What is decoy pricing and does it work?

Add a worse third plan so your target plan looks better, then test it.

Impact
Medium
Effort
Low
Filed under
Revenue, Conversion
Updated

Decoy pricing is adding a third plan that is clearly worse than one of your other plans, so the better plan looks like the obvious pick. The extra option costs the same as your target plan but gives less, or costs more for little extra. It is cheap to test, but the evidence is mixed: it works in some studies and fails to show up in others, so run it as an experiment rather than a sure thing.

How to do it

  1. Pick the plan you want most people to buy (the target). It is usually the middle or top plan.
  2. Design a decoy that is worse than the target on every point a buyer compares. The classic version has the same price as the target but fewer features, or a slightly lower price with much less. The decoy should be easy to compare with the target and a bit awkward next to the cheap plan.
  3. Put the decoy next to the target on the pricing page, with the same feature rows in the same order. The comparison only works if buyers can see that the target beats it.
  4. Keep the decoy real: something you will sell and fulfill at the listed price.
  5. Test it. Split traffic between the pricing page with and without the decoy and compare the share of buyers who pick the target plan and your revenue per visitor. Keep it only if both go up.

Examples

The Economist subscription (Dan Ariely). In *Predictably Irrational*, Ariely describes offering web-only at $59, print-only at $125 and print plus web at $125. As The Decision Lab summarizes it, Ariely ran this as a classroom exercise with his students: 84% chose print plus web with the print-only option on the list, and nobody chose print-only. A second group of students saw the list without print-only, and 68% chose web-only and 32% print plus web. This was an experiment with students, not a test on The Economist's own website, and no sample sizes are given in the summary. Wikipedia's decoy effect article flags the without-decoy figures as needing a citation. Treat it as an illustration of the mechanism, not a forecast for your page.

An online diamond retailer. In a 2020 *Marketing Science* paper, Chunhua Wu and Koray Cosguner studied sales data from a leading online jewelry retailer. Some diamonds were dominated by others (similar but worse). The authors estimate that shoppers noticed these pairs only 11% to 25% of the time, but when they did, the sale rate of the dominant diamond was 1.8 to 3.2 times higher. They estimate the effect raised the retailer's gross profit by 14.3%. The authors say the effect had been shown in lab experiments but not verified in a real product market. This is one retailer and one product category, in a market with many near-identical items. Read the abstract on the author's site.

What it looks like in practice

Say you sell a scheduling tool with Starter at $12 per month (1 calendar) and Team at $49 per month (10 calendars, reminders, reports). Adding a "Team Lite" at $45 per month (5 calendars, no reports) makes Team look like the better buy next to it. You would then watch whether Team's share rises, and drop Team Lite if Starter signups fall or refunds rise.

When it backfires

  • The evidence is disputed. In 2014 the *Journal of Marketing Research* published two papers questioning whether the effect holds up in realistic buying situations: Frederick, Lee and Baskin ("The Limits of Attraction") and Yang and Lynn. Wikipedia sums up this line of work as "some research suggests that the attraction effect does not appear in realistic purchasing scenarios." A 2016 *Palgrave Communications* paper says renowned decoy studies "have resisted replication" and argues some failures come from suboptimal initial conditions. Expect a small or zero effect on many pages.
  • Extra tiers add reading. Each added column is more to compare, and a plan nobody would pick can read as a trick.
  • Do not fake the anchor price. A decoy is fine when it is a real offer. Listing a "regular" price you never charged to make a deal look better is a different thing. The FTC's guide on former price comparisons says a comparison is legitimate when the former price is "the actual, bona fide price" at which the item was offered on a regular basis.

Questions people ask

What is decoy pricing? It is a pricing layout with a third option that is deliberately less attractive than one of the other two, so that one looks better by comparison. Researchers call it the decoy effect or attraction effect. Joel Huber, John Payne and Christopher Puto described it in 1982.

Does it work on SaaS pricing pages? There is no public, controlled data on SaaS pricing pages specifically. The diamond retailer study is the closest real-sales evidence listed here, and it covers one product category. Test it on your own traffic.

For another pricing test that needs little setup, see limited early-bird pricing.

Sources

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