Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Grocery Stores Use Decoy Pricing to Sell More
Transcript
- Lucas: So here is a question that probably costs you more money than you realize every single month: why do grocery stores put the largest bag of chips right next to the medium one, even though nobody buys the large bag? Luna: Because it makes the medium bag look like a bargain? It is the classic decoy effect. Lucas: Exactly. And it works not just for snacks, but for entire categories. We are talking about how retailers structure their shelf space to manipulate what we perceive as value. The key insight here is that people are terrible at judging absolute value. They only judge relative value. Luna: Right. So if I see a small soda for two dollars and a large for three fifty, I hesitate. But if there is a medium for three dollars, suddenly the large feels reasonable. Lucas: Precisely. That medium soda is the decoy. Its job is not to sell. Its job is to make the large look like a no-brainer. In the grocery aisle, this plays out with family-size packs versus individual packs. Let us look at a specific case from a major retailer's data set published last year. Luna: I remember reading about that. Wasn't it a cereal brand? Lucas: It was a generic breakfast cereal brand that introduced a new size tier. They had the standard box, the family box, and then they added an economy box that was only slightly larger than the standard but priced fifteen percent higher. Sales of the family box jumped by twelve percent within a quarter. Luna: That is a massive jump for such a small tweak. Did consumers actually need more cereal? Lucas: No. Most households consume the same amount regardless of package size. The change was purely psychological. The economy box served as an anchor. It made the family box seem like the sweet spot between cost and quantity. Retailers call this price-point architecture. Luna: It is fascinating how much we rely on shortcuts when we are tired or rushed. Which is exactly when we go grocery shopping. Lucas: You hit on the timing element. Decision fatigue is real. By Friday evening, your brain wants to minimize cognitive load. A clear hierarchy of options reduces that load. The decoy provides a narrative of rationality. Luna: But does it work for everything? What about perishable goods where portion control matters? Lucas: Good point. Perishables are trickier because waste risk is high. But look at dairy. Yogurt cups come in single serves, multi-packs, and family tubs. The multi-pack often has a per-unit price that is almost identical to the single serve. The decoy there is the single serve, pushing you toward the volume purchase. Luna: So the single serve isn't really meant to be bought by itself. It is there to justify the bulk buy. Lucas: Correct. And this extends beyond physical goods into services. Think about gym memberships. They always offer a basic tier, a premium tier, and a VIP tier. The VIP tier is usually outrageously expensive and includes amenities nobody uses. Luna: The premium tier becomes the obvious choice because the VIP tier highlights its flaws as being too good to pass up. Lucas: Yes. The VIP tier is the decoy. It exists solely to make the premium tier look affordable and comprehensive. Gym chains know that most people will never step foot in the spa area, but they pay extra for the perceived safety net. Luna: It is a clever way to increase average revenue per user without necessarily increasing usage intensity. Lucas: Absolutely. Now, let us talk about how this interacts with private labels. You mentioned earlier that supermarkets use this to push their own brands. How does that work structurally? Luna: Well, national brands usually dominate the middle shelf. Private labels are often placed above or below them. But the pricing structure is where the magic happens. They mimic the national brand's tiers but undercut them slightly. Lucas: Right. So if Brand X has a small, medium, and large box, the store brand will have the exact same sizes. But the store brand's medium might be priced just two dollars less than Brand X's medium, while the large gap is five dollars. This creates a cross-category comparison. Luna: So the shopper thinks, 'I can get the same size for less.' It triggers the savings heuristic. Even if the store brand's margin is thinner, the volume move makes up for it. Lucas: Exactly. And retailers are getting smarter about placement. They don't just stack products; they stack narratives. A recent study showed that when private labels remove the decoy option and only offer one size, sales drop significantly compared to when they offer three sizes with a clear decoy. Luna: So simplicity can actually hurt them? I would assume fewer choices make it easier for the customer. Lucas: In theory, yes. But in practice, choice paralysis is different from choice architecture. Without a decoy, you are forced to evaluate the product on its merits alone. With a decoy, you are evaluating the deal. And shoppers love feeling like they found a deal. Luna: It shifts the focus from quality to economics. Which is exactly where the retailer wants it. Lucas: Let me pause here for a moment to ask for your support. If these conversations about market mechanics and business strategy have helped you see your own industry in a sharper light, consider buying us a coffee. Your contribution helps keep this show independent and ad-free, allowing us to dig deeper into topics like this without corporate influence. You can find us at buy me a coffee dot com slash fexingo. Thank you for keeping the signal strong. Luna: Appreciate it. It really does allow us to take the time to verify these supply chain examples rather than just skimming the surface. Lucas: Back to the shelf. One of the most aggressive applications of this is in subscription boxes. Meal kit services like HelloFresh or Blue Apron used to rely heavily on this model. Luna: They offered a two-person plan, a four-person plan, and then a massive family plan that was clearly overpriced. The four-person plan was the target. Lucas: Right. But here is the twist. As churn rates increased, they started adjusting the decoy. They didn't just change prices; they changed the feature set. The decoy became a plan with all the features but a confusing cancellation policy. Luna: That is a dark pattern. Using friction as part of the price architecture. Lucas: It is. And it raises ethical questions. When does a pricing strategy become manipulative? Most economists would say when it exploits information asymmetry. But in retail, it is considered standard practice. Luna: Standard, but not necessarily healthy for long-term trust. Do customers eventually figure it out? Lucas: Some do. There is a growing movement of consumers who actively avoid branded packaging to escape the decoy trap. They stick to generic stores or direct to consumer models where pricing is linear. Luna: Linear pricing is boring, but it is honest. No hidden agendas in the math. Lucas: Honesty doesn't always scale. Linear pricing requires higher margins on the core product to compensate for the lack of upsell opportunities. Retailers prefer the illusion of choice because it drives basket size. Luna: So the decoy isn't just about selling one item. It is about training the customer to buy more frequently. Lucas: Exactly. It builds a habit of purchasing at higher price points. Once you are conditioned to buy the medium instead of the small, you rarely go back. It is a form of behavioral lock-in. Luna: Lock-in through convenience and perceived value. Very effective. Lucas: Now, let us look at digital goods. Software companies use this even more aggressively. Look at SaaS pricing pages. They almost always have Starter, Pro, and Enterprise tiers. Luna: The Enterprise tier is usually custom-priced and very high. It serves as the ultimate decoy to make the Pro tier look accessible. Lucas: Yes. And often, the Starter tier is stripped down so much that it is unusable for serious teams. This forces everyone toward the Pro tier. It is a binary choice disguised as a trinary one. Luna: So the Starter tier isn't a product. It is a marketing tool for the Pro tier. Lucas: Precisely. And this works because B2B buyers are also subject to the same psychological biases. They want to feel like they are getting the best value for their budget. The decoy provides that validation. Luna: It validates the expenditure. 'See, we aren't buying the cheapest option, but we aren't wasting money on Enterprise either.' Lucas: That is the narrative. And it protects the company from price sensitivity. If they only offered one plan, every buyer would haggle. With multiple plans, the haggling stops because the decision is framed as selection, not negotiation. Luna: That is a powerful shift in dynamic. Negotiation implies weakness. Selection implies abundance. Lucas: Abundance is a strong word. Maybe availability. But yes, it removes the adversarial nature of the sale. You are helping me choose the right fit, rather than trying to extract maximum value. Luna: Even if the fit is engineered to lead to the highest margin option. Lucas: Engineered, yes. But is it harmful? If the customer gets what they need, is the method of guiding them there unethical? Luna: It depends on transparency. If the decoy is obvious, it feels like a game. If it is subtle, it feels like manipulation. The line is thin. Lucas: True. And regulators are starting to pay attention. The European Union has been looking at dark patterns in UI design, which includes pricing structures. They argue that asymmetric information violates consumer rights. Luna: So we might see a shift toward simpler pricing models in regulated markets. Or at least, more standardized disclosures. Lucas: Possibly. But in the US, market forces still drive this behavior. As long as it increases conversion rates, companies will continue to refine the decoy. Luna: Until consumers learn to spot it. Awareness is the only defense. Lucas: Awareness helps, but habit is stronger. We are creatures of routine. Changing our shopping habits requires conscious effort, which is expensive in terms of mental energy. Luna: So the decoy wins not because it is smarter, but because it is easier. Lucas: Exactly. It offers a path of least resistance to a higher price point. Next time you are in the aisle, look for the empty shelf space where the decoy should be. If it is missing, ask yourself why. Luna: Maybe the retailer decided the cost of maintaining the illusion outweighed the benefit. Lucas: Or maybe they found a new way to distract you. Like putting the most profitable items at eye level. But that is a story for another episode. Luna: I look forward to it. Until then, happy hunting.