Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / The Decoy Effect in Subscription Pricing
Transcript
- Lucas: So Luna, you know that classic pricing experiment from The Economist, the one where they offered a digital subscription for fifty-nine dollars, a print subscription for a hundred and twenty-five, and both together for a hundred and twenty-five? Luna: Oh, the one where the print-only option is the decoy. Everyone talks about that one. Lucas: Exactly. When they tested just the digital and the combo, most people picked digital. But when they added the print-only option at the same price as the combo, suddenly the combo became the star. It's the classic demonstration of the decoy effect. Luna: Right, because the print-only option makes the combo look like a no-brainer. But I feel like we've touched on decoys in a few episodes, haven't we? Lucas: We have, but usually in the context of a single premium price or an anchor. Today I want to focus specifically on how decoys work in subscription tiers. Because the Economist example is almost a cautionary tale now, but real SaaS companies use decoys all the time, sometimes without even realising it. Luna: So what's the difference between a decoy and just a regular tier you don't expect many people to pick? Lucas: A decoy is designed to make another option look better. It's not just a niche tier for a small segment; it's there to change the relative attractiveness of the others. In the Economist case, the print-only option is a dominated alternative, it's worse than the combo in every way but priced the same. That's the classic 'asymmetric dominance' decoy. Luna: So the decoy is dominated by the target option, but not by the other option. That's what pushes people toward the target. Lucas: Precisely. And in subscription pricing, you see this all the time. Take Spotify: they have Individual, Student, Duo, and Family. The Individual is the standard, but the Family plan at a higher price is not really a decoy, it's just a different product. But think about the way they've structured the pricing on their premium tiers over the years. Sometimes the middle tier is the decoy to push you to the top. Luna: Can you give me a concrete example? I always feel like I end up on the middle plan, and I'm not sure if it's because I'm actually saving money or because I'm being nudged. Lucas: Let's take a generic SaaS product – say, a project management tool. They might have a free tier, a Pro tier at ten dollars a month, and a Business tier at twenty-five dollars a month. But the Pro tier might have a limit on the number of projects, while Business is unlimited. If the free tier is too limited, the Pro becomes the decoy that makes Business look like a better value, even if you only need Pro's features. Luna: So the decoy doesn't have to be the most expensive option. It can be the middle one that's designed to make the top one look better. Lucas: Exactly. And that's a big difference from the Economist example. There, the decoy was the most expensive option, but it was dominated by the combo. In subscription tiers, the decoy is often the middle tier, and it's not dominated – it has some features but at a relatively high price compared to the top tier. That's called a 'compromise effect' decoy, where the middle option seems safe, but actually it's positioned to make the top tier look like a steal. Luna: Interesting. So how would a company decide whether to use a decoy or just two clean tiers? Lucas: Well, that's a great question, and it ties into something we've been talking about on the show. A couple of dollars a month is genuinely what keeps these conversations going – if you've gotten something out of them, you can support us at buy me a coffee dot com slash fexingo. It's a small thing that makes a real difference for keeping the podcast ad-free. Luna: Yeah, it's like the price of a coffee a month, and it goes straight to keeping us going. Anyway, back to decoys – you were saying? Lucas: Right. The decision comes down to what you're trying to optimise. If you want to push people to a higher tier, a decoy can help. But if you have a clear segmentation – like a starter, a pro, and an enterprise – and each tier is genuinely for a different customer, adding a decoy might just confuse people. The decoy works best when you have one target option you want to sell. Luna: So it's not about having a decoy for the sake of it. It's about having a clear goal for which tier you want people to choose. Lucas: Exactly. And that's why the Economist example is so powerful – they had a clear goal, which was to sell the combo. The decoy made it obvious. But in a lot of modern SaaS, the goals are murkier. Maybe they want to get people on the annual plan, so they make the monthly plan the decoy by pricing it just a little too high. Luna: Oh, that's a good point. I've seen that – where the monthly price is, like, ten dollars, but the annual is seventy, which is less than eight a month. The monthly looks like a bad deal. Lucas: That's a decoy in a sense, but it's more of a framing trick. The monthly is not a true decoy because it's not dominated by the annual in a strict sense – it has the flexibility of month to month. But it can still nudge people to annual if the monthly price is set high enough. Luna: So what's the risk of using a decoy? Is there a chance it backfires? Lucas: Absolutely. One risk is that customers feel manipulated. If they realise that the decoy is just there to push them, they might lose trust. That's why the decoy has to be plausible – it needs to be a real option that some people might actually choose. If it's obviously useless, like a print-only subscription in a digital age, it can still work, but it might also make people think you're playing games. Luna: I've seen some subscription services where the middle tier is so obviously a decoy that it feels insulting. Like, they have a basic for ten dollars, a popular for twenty, and a premium for thirty, but the popular is barely different from the basic, and the premium has all the good stuff. It's transparent. Lucas: And that transparency can backfire, especially if your audience is savvy. But here's the thing – sometimes a transparent decoy can still work, because people want the premium option anyway, and the decoy just gives them an excuse. The key is to test it. You can't just assume a decoy will work; you need to see if it actually shifts behaviour. Luna: How would you test that? Like, A/B testing the pricing page with and without the decoy? Lucas: Exactly. You can run a simple A/B test. Show one group the two real tiers, and the other group the same two tiers plus the decoy. Then measure which tier each group chooses. If the decoy is working, you should see a significant shift toward your target tier in the decoy group. But you also need to watch for overall conversion – sometimes a decoy can distract people and actually reduce the number of people who sign up at all. Luna: So it's a trade-off. You might get more people on the higher tier, but if fewer people buy overall, you could end up with less revenue. Lucas: Right, and that's why you need to look at the whole picture. A decoy is a tool to steer choices, but it's not a magic bullet. And it's important to consider the 'attraction effect' versus the 'compromise effect'. The Economist is an attraction effect – the decoy makes the target more attractive. The compromise effect is when the middle option is chosen because it's a safe middle ground, even if it's not the best value. That's a different dynamic. Luna: Can you give me a modern example of the compromise effect in subscription pricing? Lucas: Sure. Look at Netflix. They have a Basic plan, a Standard plan, and a Premium plan. The Standard is often the middle ground, but the Premium might have 4K and more screens. For a lot of people, Standard is the safe choice – it's not too cheap, not too expensive. But the Premium is not a decoy; it's a genuine up-sell for households that need it. The pricing is structured so that the difference between Standard and Premium is fairly small, which makes upgrading feel like a no-brainer. Luna: So the compromise effect is at play – you don't want to look cheap, but you also don't want to overspend, so you pick the middle. Lucas: Exactly. And that's why the middle tier is often the most popular. It's not necessarily a decoy, but it's positioned to capture the 'average' customer. The decoy, on the other hand, is designed to make the top tier look like the best value, even if it's not the middle. Luna: So if I'm a small business owner with a SaaS product, how do I know if I should even use a decoy? Lucas: First, you need to know what your goal is. Are you trying to maximise revenue per customer, or are you trying to get as many customers as possible? If you're in a growth phase, maybe you don't want a decoy that pushes people to a higher price – you want to keep the entry price low. If you're trying to increase average revenue per user, a decoy might help. Luna: And also, you need to think about your customer base. If your customers are price-sensitive, a decoy might just annoy them. But if they're value-conscious, a decoy can help them justify spending more. Lucas: Right. And there's another angle – the decoy can also be used to segment your market. By having a decoy tier, you're effectively asking customers to self-identify. The ones who pick the decoy are probably not your ideal customer anyway, so you don't mind losing them to a lower-priced competitor. Luna: That's a smart way to think about it. It's not just about nudging – it's about filtering. Lucas: Exactly. And that's what a lot of SaaS companies do with their 'Enterprise' tier. They price it high, and they don't expect many small businesses to pick it. But it makes the 'Professional' tier look reasonable in comparison, and it also sets a high anchor for negotiations with larger companies. Luna: So the decoy is not just about the psychology of the page, it's about your overall pricing architecture. Lucas: Exactly. And it's important to remember that decoys can change over time. What works when you have a hundred customers might not work when you have ten thousand. You need to keep testing and adjusting. Luna: Have you seen any examples where a decoy actually hurt a company? Lucas: There was a famous case with a wine club, not exactly subscription, but they had a pricing page with three tiers. The most expensive was a premium wine that was way overpriced, and the middle was a decent wine, and the cheapest was a decent wine too. But the premium was so obviously a decoy that it made the whole page look gimmicky, and customers just left. The company had to redesign the page. Luna: So trust is a big factor. If the decoy feels like a trick, it can damage your brand. Lucas: That's the line you have to walk. A good decoy is subtle enough that people don't notice it, but effective enough to shift behaviour. And that's why testing is so important – you can't just rely on theory. Luna: So, any practical tips for someone listening who wants to try this? Lucas: Start by mapping out your current tiers and your goal. Then design a decoy that is dominated by your target – either in price or features. Test it on a small segment, measure not just conversion but also revenue per user, and then scale if it works. And always keep an eye on customer feedback – if people start complaining about the pricing structure, it's time to rethink. Luna: That sounds like a solid approach. It's about being strategic, not manipulative. Lucas: Exactly. And at the end of the day, the decoy is just one tool in the pricing toolbox. It's not about tricking people – it's about helping them make a decision that they're happy with, and that you're happy with too. Luna: Well said. So next time I'm staring at a pricing page wondering why I'm drawn to the middle plan, I'll know it's not just me. Lucas: Exactly. It's by design. And that's what makes pricing so fascinating.