Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Price Tier Makes You Pick the Middle Option
Transcript
- Lucas: Luna, let me ask you something. You open a streaming service's pricing page, and there are three options. Basic at nine ninety-nine, Standard at fourteen ninety-nine, Premium at twenty-nine ninety-nine. Which one do you pick? Luna: Honestly? Probably the middle one. It feels like the safe bet — not too cheap, not too expensive. Lucas: Exactly. And that's not a coincidence. That's the decoy effect in action. The premium tier isn't really meant to sell — it's meant to make the mid-tier look reasonable. Luna: So the twenty-nine ninety-nine option is a decoy? Lucas: Often, yes. It's priced high enough that it anchors your perception. Suddenly fourteen ninety-nine doesn't feel like a splurge, it feels like a deal. And the basic tier at nine ninety-nine? That starts to look stripped down by comparison. Luna: Right, because what's missing from basic? Maybe no HD, maybe ads. So the middle option becomes the 'good enough' choice. Lucas: Exactly. Now, this isn't new. The classic example is from The Economist back in the 1990s. They offered a web-only subscription for fifty-nine dollars, a print-only for a hundred twenty-five, and a print plus web for a hundred twenty-five. The print-only was the decoy — nobody would buy it when the bundle was the same price. But when they removed the decoy, most people chose the cheapest option. Luna: So the decoy changed the entire distribution of choices. Lucas: Dramatically. That study by Dan Ariely showed that with the decoy, eighty-four percent chose the bundle. Without it, only thirty-two percent chose the bundle. That's a fifty-two point swing. Luna: Okay, but that's an old example. Does it still work today? I feel like consumers are getting savvier. Lucas: It absolutely still works. But the execution has to be smarter. Take a modern streaming service — let's pick one. They'll offer a basic plan with ads at seven dollars, a standard ad-free at fifteen, and a premium with 4K and multiple streams at twenty-five. The premium is the decoy if it's priced disproportionately high relative to its features. Luna: But what if the premium actually delivers value? Then it's not a decoy, it's just a premium tier. Lucas: That's the key distinction. A genuine premium tier has features that justify the price. A decoy tier is deliberately overpriced to make the middle option shine. If customers actually buy the premium, it's not a decoy anymore. Luna: So how do you know if you're looking at a decoy or a real premium option? Lucas: Look at the feature gap. If the jump from mid to premium costs twice as much but only adds one minor feature, that's a decoy. If the jump adds significant value — like more streams, better quality, family sharing — then it's a legitimate tier. Luna: I remember a SaaS tool I used — they had three plans: Starter at ten bucks, Professional at fifty, and Enterprise at 'Contact Us.' That's a decoy too, right? The Enterprise price is hidden but the message is clear: if you need more than Professional, it's going to be expensive. Lucas: Classic. The 'Contact Us' tier is a soft decoy. It's not a hard number, but it still anchors that Professional is the sensible choice. Especially in B2B, where you don't want to seem cheap but you also don't want to overcommit. Luna: And that's the genius of it — it plays on our desire for a compromise. We don't want to feel like we're buying the cheapest, but we don't want to waste money either. Lucas: Exactly. Psychologists call it the compromise effect. When given three options, we tend to avoid extremes and pick the middle. The decoy just makes sure the middle is exactly the one you want to sell. Luna: But there's a risk, right? If customers catch on, they might resent the manipulation. Lucas: There is that risk. And it's higher today because people share pricing screenshots and compare notes. If your decoy is too obvious — like a price that's absurdly high for no reason — it can backfire. Customers might lose trust or even choose a competitor. Luna: So what's the right way to deploy it? Any recent examples that work? Lucas: One that I think is well done is actually from a meal-kit delivery service. They have a two-person plan at sixty dollars, a four-person at a hundred, and a family plan at a hundred thirty. The family plan adds extra portions and more variety, so it's not a pure decoy. But the price jump from four-person to family is thirty percent, while the jump from two-person to four-person is sixty-seven percent. So the four-person plan feels like the sweet spot. Luna: So the decoy doesn't have to be a useless option — it just has to make another option look better. Lucas: Precisely. You can even have multiple decoys. Some companies use a 'good, better, best' structure where the 'best' is so expensive that 'better' seems like the obvious choice. But then they might also have a 'good' that's stripped down to highlight the value of 'better.' Luna: It's like a maze designed to lead you to one exit. Lucas: That's a great way to put it. And the exit is the one with the highest profit margin, not necessarily the highest price. The middle option often has the best margin because it doesn't include the costliest features. Luna: Let's talk about a real case. I was looking at a cloud storage company — they had a free tier, a Pro tier at ten dollars for two terabytes, and a Business tier at twenty dollars for unlimited storage. The Business tier seems like a decoy because unlimited is hard to value, but it's only double the price for way more storage. Lucas: Interesting. In that case, the Business tier might actually be the primary offer if they want to upsell. But the decoy could be the free tier. By making free very limited — say, only five gigabytes — the Pro tier feels like a huge upgrade for a small price. Luna: So the decoy can be at the low end too. Make the cheap option so unattractive that people avoid it. Lucas: Absolutely. That's called the 'ugly duckling' decoy. It's common in subscription models where the entry-level plan is deliberately feature-poor. For example, a project management tool might offer a free plan that only allows three projects. If you have four projects, the paid plan becomes necessary. Luna: But doesn't that risk alienating users who start free and then feel forced to pay? Lucas: It can, if the free plan is too restrictive. The trick is to make the free plan valuable enough that people try it, but limited enough that they hit a pain point quickly. That pain point drives conversion. Luna: So the decoy effect is really about shaping perception, not just listing prices. Lucas: Exactly. And it works because we don't evaluate prices in a vacuum. We compare. The decoy gives you a comparison that makes your target option look like the obvious winner. Luna: I think this is a good moment to mention something. If these marketing conversations have sparked something you've actually used — like rethinking your own pricing — there's a way to support the show directly. Lucas: Yeah, we keep this ad-free because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. It's a small group, but it genuinely funds the production time for episodes like this. Luna: And it's just a way to keep the conversations going without any sponsors. So if it's useful to you, that link is an easy way to be part of it. Lucas: Alright, back to decoys. One industry where the decoy effect is really subtle is in pricing for SaaS add-ons. For instance, a time-tracking tool might offer a base plan for ten dollars, then a plan with reporting for twenty, and a plan with reporting and integrations for thirty. The integration add-on might only cost five dollars separately, but by bundling it into the thirty-dollar plan, the twenty-dollar plan seems like a better deal. Luna: So they're using the high-tier decoy to push the mid-tier, but also anchoring the value of the add-on. Lucas: Exactly. And it works because we tend to anchor on the highest price. If the thirty-dollar plan is there, the twenty-dollar plan feels like a saving. But if you only had two options — ten and twenty — you might feel more hesitation. Luna: I've also seen the opposite — where the decoy is the mid-tier. Like a coffee shop that sells small for two, medium for three, large for four. The medium is a decoy because the large is only a dollar more and obviously better value. Lucas: That's a classic 'good-better-best' where the 'better' is the decoy for 'best.' It works when the marginal cost of upgrading is low for the seller. They'd rather you buy the large because the profit margin is higher. Luna: So the decoy effect is flexible — it can be at the top, middle, or bottom. Lucas: Right. And the key is understanding your cost structure and customer psychology. You can even run A/B tests to see which tier configuration drives the most revenue. Luna: What about ethics? Is it manipulative to design a pricing page that nudges people toward a specific choice? Lucas: I think it depends on the intent and transparency. If you're using a decoy to trick people into buying something they don't need, that's problematic. But if you're using it to help customers see the best value for their needs — and you genuinely believe the mid-tier is the right fit — then it's just good design. Luna: That's a fine line, though. Who decides what's 'right' for the customer? Lucas: That's where data comes in. If your decoy pushes most customers to a plan they actually use and are happy with, it's likely ethical. If it leads to high churn or complaints, you've crossed the line. Luna: So test and iterate. Lucas: Exactly. And be transparent about what each tier includes. No hidden fees, no misleading feature lists. The decoy effect should be about presentation, not deception. Luna: Alright, any final takeaways for listeners who want to try using a decoy? Lucas: Start simple. Take your current pricing and add a third tier that's deliberately overpriced relative to its value. See if it shifts sales toward the middle. Run it for a month and compare conversion rates. You might be surprised how much a single line on a pricing page can change behavior. Luna: And if you do try it, let us know how it goes. We'd love to hear real-world stories.