Latest / Marketing Psychology with Fexingo: Behavioral Triggers, Persuasion, and Consumer Behavior / The Decoy Effect How a Third Option Steers Your Choice
Transcript
- Lucas: If these marketing conversations have sparked something you've actually used at work or in your own shopping decisions, you might already know why we're going deep today on a pricing trick that's hiding in plain sight. Luna: I think I know where you're headed. The one where a third option makes one of the other two look way better? Lucas: Exactly. The decoy effect. Also called asymmetric dominance. It's when you add a third option that nobody would pick on purpose, but its presence shifts preference toward the option the seller actually wants you to buy. Luna: And it works because we're terrible at judging value in absolute terms. We need comparison. Lucas: Right. So let me give you the textbook example. Dan Ariely made this famous in Predictably Irrational. He showed people subscription options for The Economist. Three tiers: online-only for $59, print-only for $125, and print plus online for $125. Luna: That print-only option at the same price as the bundle is the decoy. Nobody would pick print-only when you can get both for the same money. Lucas: Exactly. In the study, when only the two real options — online-only and print plus online — were presented, people split about 68 to 32 in favor of the cheaper online-only. But when the decoy print-only was added, 84 percent chose the bundle. Luna: So the decoy didn't just sit there. It completely flipped the majority preference. Lucas: That's the power. And it's everywhere. Movie theaters have been doing it for decades. The small popcorn is $4, the medium is $7, and the large is $7.50. The medium is the decoy — it makes the large look like a bargain for just fifty cents more. Luna: And nobody buys the medium. They either size down to small or up to large. But the theater wants you to upsize. Lucas: Right. The decoy shifts you. And the margins on that upsell are enormous. A large popcorn costs maybe twenty cents more in materials than a medium, but they charge two to three dollars more. Luna: That's not even the most interesting part to me. I think the real genius is when companies use decoys in subscription tiers to push you toward the middle option. Lucas: Absolutely. Take Apple's iPhone storage tiers. They offer 128 gigabytes, 256, and 512. The price difference between 128 and 256 is often $100, but the jump from 256 to 512 is $200. The 256-gig model becomes the sweet spot — a decoy at the high end makes the middle look reasonable. Luna: And a lot of people end up paying more than they initially planned. But it doesn't feel like a trick because you made the choice yourself. Lucas: That's what makes it so effective. It exploits the way our brains compare options. We don't evaluate features in isolation. We look for relative advantages. The decoy gives us a clear winner by comparison. Luna: So how do you spot it? What should a consumer look for? Lucas: First, watch for any option that seems deliberately unattractive. If you see three price points and one is almost identical to another but with fewer features, that's a decoy. Second, ask yourself what the seller gains if you pick the middle or highest option. Luna: And if you're a marketer, how do you ethically use this? Lucas: I think the line is: don't use it to deceive. Use it to help customers see genuine value. If your premium product really is a better deal for heavy users, a decoy can guide them there without manipulation. The problem is when the decoy is fake — a product you never intend to sell. Luna: There's a famous case from the 1990s. Williams-Sonoma introduced a bread maker for $275. Nobody bought it. So they added a second model for $429. Suddenly the $275 model started selling. Lucas: Classic decoy. The $429 model made the $275 one look like a bargain. And they probably sold very few of the $429 units, but that wasn't the goal. The goal was to move the $275 one. Luna: It makes me think about how often we see this in software pricing. Three tiers: Basic, Pro, Enterprise. The Pro is often what they want you to buy, and the Enterprise is priced so high that Pro looks completely reasonable. Lucas: Exactly. And the gap between Basic and Pro is usually small in features but big in perceived value. The Enterprise tier is the decoy. It makes the Pro tier the 'safe' choice. Luna: So the decoy effect is basically a nudge. But it's a nudge that works on automatic pilot. Lucas: Right. And it's incredibly robust. Studies have shown it works even when people know about it. In one experiment, researchers told participants about the decoy effect before presenting the options. It still influenced their choices. Luna: That's scary. Even awareness doesn't fully immunize you. Lucas: But it helps. The first step is just noticing the structure of the choices. The second is forcing yourself to evaluate options on their own merits, not just relative to each other. If you can estimate what something is worth to you personally, the decoy loses power. Luna: Let's bring in a modern example. Streaming services. Netflix has Basic with ads, Standard, and Premium. The prices are staggered so that Standard often feels like the best value, especially when Premium is only a few dollars more but adds little you actually need. Lucas: Right. And the decoy might be the ad-supported tier if it's stripped down enough. Or the Premium tier if the price jump is small. It depends on what Netflix wants to push. Right now, they seem to want people on Standard ad-free. Luna: Which brings up a good point: the decoy can be at either end. Low-end decoy or high-end decoy. Lucas: Low-end decoy makes the middle look better. High-end decoy makes the middle look like a steal. Both work because we hate extremes that don't offer clear benefits. Luna: So if you're designing a pricing page, you want to think carefully about which option you want to sell most, and then build the other two to make that one the obvious choice. Lucas: And that's exactly what companies do. They A/B test different price structures to find the decoy that maximises profit. It's not an accident. It's engineering. Luna: I want to ask about one more context: healthcare or education. Where the stakes are higher. Is the decoy effect used there? Lucas: It can be, though it's controversial. Some health insurance plans use tiered options where a middle plan is deliberately framed against a high-deductible plan and a gold-plated plan. The middle plan becomes the anchor. But in those cases, the decoy might actually help people choose a plan that's better for them. It's a tool. Luna: A tool that works because we're cognitively lazy. And because comparing is easier than calculating. Lucas: Exactly. And that's the core insight. The decoy effect isn't about adding information. It's about changing the context of comparison. Luna: I love that. Changing the context makes all the difference. Lucas: Quick honest thing: a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making these episodes. We keep it ad-free, no sponsors, no tracking. It's just people who find the conversations useful and want to keep them going. Luna: Yeah, and it's a small group — maybe two percent of listeners — but that's enough to cover everything. If you've ever used one of these concepts in a meeting or a decision, that's the kind of thing that makes it worth it. Lucas: So back to the decoy. The next time you're choosing between three options, pause and ask: is one of these deliberately useless? If so, you've found the decoy. And you can make a more independent choice. Luna: Or you can use it yourself if you're selling something. Just keep it honest. Lucas: Right. The decoy effect is a mirror. It shows how we think about value. And once you see it, you can't unsee it.