Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $999 iPhone Anchor Makes You Buy the $799 Model
Transcript
- Lucas: Apple launches a new iPhone. There are three models: the base model at $699, the mid-tier at $799, and the pro at $999. And almost everyone buys the $799 one. Luna: Almost everyone? I thought the pro was the big seller. Lucas: It depends on the year, but Apple's own data — and third-party sales reports — consistently show the middle storage tier of the flagship model is the volume leader. And that's not an accident. It's a direct result of how they set the prices. Luna: So the $999 model exists to make the $799 look like a deal? Lucas: Exactly. That's price anchoring in its purest form. The $999 model is what behavioral economists call the 'decoy' — it's not necessarily meant to be the volume seller. It's meant to make the $799 model feel reasonable by comparison. And it works because we don't evaluate prices in isolation. Luna: We always compare. So if the pro is $999, suddenly $799 feels like a savings of $200. Lucas: Right. And Apple knows that. They also know that if they only offered the $699 and the $799, more people might pick the $699 because, on its own, it looks like a great value. But add a $999 option, and the $799 becomes the 'middle' — and we're wired to gravitate toward the middle. Luna: So the decoy doesn't just anchor the price upward, it also shifts which option feels like the safe choice. Lucas: Precisely. And this isn't just about iPhones. It's a core pricing strategy used across industries. But Apple does it with unusual precision. They also layer in storage tiers. The base iPhone might start at 128GB, but the next tier is 256GB for an extra $100. And the jump from 256GB to 512GB is another $200. Each tier is designed to make the next one seem like a better value per gigabyte. Luna: So the 256GB model is the sweet spot for most people, and Apple prices the 512GB high enough to push you toward the 256GB. Lucas: Yes. And that's a form of price anchoring within the same product line. You're comparing storage tiers, not just phone models. The 512GB at a $200 premium anchors the 256GB as the 'smart' choice. And the 128GB at the bottom anchors that you're getting a lot more for just a hundred more. Luna: It's like they're guiding your hand. But doesn't this strategy depend on people actually comparing? What if someone just walks in and buys the cheapest? Lucas: Some do. But Apple's data shows the majority compare. They see the three options, they do the mental math, and they pick the middle. It's a well-documented phenomenon called the 'compromise effect.' And Apple has been using it for over a decade. Luna: Let's look at the actual numbers from last year's launch. The iPhone 15 Pro started at $999 for 128GB, $1099 for 256GB, and $1299 for 512GB. The base iPhone 15 was $799 for 128GB. So the $999 Pro anchors the whole lineup. Lucas: Right. And what happened? Analysts reported that the iPhone 15 Pro — the $999 model — was the best-selling variant, but within the Pro line, the 256GB version was the most popular. So the anchor worked: the $999 price point became the new normal, and then within that, the $1099 felt like a reasonable upgrade. Luna: So the anchor isn't just the top-tier model. It's the entire pricing structure. The $699 model anchors the floor, the $999 anchors the ceiling, and the $799 sits right in the middle. Lucas: Exactly. And Apple has refined this over time. They used to offer a 64GB model at a lower price, but they phased it out because it was too cheap — it made the $799 feel expensive. Now the entry point is $699, which is still premium, but it's just low enough to make the $799 look like a step up, not a splurge. Luna: So the $699 is almost a decoy in itself — it exists to make the $799 look like the 'real' iPhone. Lucas: Right. And that's the genius. They don't want to sell the $699 model to most people. They want to sell the $799. But without the $699, the $799 would look expensive. By offering a cheaper option, they make the $799 feel like a premium upgrade that's still reasonable. Luna: And the $999 model — that's the aspirational anchor. It makes the $799 feel like the practical choice. Lucas: Exactly. And this strategy isn't unique to Apple, but they execute it with remarkable consistency. Every year, they adjust the prices slightly to maintain the same psychological gap. The spread between base and pro is usually $200 to $300 — enough to feel significant, but not so much that the middle seems overpriced. Luna: So what's the key takeaway for a marketer listening? How do you apply this? Lucas: First, never offer just two price tiers. You need a decoy. If you have a good option and a better option, people will struggle to choose. Add a third option — a premium version that's clearly overpriced — and suddenly the middle looks like the obvious winner. Luna: And the premium version should be genuinely good, not just a fake option. People need to believe it's worth the price, even if they don't buy it. Lucas: Right. And second, the price gaps matter. A $100 difference between tiers is very different from a $200 difference. Apple uses $100 gaps between storage tiers within a model line, and $200 between models. Those numbers are tested. Luna: And the $100 gap feels like a small upgrade, while the $200 feels like a move to a different category. Lucas: Exactly. And third, you need to know your customer's reference price. For Apple, that's around $700 to $800 for a smartphone. They set the anchor just above that range to pull people up. If you're selling software subscriptions, your reference point might be $10 a month. Your decoy should be something like $20 a month for a premium tier. Luna: So the decoy has to be plausible but unappealing enough to drive people to the middle. Lucas: Yes. And it should be priced so that the middle option gives you a clear 'win' — either more features for a slightly higher price, or the same features for a lower price than the premium. That's the sweet spot. Luna: Let's talk about a real-world example outside of tech. I remember seeing a wine list at a restaurant where they had a $12 glass, a $16 glass, and a $28 glass. I almost always bought the $16. Lucas: Perfect. The $28 glass is the decoy. It's overpriced, but it's plausible — maybe it's a rare vintage. And it makes the $16 feel like a reasonable choice, even though the $12 is perfectly good wine. Luna: And the $12 anchors the low end, so the $16 feels like a step up, not just a middle option. Lucas: Exactly. That's the same structure: low, middle, high. The middle is the target. And it works because we're wired to avoid extremes. We don't want to seem cheap, but we also don't want to overspend. The middle is the safe compromise. Luna: So if you're a small business owner, you could apply this to your own pricing. Say you offer a basic plan at $19, a standard at $29, and a premium at $59. The $59 anchors the standard as the value pick. Lucas: Exactly. But you have to be careful. The premium plan can't be a joke. It needs to have real value — maybe extra features, priority support, or more storage. If it's obviously a throwaway, customers will see right through it. Luna: And the basic plan needs to be functional enough that it's a real option, but stripped down enough that most people will want to upgrade. Lucas: Right. The basic plan is the 'bait' — it gets people in the door, but it's deliberately limited so that the standard feels like a necessary upgrade. That's another layer of the strategy. Luna: So it's not just about anchoring. It's about framing the entire choice architecture. Lucas: Yes. And Apple is a master of this. They've been doing it for so long that consumers now expect three tiers. If Apple suddenly offered only two, people would feel lost. Luna: It's become a mental shortcut. Three tiers means 'choose the middle' is the default. Lucas: And that's powerful. Because once you've trained your customers to expect three tiers, you can adjust the prices over time. Apple has slowly raised the price of the base model from $649 to $699 to $799 over the years, and people barely notice because the middle still feels like the right choice relative to the premium. Luna: So the anchor itself shifts upward over time, but the psychological gap stays the same. Lucas: Exactly. And that's how you increase average revenue per user without losing customers. You move the whole structure up, but keep the relative differences consistent. Luna: One thing I've always wondered — do you think Apple ever considers offering a fourth tier? Like an ultra-premium model at $1,499? Lucas: They have, actually. With the iPhone Pro Max, they sometimes add a fourth tier at the top. But that's usually a separate lineup. Within a given model, three tiers seems to be the sweet spot. More than three and people get overwhelmed. Luna: So three is the magic number for anchoring. Lucas: In many cases, yes. But you have to test it for your own product. The key principle is: always give people a reason to choose the option you want them to buy. And that reason is often a comparison with something deliberately worse or more expensive. Luna: And that something needs to be real. Not a phantom product. Lucas: Right. And speaking of real — we should mention that this show is listener-supported. A few of you chip in monthly through buy me a coffee dot com slash fexingo, and that's what keeps these episodes free and without ads. Luna: Yeah, it's a small group, but it makes a big difference. If you've gotten value from these pricing deep dives, that's the way to keep them coming. Lucas: So back to Apple — there's one more nuance I want to touch on. The anchoring effect is strongest when the decoy is 'relatable' — meaning it's a product the customer could actually imagine buying. If the $999 iPhone were a completely different device, like a MacBook, it wouldn't work as well. Luna: Because it has to be a direct comparison. You're comparing iPhones to iPhones, not iPhones to laptops. Lucas: Exactly. The decoy has to be in the same category, with similar features, just priced higher. That's why Apple doesn't use the iPad as a decoy for the iPhone. The categories are too different. Luna: So the takeaway: your decoy should be a version of your own product, not a different product. Lucas: Yes. And ideally, it should share the same core features but have one or two premium additions that most people don't need. That way, customers feel smart for choosing the middle option — they're not paying for extras they won't use. Luna: And that feeling of smartness is what drives satisfaction and repeat purchases. Lucas: Exactly. Apple's entire pricing strategy is built on making you feel like you made the right decision. And the anchor is the tool that guides you there.