Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How The Decoy Effect Shapes Your Subscription Choices
Transcript
- Lucas: I was at the multiplex last night, and I didn't even want to buy popcorn anymore. But there it was again, that classic three-tier pricing trap. A medium for eight dollars, a large for ten, and a huge for twelve. And suddenly, the large looks like the only rational choice. Luna: It’s not just the theater though. It’s everywhere now. Look at any software subscription page or streaming service tiering. They are all doing this to us. Lucas: Right. This is what we call the decoy effect. Or asymmetric dominance. You have two options that are close in value, and then a third option is added specifically to make one of them look better. It’s not about the product itself. It’s about the comparison. Luna: So the decoy isn't meant to be bought. It's meant to steer you away from the cheap option and toward the premium one. Lucas: Exactly. Let's go back to that movie theater example because it’s the cleanest illustration. If they only had small for five and large for ten, you might think twice about spending ten. But when you add the huge for twelve, the large becomes a steal. You’re getting almost as much as the huge for two dollars less. The huge is the decoy. It’s slightly worse value than the large, but it exists solely to make the large look good. Luna: And if the huge were actually cheaper, say nine dollars, would that change the dynamic? Lucas: Yes, absolutely. If the huge was nine, the large loses its appeal entirely. Everyone goes for the huge. The trick is that the decoy must be clearly inferior to the target option, but comparable enough to trigger the comparison. It has to be in the same category. You can’t use a bicycle to make a sedan look like a good deal. Luna: But people rarely analyze it that closely. They just see the numbers and pick the middle. Lucas: They do. And businesses know that humans are lazy evaluators. We hate doing complex utility calculations. So they structure the choices so the math does the thinking for us. In the case of the popcorn, the marginal cost of filling the container is near zero for the theater. They don’t care if you get more corn. They care that you spent ten instead of five. Luna: This feels incredibly familiar with digital subscriptions. I’ve seen this with so many apps lately. Lucas: Let’s talk about a specific case. There was a study on a popular photo editing app. They originally offered two plans: basic for four dollars a month and pro for ten dollars a month. Conversion was flat. Then they introduced a new tier. Not a higher tier, but a middle one. They called it plus. It was seven dollars a month. It had most of the features of the pro plan, but lacked maybe two advanced tools. Luna: So the basic plan became too expensive relative to the plus plan, and the pro plan looked like a tiny jump in price for a big jump in features. Lucas: Precisely. The plus plan was the decoy. It wasn’t designed to be the winner. It was designed to make the pro plan look irresistible. And it worked. Sales for the pro plan jumped significantly. People felt smart choosing the pro plan because the price gap between plus and pro seemed negligible compared to the feature gain. Luna: It makes you feel like you’re getting a deal, even though you’re spending more than you intended. Lucas: That’s the emotional hook. You walk away feeling victorious over the pricing algorithm. But you’ve been played. The real question is, how do you defend against this? Because once you see the pattern, it’s hard to unsee it. Luna: I think the first step is ignoring the middle option entirely. Treat it as noise. Lucas: That’s a good heuristic. Focus on your absolute needs. Ask yourself what you actually need to do the job. If you only need the basic features, then the pro plan is irrelevant regardless of how good the deal looks. Don’t let the pricing structure dictate your requirements. Luna: But what if you actually do need those extra features? How do you know if you’re being rational or just manipulated? Lucas: You have to separate the price from the value. Evaluate each plan in isolation. Would you pay ten dollars for the pro plan if there was no seven-dollar option? If the answer is no, then you’re falling for the decoy. If the answer is yes, then you’re just upgrading for legitimate reasons. Luna: That’s a tough mental exercise. Most people don’t have the bandwidth to run that simulation for every purchase. Lucas: True. And that’s why companies use it. It exploits our cognitive shortcuts. We prefer decisions that require less mental effort. By presenting three options, they create a false sense of security. We think we’re comparing apples to oranges, but really we’re just being guided toward the apple they want to sell. Luna: It’s interesting how this applies to physical goods too. Like cars or furniture. Lucas: Definitely. Car dealerships are masters of this. They’ll offer you a base model, a mid-trim with a sunroof and leather seats, and a top-tier model with everything except the kitchen sink. The mid-trim is often priced just below the top-tier to make the top-tier seem worth the extra cash. But usually, the top-tier includes things you’ll never use. Luna: So the goal is to get you into the car, then upsell you on the trim level. Lucas: Exactly. Once you’re committed to buying a car, the dealer shifts the battlefield. They use the decoy effect to maximize the margin on accessories and upgrades. It’s a layered approach to behavioral manipulation. Luna: It feels like we’re constantly under siege by these tactics. Is there any regulation against this? Lucas: Not really. As long as the prices are transparent, it’s considered fair competition. Regulators focus on fraud or hidden fees, not on clever pricing structures. It’s a gray area of consumer psychology. It’s annoying, but legal. Luna: So we’re left to protect ourselves. Which brings us to the broader economic impact. If everyone falls for this, doesn’t that inflate prices across the board? Lucas: It does. When consumers consistently choose higher-priced options due to framing effects, companies raise baseline prices. The market adjusts upward. We end up paying more for less value overall. It’s a inefficiency driven by psychology rather than utility. Luna: That’s a sobering thought. We’re literally subsidizing their marketing departments with our own poor decision-making. Lucas: In a way, yes. And it’s not just about money. It’s about satisfaction. Studies show that people who fall for the decoy effect report lower satisfaction with their purchase later. They realize they paid for features they didn’t need. The victory feels hollow. Luna: So the best defense is awareness. Just knowing the trick exists helps you resist it. Lucas: Awareness is step one. But the real work is discipline. Sticking to your initial criteria. Ignoring the flashy middle option. It requires a bit of friction, but it saves you money and regret. Luna: Agreed. Next time I’m looking at a subscription, I’m going to pretend the middle tier doesn’t exist. Lucas: Do that. And remember, the decoy is always there to distract you from the real question: what do you actually want? Luna: Thanks for the reminder, Lucas. It’s easy to forget that we’re the ones setting the budget, not the pricing team. Lucas: We set the budget. But they design the maze. Our job is to find the exit before we get lost in the details. Luna: Before we dive back into the weeds, I want to pause for a moment. If walking through the economy with us has made something click, or simply kept you entertained during your commute, consider supporting the show directly. Lucas: Listener support is what keeps Fexingo Business ad-free and independent. It allows us to dig deeper into topics like this without worrying about sponsorships influencing our angles. If you enjoy the insights, check out buy me a coffee dot com slash fexingo. Even a small contribution helps keep the lights on and the research sharp. Luna: It really makes a difference. And it ensures we can keep bringing you these deep dives every day. Thanks for considering it. Lucas: Anyway, let’s circle back to the data. Because while individual decisions matter, the aggregate effect of the decoy effect is reshaping entire industries. Luna: Especially in the tech sector where subscription models dominate. Lucas: Right. Tech companies have embraced tiered pricing more aggressively than any other sector. From cloud storage to creative software, the three-tier model is standard. And the results are consistent. Revenue per user increases significantly when a decoy is introduced. Luna: But does it hurt customer loyalty? If people feel tricked, won’t they churn? Lucas: That’s the million-dollar question. Some studies suggest short-term revenue gains come at the cost of long-term trust. But most companies prioritize immediate metrics. They assume that as long as the product delivers value, the pricing tactic won’t drive users away. It’s a gamble, but one they’re willing to take. Luna: It seems like a fragile equilibrium. One bad experience could undo years of brand building. Lucas: Exactly. Transparency is becoming a competitive advantage. Companies that explain their pricing clearly, without tricks, are starting to win over skeptical consumers. It’s a slow shift, but it’s happening. Luna: Maybe the next wave of disruption will be honest pricing. No decoys, no hidden fees, just straight value. Lucas: That’s a beautiful ideal. But until then, we’ll keep watching the traps spring shut. And we’ll keep teaching our listeners how to spot them. Luna: Here’s to making smarter choices in a world designed to confuse us. Lucas: To that. And to remembering that sometimes, the small popcorn is exactly what you wanted.