Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / Why Three Price Points Beat One Every Time
Transcript
- Lucas: So let's start with a question. You walk into a movie theater — small popcorn costs $4, medium costs $6.50, large costs $7. Which one are you buying? Luna: The large. I mean, for fifty cents more than the medium, you get way more popcorn. Lucas: Exactly. And that's the decoy effect in action. The medium popcorn isn't there because the theater expects you to buy it. It's there to make the large look like a no-brainer. Luna: So the medium is the decoy. It's deliberately unattractive relative to the large. Lucas: Right. And the classic academic example of this comes from Dan Ariely's book Predictably Irrational. He published a 2009 study using a real subscription offer from The Economist. Lucas: The original ad had three options. Option A: web-only subscription for $59. Option B: print-only for $125. Option C: print plus web for $125. Luna: Wait — B and C are the same price. But C gives you the web access too. So B is completely dominated. Lucas: Exactly. Ariely ran an experiment with 100 MIT students. He showed them the three options, and 84 percent chose the print plus web for $125. Only 16 percent chose the web-only for $59. Nobody chose print-only. Luna: So the print-only option was the decoy. It made the combo look like a steal. Lucas: Then Ariely removed the decoy — just the web-only at $59 and print plus web at $125. The results flipped. Now 68 percent chose the $59 web-only, and only 32 percent chose the combo. Luna: So the presence of the decoy shifted the majority from the cheap option to the expensive one. That's a huge swing in revenue per customer. Lucas: Huge. And it's not just a lab curiosity. You see this everywhere. Netflix's standard plan with HD — $15.49 a month — sits between the basic at $11.99 and the premium at $19.99. The standard plan is the one they push. Luna: But is the basic plan the decoy there? Or the premium? Lucas: Good question. In Netflix's case, the basic plan is deliberately stripped down — no HD, lower resolution, only one screen. It's the decoy that makes the standard plan feel like a fair trade-off. The premium exists to anchor the high end, but the real target is standard. Luna: Apple does this too with iCloud storage. 50 GB for 99 cents, 200 GB for $2.99, 2 TB for $9.99. The 200 GB is the sweet spot. The 50 GB is too small for most people, so it pushes you to the 200. Lucas: And the 2 TB makes the 200 look reasonable. It's the same structure — a decoy at the bottom, an anchor at the top, and the profit center in the middle. Lucas: Now, a practical takeaway: if you're setting pricing tiers for a product or service, three tiers almost always outperform two. With two tiers, customers tend to pick the cheaper option. With three, the middle option becomes the default. Luna: But there's a nuance. The decoy has to be clearly inferior to the target option on a dimension that matters. If the decoy is just weird or irrelevant, it doesn't work. Lucas: That's right. In The Economist example, the decoy was inferior on value — same price, less content. In the popcorn example, the decoy was inferior on quantity per dollar. If you create a decoy that's cheaper but has fewer features, it works. If you create a decoy that's more expensive but worse, it can backfire. Luna: Let's talk about ethics for a second. The decoy effect is a form of manipulation, right? You're structuring choices to steer people toward a specific outcome. Lucas: I think there's a line. If you're transparent about what you're offering and the decoy is a real product that someone might legitimately want, it's just good pricing. The Economist's print-only subscription was a real product. But if you create a decoy that's clearly designed to deceive — like a fake tier that no one would ever buy just to make the middle look better — that feels shadier. Luna: There's a famous case from the 1990s where a magazine tested a decoy that was just a slightly worse version of the premium tier at the same price. Customers felt tricked when they found out. It damaged trust. Lucas: Right. So the rule of thumb: your decoy should be a legitimate offering that some customers might choose. It just happens to make the target option look more attractive. Lucas: Before we go deeper, I want to mention something. This show exists because listeners support it — we don't run ads, and we want to keep it that way. If today's episode was useful to you, and you want to keep it ad-free and accessible, buy me a coffee dot com slash fexingo helps. That's literally what keeps us going. Luna: Yeah. And it's a small-ask thing. If today's conversation was worth a coffee to you, that's the link. Lucas: Exactly. Alright — back to pricing. One more classic example: the Williams-Sonoma breadmaker. In the 1990s, they introduced a $275 breadmaker. It didn't sell well. Then they introduced a $429 model — bigger, fancier. Sales of the $275 model doubled. Luna: The $429 model was the decoy. It made the $275 model look like a good deal by comparison. And the $275 model was already profitable at that price. Lucas: Exactly. The decoy doesn't have to be a product you want to sell. It just has to exist and be visible. Its job is to change the reference point. Luna: So for a small business or startup, you can use this without a huge budget. Just design three tiers: a cheap stripped-down option, a mid-tier that's your real goal, and a premium tier that's expensive but has a few extra features. The mid-tier will get picked most. Lucas: But you have to be careful with the price gaps. If the gap between mid and premium is too small, people might jump to premium. If it's too large, the premium becomes irrelevant. Research suggests the premium should be about 30 to 50 percent more than the mid-tier. Luna: And the decoy should be priced close to the mid-tier — like the popcorn example, where medium was $6.50 and large was $7. The proximity makes the comparison stark. Lucas: Right. One more thing — the decoy effect works best when the products are hard to compare on objective quality. If everything is a commodity, price alone drives choice, and the decoy loses power. Luna: So for a SaaS product with lots of features, it's perfect. For something like bottled water, it's harder. Lucas: Exactly. Let's wrap with a forward-looking thought. As AI tools make it easier to customize pricing dynamically, we might see more sophisticated decoys — decoys that change based on who you are or what you've clicked. That raises new ethical questions. Luna: Personalized decoys. That's a whole different conversation. But for now, the core lesson is solid: three tiers, with one clearly inferior, and the profit center in the middle. Lucas: And if you're not using this, you're leaving money on the table. Thanks for listening, and we'll see you next time.