Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a Three-Tier Menu Pushes You to the Middle Option
Transcript
- Lucas: Let's start with a subscription offer that's become almost legendary in behavioral economics. Back in 2009, The Economist ran a pricing test that Dan Ariely later made famous in his book 'Predictably Irrational'. Luna: I remember this — it's the one with the three-tier menu, right? Lucas: Exactly. The offer had three options. Option A: digital-only subscription for fifty-nine dollars. Option B: print-only subscription for one hundred and twenty-five dollars. Option C: print plus digital subscription — also for one hundred and twenty-five dollars. Luna: So Option B is strictly worse than Option C. Same price, but you only get print. Lucas: Right. That's the decoy. When Ariely ran the experiment with a hundred MIT students, only sixteen percent chose the digital-only option at fifty-nine dollars. Zero percent chose the print-only decoy. And eighty-four percent chose the combined bundle at one hundred and twenty-five dollars. Luna: But what happens if you remove the decoy? If you just offer digital for fifty-nine and print plus digital for one twenty-five? Lucas: Ariely ran that too. With the decoy removed, the split shifted dramatically. Sixty-eight percent chose the cheaper digital option. Only thirty-two percent went for the bundle. The presence of that obviously inferior option — the print-only at the same price — pushed people toward the more expensive bundle. Luna: It's a nudge that works even when people are aware of it. I've seen that offer and I still feel the pull. Lucas: That's the key insight. The decoy doesn't need to be hidden. It works by changing the relative value of the other options. Option C looks like a steal compared to Option B, and Option A becomes the risky choice — what if I miss the print experience? The decoy anchors your perception of value. Luna: So the decoy is basically a pricing prop that makes the target option seem like a smarter decision. Lucas: Exactly. And this isn't limited to subscriptions. Think about movie theater popcorn. You've got small for three dollars, medium for six-fifty, and large for seven. The medium is priced so close to the large that it feels like a bad deal — for fifty cents more, you get a much bigger bucket. So most people buy the large. Luna: But the theater wants you to buy the large. The medium is the decoy. Lucas: Right. And it works because humans don't evaluate prices in absolute terms. We compare options within a set. The decoy makes one option asymmetrically dominant — Option C is better than B on every dimension, and it's close enough to A on price that the extra value feels like a no-brainer. Luna: What's a modern example you've seen recently that uses this structure? Lucas: A lot of SaaS companies do it with their pricing tiers. Take a project management tool — let's call it Basecamp or Asana. They often have a free tier with limited features, a mid-tier at ten dollars per user per month, and a premium tier at twenty dollars. But sometimes they'll add an extra tier that's intentionally overpriced or feature-limited to push people to the mid-tier. Luna: So the decoy isn't always the cheapest or the most expensive. It can sit anywhere as long as it makes another option look better. Lucas: That's the nuance. In the popcorn example, the medium is the decoy. In The Economist example, the print-only was the decoy. The decoy is the option that nobody chooses, but its presence changes the choice between the other two. Luna: And this is different from price anchoring, where you show a high price first to make everything else seem reasonable. The decoy is a third option that redefines the comparison. Lucas: Right. Anchoring is about setting a reference point. The decoy is about creating an asymmetric comparison. But they often work together — in the Economist offer, the one hundred and twenty-five dollar price anchors the bundle, and the decoy makes that anchor seem like a bargain. Luna: So if you're designing a pricing page, how do you decide which option to make the decoy? Lucas: You want the decoy to be clearly inferior to the target option on a key dimension — usually price or features. And it should be priced close to the target, not close to the cheap option. If the decoy is too cheap, it might pull people down instead of pushing them up. Luna: Let me think of a real example I saw recently. A streaming service — not naming names — had a plan with ads for seven dollars, a plan without ads for twelve dollars, and a premium plan with 4K for seventeen dollars. The middle plan at twelve dollars is the obvious choice for most people. Lucas: But is the twelve-dollar plan the decoy or the target? If they want people on the twelve-dollar plan, then the seventeen-dollar plan might be the decoy — it's expensive enough that the twelve-dollar plan looks reasonable by comparison. Luna: So the decoy can be above or below the target. It just has to make the target look like the best deal. Lucas: Exactly. And that's why three-tier pricing is so common. With two options, people tend to pick the cheaper one. With three, the middle option often wins. The decoy creates a reference point that the target exploits. Luna: But what happens when customers are sophisticated? I mean, people in business listen to this podcast. They know about the decoy effect. Does knowing about it make you immune? Lucas: Surprisingly, not really. Studies show that even when you explain the decoy effect to people beforehand, they still fall for it in the moment. Because it's not a cognitive trick — it's a perceptual one. Your brain compares options automatically, and the decoy shifts that comparison before you can consciously override it. Luna: So awareness helps a little, but the effect is still there. I guess that's why it's been used for decades. Lucas: And it's not just pricing. The decoy effect shows up in product design too. Apple's iPhone storage tiers — sixty-four, one twenty-eight, two fifty-six gigabytes — the middle option is often the decoy. The price jump from one twenty-eight to two fifty-six is smaller per gigabyte, so the large looks like a better value. But Apple probably wants you on the middle tier for margin reasons. Luna: That's a great point. The decoy can be the middle option if it makes the high-end option look like the best value, but the company actually wants to sell the high-end. Or the decoy can be the high-end to make the middle look reasonable. Lucas: You've nailed the strategy. The key is to identify your target — the option you want most people to choose — and then design a decoy that makes that target look superior. The decoy should never be the target itself. Luna: Speaking of designing for the listener, I want to mention something we do on this show. We deliberately keep it ad-free. No sponsor reads, no mid-roll interruptions. And if these marketing conversations have sparked something you've actually used, we'd love it if you'd consider supporting that choice. Lucas: Yeah, it's a small thing, but it makes a big difference in how we approach topics. If you want to keep this ad-free experiment going, the link is buy me a coffee dot com slash fexingo. No pressure — just a way to say the show matters to you. Luna: And we're back to the decoy. So we've established that it works, even when you know about it. But are there any ethical boundaries? I mean, is it manipulative to design a pricing page that nudges people toward a more expensive option? Lucas: That's a fair question. I think the line is crossed when the decoy is deceptive — like hiding fees or creating a false sense of scarcity. But presenting options in a way that highlights value is just good design. The decoy effect is a tool; it's how you use it that matters. Luna: So if you're a small business, how would you test a decoy? You don't have The Economist's budget for A/B testing. Lucas: Start simple. If you currently have two tiers, add a third that's clearly inferior to your target. Run it for a month and compare conversion rates. You don't need a huge sample — even fifty to a hundred data points will show a directional effect. And the cost is just the time to update your pricing page. Luna: And if it doesn't work? What then? Lucas: Then you iterate. Maybe the decoy isn't positioned right — maybe it's too close to the cheap option or too far from the target. Or maybe your customers are unusually price-sensitive. But in my experience, the decoy effect is remarkably robust. I've seen it work in B2B SaaS, consumer subscriptions, even in retail. Luna: Any final thoughts on applying this today? Lucas: One thing: don't overcomplicate it. The best decoys are simple and obvious. The print-only subscription at the same price as the bundle — that's clear. The medium popcorn that's almost the same price as the large — that's clear. If you have to explain why one option is a better deal, the decoy is too subtle. Luna: So clarity beats cleverness. Good note. Lucas: Exactly. Next time you're looking at a three-tier menu, ask yourself: which option is the decoy? And if you can spot it, you're already thinking like a pricing strategist.