Latest / The Pricing Marketing Podcast with Fexingo: Price Anchoring, Bundling, and Conversion Pricing / How a $75 Espresso Machine Anchors the $400 Model
Transcript
- Lucas: So you walk into a kitchen appliance store, and on the shelf, there's an espresso machine for 75 dollars. Looks basic. Plastic casing. One button. No milk frother. Luna: Right — the kind of machine you'd probably only buy for a dorm room or a vacation rental. Lucas: Exactly. And right next to it, there's a machine for 400 dollars. Stainless steel, programmable settings, built-in grinder, the works. And then — and this is the key — there's a third machine for 250 dollars. It's good, but not as good as the 400-dollar one. Luna: So the 75-dollar machine is the decoy? It's not meant to sell well — it's meant to make the 250-dollar model look reasonable and the 400-dollar one look like a justified splurge? Lucas: That's exactly it. The 75-dollar machine anchors your sense of what a baseline espresso machine costs. Once you see that, the 250-dollar one feels like a big upgrade for a moderate price increase. And the 400-dollar one becomes the 'premium but aspirational' option. Luna: But here's what's interesting — a lot of stores don't actually expect to sell many of the 75-dollar machines. They're loss leaders, sometimes even just props on the shelf. Lucas: Right. And the thing is, this isn't some niche tactic. You see it everywhere. Nespresso does this with their entry-level machines — the ones they sell for under 100 dollars, often through partnerships or bundles. Those machines are deliberately limited. You can't adjust the cup size, you can't use your own coffee. But they exist so that when you see the 200- or 300-dollar machine, you think, 'Well, for just a little more, I get so much more.' Luna: And the data backs this up. A 2023 study in the Journal of Marketing Research found that when a decoy product is added to a set of two options — a cheap and a premium one — the premium option's share of sales increases by an average of 18 percentage points. Lucas: That's huge. And it's not just espresso machines. This is the same logic behind why Apple sells a 16-inch MacBook Pro for 3,500 dollars when most people probably only need the 14-inch for 2,500. The 16-inch is the anchor that makes the 14-inch feel like a good compromise. Luna: So the decoy doesn't have to be cheap. It can be expensive too. Lucas: Exactly. The key word is 'asymmetric dominance.' The decoy is strictly dominated by one option — meaning it's clearly worse in some dimension — but it's not dominated by the other. So it pushes you toward the option that dominates it. Luna: Right. So in the espresso machine example, the 75-dollar machine is dominated by the 250-dollar one on features, but not by the 400-dollar one on price. So it funnels you toward the middle. Lucas: And there's a beautiful real-world test of this from 2022. A company that sells coffee subscriptions ran an A/B test on their pricing page. They had a basic plan for 10 dollars a month and a premium plan for 25 dollars. They added a third 'deluxe' plan for 35 dollars that was identical to the premium one but with a few extra perks. The conversion rate to the premium plan jumped by 14 percent. Luna: So the deluxe plan was the decoy. It made the premium one look like the sensible middle ground. Lucas: Exactly. And that's the psychological principle at play here. People don't evaluate options in isolation. They compare. And when you give them a comparison that makes one option look obviously better on value, they gravitate toward it. Luna: But there's a risk. If customers figure out that the cheap option is deliberately hobbled, they might feel manipulated. Nespresso gets some flak for that — people complain that their entry-level machines are too basic. Lucas: That's a fair point. But I think the key is that the decoy has to have a legitimate reason to exist. The 75-dollar machine isn't a fake product — it's a real machine that some people genuinely want. It just happens to also serve as an anchor. And I think that's the difference between a clever pricing strategy and a deceptive one. Luna: Yeah, that makes sense. So for businesses listening, the takeaway might be: don't just add a decoy for the sake of it. Make sure it serves a real segment of your customer base. Lucas: Absolutely. And one more thing — the decoy effect works best when the options are clearly differentiated on one key dimension. For espresso machines, it's features versus price. In SaaS, it's often seats versus features. Dropbox does this really well — they have a free plan, a Plus plan for 10 dollars, and a Family plan for 20 dollars. The Family plan is basically two Plus accounts with extra storage, so it makes the Plus look like a good deal for individuals. Luna: Right, because the Family plan anchors the price higher, so 10 dollars feels like a steal. Lucas: Yeah. And you know, I was thinking about this the other day — if any of these marketing conversations have sparked something you've actually used at work or in your own business, it's worth mentioning that listener support is what keeps this show ad-free. A couple of dollars a month genuinely makes a difference. There's a page for that — buy me a coffee dot com slash fexingo. Luna: It's true. We get messages from listeners saying they tried a pricing tweak we talked about and saw a real lift. That feedback is what keeps us going. Lucas: So back to the decoy effect — we should talk about where it can backfire. If the decoy is too similar to the target option, customers get confused and may just choose the cheapest option out of annoyance. Luna: Yeah, there's a classic example from a 2020 study by the University of Chicago. They looked at a car rental site that offered a compact car for 30 dollars, a full-size for 40, and a luxury for 80. The luxury was clearly the decoy, and it worked — sales of the full-size went up. But when they replaced the luxury with a 'premium' car for 42 dollars — barely different from the full-size — sales of the full-size actually dropped. Lucas: Because people thought, 'Why pay 40 when I can get something almost identical for 42?' They got suspicious. Luna: Exactly. So the decoy needs to be clearly different, not just a minor tweak. Lucas: And that's why the espresso machine example works so well. The 75-dollar machine is obviously basic. The 400-dollar one is obviously premium. The 250-dollar one sits right in the middle, and it becomes the 'smart' choice. Luna: Let's talk about one more application — digital subscriptions. I've seen a lot of news sites use a three-tier model: a digital-only plan for 10 dollars, a premium plan with print for 30, and a 'deluxe' plan with extra newsletters and events for 100. The 100-dollar plan is the decoy that makes the 30-dollar one look reasonable. Lucas: And what's interesting is that the 100-dollar plan might actually be a 'phantom' decoy — meaning very few people buy it, but it still does its job psychologically. The New York Times has something like that with their All Access plan. It's priced much higher than the basic digital, and it's probably not a top seller, but it anchors the value of the mid-tier option. Luna: And you don't need to sell many of the decoy for it to work. In fact, if you sell too many, you might be underpricing your main product. Lucas: That's a great point. The decoy's job is to be a reference point, not a revenue driver. If it starts selling well, you've probably set your main pricing too high. Luna: So next time you see a three-tier pricing page, ask yourself: which one is the decoy? And then ask: does it make the option I actually want look like a better deal? Lucas: And if you're building a pricing page yourself, start by identifying which option you want people to choose. Then build a decoy that makes that option look dominant on the dimensions that matter most to your customers. Luna: That's a solid takeaway. And maybe test it — because every audience is a little different. Lucas: Exactly. Run an A/B test with and without the decoy. You might be surprised how much of a lift you get.