Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $12 Software Add-On Explains Decoy Pricing
Transcript
- Lucas: So you're on Adobe's website, looking at their photography plan. Twenty bucks a month for Photoshop and Lightroom. Seems reasonable. Then you notice the single-app plan — Photoshop alone, also twenty bucks a month. And right next to it, the photography plan with 1TB of cloud storage — thirty dollars. Luna: Wait — so the single-app plan is the same price as the bundle? That almost makes no sense unless you want just one app. Lucas: Exactly. That single-app plan is the decoy. Most people will look at it, see it costs the same as the bundle but gives you way less, and think: the bundle is the smart choice. Adobe doesn't expect many people to buy the single app — it exists to make the bundle look better. Luna: So it's not really about selling the decoy. It's about steering you toward the higher-margin option. Lucas: Right. And this is the decoy effect — also called asymmetric dominance. A third option that's clearly worse on some dimension makes the target option seem like a no-brainer. The classic example is from Dan Ariely's research: The Economist offered a web-only subscription for fifty-nine dollars, a print-only subscription for one hundred twenty-five dollars, and a print plus web subscription for one hundred twenty-five dollars. The print-only option was a decoy — it made the print plus web bundle feel like a steal. Luna: I remember that. And when they removed the decoy, people shifted back to the cheaper web-only option. So the decoy literally changed what people chose. Lucas: That's the power. It doesn't just influence preference — it can double the proportion of people picking the target. And the decoy doesn't have to be a full product. Sometimes it's a small add-on you never buy. Luna: Give me an example of that — a tiny decoy. Lucas: Popcorn at the movies. A small popcorn might be five dollars, a large is seven dollars. The small is overpriced per ounce, so most people size up. But add a medium for six-fifty, and suddenly the large looks like great value. The medium is the decoy — nobody buys it, but it pushes you to the large. Luna: Right, because the large is only fifty cents more than the medium, but you get way more popcorn. The medium makes the large's price feel tiny. Lucas: Exactly. And software companies use this all the time. Take project management tools like Basecamp or Asana. They'll have a free tier with limited features, a pro tier at thirty dollars a month, and an enterprise tier with a custom price that's probably double. The enterprise tier makes the pro tier feel affordable, even if almost no one buys enterprise. Luna: So the enterprise tier is the decoy — it anchors the pro tier as the rational middle ground. I've seen that in my own research: when you add a premium option, the mid-tier becomes more attractive. Lucas: And it works because humans compare relatively, not absolutely. We don't know if thirty dollars for a project management tool is a good deal in a vacuum. But next to a hundred-dollar enterprise plan, it feels cheap. That's the whole game. Luna: But aren't there ethical concerns? I mean, you're essentially tricking people into spending more than they intended. Lucas: That's a fair point. There's a line between nudging and manipulation. If the decoy is a real product that someone might legitimately want — like Adobe's single app — it's arguably just presenting choices honestly. But if the decoy is a sham that nobody would ever buy, like a deliberately bad deal, it feels more deceptive. Luna: I think the difference is intent. Is the decoy there to help customers find the best value, or to trick them into paying more for something they don't need? Lucas: And honestly, most customers are savvy enough to spot a bad deal. But the decoy effect works at a subconscious level. You might not even realize you're comparing prices relative to each other. And that's why it's so effective. Luna: Let's talk about a concrete case. I read about a car wash that offered a basic wash for five dollars, a premium wash for eight dollars, and a deluxe wash for fifteen dollars. The premium was the target. But they also had a fourth option — a super deluxe for twenty dollars. That made the deluxe look less attractive. Lucas: Interesting — so they used two decoys? The super deluxe made the deluxe seem overpriced, and the basic made the premium seem reasonable. Luna: Exactly. And they found that the premium option's sales increased by thirty percent when they added the super deluxe. The decoy doesn't have to be cheaper — it can be more expensive to make the target look like a bargain. Lucas: That's the asymmetric dominance working in reverse. The decoy can be a 'phantom' option — something that exists on the page but is clearly not intended to be chosen. Like a gold-plated version of a product that costs ten times as much. Luna: Apple does that with their MacBook Pro configurations. They have a base model at two thousand dollars, then a mid-tier at twenty-five hundred, and a top-tier at thirty-one hundred. The top-tier is so expensive that the mid-tier feels like the sweet spot. But some people actually buy the top-tier. Lucas: Right, and that's where the decoy effect overlaps with price anchoring. The top-tier anchors the entire lineup upward. Even the base model seems more reasonable when you see it next to a thirty-one-hundred-dollar machine. Luna: Another example I love is from subscription boxes. A beauty box might offer monthly for twenty dollars, quarterly for fifty dollars, and annual for one hundred fifty dollars. The quarterly is the decoy — it's slightly cheaper than three months separately, but the annual works out to twelve-fifty a month. Most people will pick annual. Lucas: But is the quarterly really a decoy? Some people might genuinely want a quarterly subscription. The key is whether the quarterly's price makes the annual look disproportionately good. If the quarterly is priced at fifty dollars, and the annual is one hundred fifty, that's only three times the price for twelve boxes — so you're paying more per box for quarterly. That's a bad deal, so it pushes you to annual. Luna: So the decoy doesn't have to be a distinct product. It can be a pricing structure that makes one option dominate. And that's where we get into the world of 'good-better-best' pricing. Lucas: Good-better-best is basically decoy pricing in disguise. The 'good' option is usually stripped down to be unattractive. The 'best' is so expensive that the 'better' looks like the rational choice. And most people pick 'better' — which is exactly what the company wants. Luna: There's a famous study by Itamar Simonson at Stanford. He asked people to choose between a six-pack of cookies for two dollars and a dozen cookies for four dollars. Most people picked the six-pack because it was cheaper. But when he added a single cookie for one dollar, suddenly most people picked the dozen. The single cookie was a decoy. Lucas: That's a clean experiment because the decoy is clearly inferior. Nobody wants one cookie for a dollar when you can get six for two. But its presence changes the context. Now the dozen seems like a great deal — four dollars for twelve, compared to one dollar for one. Luna: And that's the decoy effect at its most elegant. You don't need a complex pricing table. Just one strategically placed bad option can shift millions in revenue. Lucas: Let's bring it back to software. I was looking at a SaaS tool for video editing. They had three plans: Basic at fifteen dollars a month with 1080p export, Pro at thirty dollars with 4K export, and Enterprise at fifty dollars with 4K plus cloud collaboration. The Enterprise makes Pro look good, but the real decoy might be Basic — because who wants 1080p when 4K is only fifteen dollars more? Luna: So Basic is the decoy that pushes people to Pro. And Pro is the target. The company probably makes most of its revenue from Pro. Enterprise is just there to make Pro seem affordable. Lucas: Exactly. And this is why decoy pricing is so pervasive. It's cheap to implement — you just add a line to your pricing page — and it can lift conversion rates by double digits. But you have to be careful about customer backlash if people feel manipulated. Luna: Which brings us back to the ethics. I think as long as the decoy is a real option that someone might genuinely choose, it's fair game. But if you're creating a phantom option that no one would ever buy, it crosses a line. Lucas: Agreed. And the best decoys are often real products that serve a niche. Like Adobe's single-app plan — some people really do only want Photoshop. But the pricing makes it a natural decoy for the bundle. Luna: We've covered a lot of ground. Let's wrap with a practical takeaway. If you're setting up pricing tiers, what's the one thing you should do? Lucas: Design your decoy to make your target option the obvious winner. That usually means the decoy should be slightly worse on one key dimension — like price per feature — while being nearly the same price as the target. And always test it. What works in theory might not work with your customers. Luna: And if you're a consumer, the takeaway is to ignore the decoy. Compare options based on your needs, not the prices on the page. But that's easier said than done. Lucas: Definitely. The decoy effect exploits our natural tendency to compare. Knowing it exists is half the battle. But even knowing, I still find myself upgrading to the medium popcorn. Luna: Same here. Alright, that's a wrap on decoy pricing. Thanks, Lucas. Lucas: Thanks, Luna. And as always, if you find these marketing breakdowns useful, you can support the show at buy me a coffee dot com slash fexingo. It's listener-funded, no ads, and a small group of people already make it possible. We appreciate every bit that keeps these conversations going. Talk to you next time. Luna: Yeah, it really helps us keep the show independent. Alright, see you.