Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy That Costs You More Than You Think
Transcript
- Lucas: So you walk into a movie theater and the small popcorn is four dollars, the medium is six fifty, and the large is seven. Which one do you pick? Luna: The large, obviously. It's only fifty cents more than the medium. Lucas: Exactly. And that's the decoy in action. The medium popcorn isn't priced to sell — it's priced to make the large look like a steal. That's the compromise effect, and it's one of the most powerful pricing tricks in the playbook. Luna: We've talked about anchoring before, but this feels different. Anchoring sets a reference point. The decoy actually changes the choice architecture. Lucas: Right. Anchoring gives you a high number to distort perception. Decoy pricing gives you a third option that makes one of the other two look irresistible. The classic academic example is from Dan Ariely's work — he showed people three subscription options for The Economist. Luna: Oh, I remember that. Web-only for fifty-nine dollars, print-only for a hundred and twenty-five, and print plus web for a hundred and twenty-five. The print-only was the decoy. Lucas: Exactly. When the decoy was removed, most people chose the cheap web-only option. With the decoy, they flocked to the bundle. The decoy made the bundle look like you're getting the print edition free. Luna: So the decoy doesn't have to be a middle option. It can be a high-priced close substitute that makes the target seem cheap. Lucas: That's the key insight. The decoy is an option that is clearly worse than the target on some dimension, but not too much worse. It creates what behavioral economists call 'asymmetric dominance.' The target dominates the decoy, so the target looks better. Luna: Give me a concrete example from this week's research. Lucas: I looked at a SaaS company — a project management tool. They had three tiers: Basic at ten dollars per month, Pro at fifty dollars, and Premium at fifty-five dollars. The Premium tier had almost the same features as Pro, just a little more storage and priority support. But the price difference was only five dollars. Luna: So Premium is the decoy. It makes Pro look like a bargain because you get almost everything for just five dollars less. Lucas: Exactly. And the data showed that over sixty percent of new customers picked Pro. Before they added Premium, the split was about forty percent Basic, forty percent Pro, and twenty percent a higher enterprise plan. After introducing Premium, Pro jumped to over sixty percent. Luna: So the decoy cannibalized both the cheap option and the expensive option, but massively boosted the middle. That's a huge lift. Lucas: It is. And the beauty is that the decoy doesn't need to sell a single unit to be effective. As long as it's there, it reshapes the comparison. The brain hates picking between two options when both have trade-offs. Give it a third option that's clearly worse on one dimension, and suddenly the choice feels obvious. Luna: But doesn't that feel manipulative? If customers figure out the decoy, they might get angry. Lucas: It can backfire if the decoy is too obvious. If the premium tier is priced at fifty-five dollars and has exactly the same features as Pro, customers will feel tricked. The decoy has to offer genuine, if marginal, value. In that SaaS example, Premium did include more storage and priority support — it's just that most users didn't need it. Luna: So the decoy should be a real product, just one that's positioned to make the target look like the smart choice. Lucas: Right. And there's another variant: the 'ghost decoy.' That's when you show a third option that's temporarily unavailable. Like a hotel listing that says 'Deluxe Suite — sold out' next to the standard room and the premium suite. The sold-out option acts as an anchor that makes the premium suite look more desirable. Luna: That's clever. But I imagine it only works if the ghost decoy is credible. If it's always sold out, people catch on. Lucas: Exactly. One travel site I studied actually rotates which room is 'sold out.' On busy weekends, they mark the mid-tier as unavailable, pushing people to the high end. On slow weekends, they mark the high-end as unavailable, pushing people to the mid-tier. It's dynamic decoy pricing. Luna: That's fascinating. And it feels less manipulative because the availability is real — it's based on actual inventory. Lucas: We should also talk about the decoy in physical products. Think about a wine list. You see a bottle for thirty dollars, one for forty-five, and one for a hundred. The hundred-dollar bottle is the decoy — it makes the forty-five-dollar bottle look reasonable. Luna: And restaurants know that. They'll put a ridiculously expensive bottle on the list just to anchor the rest. The sommelier might not expect to sell it often, but it lifts the average bottle price. Lucas: One of my favorite examples is from a software company that sold a basic version for ten dollars, a professional version for sixty, and a 'premium' version for sixty dollars that had fewer features than the professional version. Wait, that sounds backward. Luna: That's a different kind of decoy — the 'inferior decoy.' It's priced the same as the target but offers less. So it makes the target look superior on features for the same price. Lucas: Right. That's a classic move in subscription pricing. You create a 'bad deal' at the same price point to push people to the better deal. It works because people compare features directly. If option A and B are both sixty dollars, but A has more features, A wins. Luna: But doesn't that confuse customers? Having two options at the same price? Lucas: It can, if it's not clear. But if the inferior decoy is obviously worse, people quickly rule it out. The key is that the decoy should be just good enough to be plausible, but clearly not the best choice. Luna: So how do you decide what makes a good decoy? Any rules of thumb? Lucas: First, the decoy should be priced close to the target, or have a similar price but fewer features. Second, the target should clearly dominate the decoy on at least one important dimension. Third, the decoy shouldn't be so bad that it's laughable — it needs to be a realistic option for some segment. Luna: And you need to test it. What works in one market might not work in another. Lucas: Absolutely. I remember a case where a media company tried a decoy for their subscription tiers. They had digital-only at ten dollars, print plus digital at twenty, and a digital-only with a tote bag at fifteen. The tote bag was supposed to make the twenty-dollar bundle look cheap. But it flopped because their audience hated clutter. Luna: So the decoy actually hurt? Because it made the bundle look like a worse deal compared to the tote bag option? Lucas: Exactly. Some customers saw the tote bag as a bonus, so they chose the fifteen-dollar option instead of the twenty-dollar bundle. The decoy cannibalized the target. They had to remove it. Luna: That's a good lesson. The decoy needs to be unattractive for the target audience. If it becomes attractive, it's not a decoy anymore — it's a competitor. Lucas: Right. Let's shift to something I've been thinking about — if today was actually useful to you, the way these stay ad-free is listener support. It's a small thing, but it keeps the show independent. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, that's how we keep doing deep dives on stuff like decoy pricing without any sponsors. Every bit helps. Lucas: So back to the decoy — one more variant I want to cover: the 'phantom decoy.' That's when you show a product that doesn't exist yet, like 'Coming Soon — Platinum Tier' with a high price. People start comparing current options to that phantom, and the current options look better. Luna: That feels borderline deceptive. If the phantom never launches, customers lose trust. Lucas: It can be, if used dishonestly. But some companies use it as a teaser for a real upcoming tier. They list the price to gauge demand, and if it gets traction, they actually launch it. That's more of a test than a trick. Luna: I think the biggest takeaway here is that decoy pricing works because our brains are wired to compare. We don't evaluate options in isolation — we need a reference point. The decoy is a manufactured reference. Lucas: Exactly. And if you're a buyer, the best defense is to ask yourself: 'Would I buy this if the other options didn't exist?' If the answer is no, you're probably being decoyed. If you're a seller, the question is: 'Is my decoy genuinely inferior, or am I tricking people?' Luna: And if it's a trick, it might work once, but it'll cost you in the long run. Lucas: That's the line. Use the decoy to clarify value, not to deceive. When it's done well, it helps customers make a decision they're happy with — and that's good business.