large is the decoy, and the medium feels sensible. Lucas: That's exactly the same mechanism. The large tub at $8 makes the medium at $6 look reasonable, even though the medium is probably overpriced per ounce. The theater doesn't care which one you pick — they win either way. But they've nudged you toward a higher margin item. Luna: So decoys are everywhere. How do you spot one in the wild? Lucas: Look for an option that seems obviously worse than another option at a similar price. Like the print-only Economist subscription. Or a small coffee that's only a dollar less than the medium but the medium is barely more expensive. That's a decoy. Luna: But sometimes the decoy is a premium product that's meant to be aspirational, not a bad deal. Like a high-end phone that makes the standard model look affordable. Lucas: Right, there's a difference between a decoy and a prestige anchor. A decoy is designed to be dominated — it's a worse deal. A prestige anchor is just a premium option that sets a high reference point. But they both serve a similar purpose: to shift your perception of the other options. Luna: I think the key is that the decoy makes the target option look like the smart choice, not just the cheap one. It's about perceived value. Lucas: Exactly. And that's why decoy pricing is so powerful in subscription models. Think about software as a service. You have a basic plan, a pro plan, and an enterprise plan. The basic plan is stripped down, the pro plan is the sweet spot, and the enterprise plan is priced so high that pro looks like a no-brainer. Luna: So the enterprise plan is the decoy. And it works because it anchors the price range and makes pro seem reasonable. Lucas: Yes. And the best part is that the enterprise plan doesn't need to be a bad deal — it just needs to be priced in a way that makes pro look better. Some companies intentionally price enterprise at a level that few will buy, but it serves its purpose. Luna: But what about the risk of ticking off customers who feel manipulated? I can imagine someone seeing through the decoy and feeling annoyed. Lucas: That's a real risk. If the decoy is too obvious or the difference is too stark, it can backfire. People don't like feeling tricked. That's why the best decoys are subtle — they feel like a natural part of the product lineup, not a cheap trick. Luna: So there's an ethical line. You want to influence, not deceive. Lucas: Right, and I think the line is about whether the target option is genuinely a good value. If pro is legitimately the best deal for most customers, then steering them there is a win-win. The decoy isn't taking advantage of anyone — it's just making the good choice more obvious. Luna: That's a fair framing. And it's probably why the best decoy examples come from companies that actually have a strong middle option. Lucas: Speaking of strong middle options, let's talk about how decoy pricing shows up in something as mundane as a restaurant menu. You'll often see a $45 steak on the menu, and next to it a $25 pasta. The steak is the decoy — it makes the pasta seem like a reasonable indulgence. And it also makes the $30 chicken seem like a compromise. Luna: I've seen that. It's like the menu is designed to guide you to the highest-margin dish without you realizing it. Lucas: Exactly. And the same principle applies to wine lists. They'll put one outrageously expensive bottle on the list, and suddenly the $50 bottle looks like a steal. That's decoy pricing at work in a very traditional setting. Luna: I think a lot of listeners might be thinking about how to apply this to their own business. What's the first step? Lucas: Start by mapping your current pricing tiers and see if there's a natural decoy. Ask yourself: is there an option that most customers won't pick but that makes another option look better? If not, you might be missing an opportunity. Luna: But you also have to be careful not to overcomplicate. Too many options can lead to choice paralysis, and that's the opposite of what you want. Lucas: That's a great point. The decoy only works if the choice set is clean. If you have seven options, the effect gets diluted. Three options is the sweet spot — one target, one decoy, and one that's just there to add context. Luna: So three is the magic number. I've seen that in a lot of pricing pages, actually. Basic, Pro, and Enterprise. Lucas: And the best part is that you can test it. Run an A/B test with and without the decoy. You'll often see a significant increase in the take rate for the target option. It's one of the most reliable pricing interventions out there. Luna: I wonder if there are industries where decoy pricing doesn't work. Like, maybe in B2B or high-ticket sales where buyers are more analytical. Lucas: That's a really good question. In B2B, the purchase process is often more deliberate, with multiple stakeholders and a formal procurement process. But even then, decoys can still influence the initial framing. A vendor might present three tiers, and the middle one looks like the safest choice for a committee. Luna: So it's not about the complexity of the decision, it's about the psychology of comparison. Lucas: Exactly. As long as there's a comparison, the decoy can work. And you see it in everything from software to consulting packages to even charitable donations. We did an episode on anchoring in donations, and the decoy effect is its cousin. Luna: Before we go further, I want to mention something that's been on my mind. We've been doing this podcast for a while now, and a lot of listeners have told us these pricing conversations have genuinely helped them in their own work. Lucas: That means a lot to hear. And honestly, the reason we can keep making these episodes ad-free is because a small group of listeners chips in through buy me a coffee dot com slash fexingo. It's not a big ask — just a few dollars a month from people who find value in what we do. Luna: Yeah, it really does keep the lights on. And it lets us stay independent, without any sponsor pressure affecting what we talk about. Lucas: Right. So if you've gotten something out of these conversations, that's the best way to keep them coming. No pressure, just something to think about. Luna: And we're back to the decoy effect. So we've talked about how it works and how to spot it. But what about when it backfires? Have you seen any famous examples? Lucas: One that comes to mind is when a company tries to use a decoy that's too similar to the target. If the decoy is almost the same price and features, it just confuses people. They might end up picking the decoy or abandoning the purchase altogether. Luna: So the decoy has to be clearly inferior, but not so inferior that it feels insulting. Lucas: Exactly. It's a balance. And another failure mode is when the decoy is so obviously a decoy that customers feel manipulated. They might call it out publicly, which is bad for trust. There was a case with a software company that had a $5,000 enterprise plan that was basically a placeholder, and customers saw right through it. It created a lot of negative sentiment. Luna: That's a cautionary tale. So the decoy needs to feel like a legitimate option, even if it's not the intended choice. Lucas: Right. That's why the best decoys are options that you could actually sell to someone — they're just not the best value. For example, a basic plan that's missing key features at a price that's only slightly lower than the pro plan. It's not a ridiculous deal, but it's clearly worse. Luna: I think we've covered a lot of ground here. But one thing I'm curious about — how does decoy pricing interact with other pricing strategies we've talked about, like bundling or free shipping thresholds? Lucas: They can work together beautifully. Take bundling: you might offer a bundle at a certain price, and then a premium bundle that's more expensive. The premium bundle acts as a decoy to make the standard bundle look like a better deal. And with free shipping, the threshold itself can act as an anchor, making you add items to your cart to hit it. Luna: So it's all about creating a comparison frame that guides the decision. Lucas: Exactly. And the most effective pricing strategies often use multiple psychological principles at once. Decoy pricing is just one tool in the toolbox, but it's a powerful one. Luna: Well, I think the next time I see a $2,000 mattress, I'll appreciate the craft behind it a little more. Lucas: And maybe you'll think twice about which one you actually walk out with. But at least you'll know why you're making that choice.