The Decoy Effect and Three-Tier Pricing: How a Third Option Changes Choices

An option nobody picks can change what everyone else picks

The decoy effect is the finding that adding an option almost no one chooses can change how often people choose the others. Huber, Payne, and Puto reported it in a 1982 study. If you are deciding whether to move from two pricing plans to three, it gives you a concrete way to think about the third one.

The size of the effect varies a lot by setting, though. It does not work the same way for every product, so the practical approach is to understand the mechanism and then test it lightly with your own customers.

What is happening

The study centers on an "asymmetrically dominated" option. Say you have option A and option B, each better on a different dimension. You then add A', which is clearly worse than A: no better on any dimension, and worse on at least one.

Next to A', option A looks good, so more people may pick A. A' itself is rarely chosen. Its job is to give people an easy reason to choose A.

People often do not judge value on an absolute scale. They judge by comparison with what sits in front of them. The decoy effect is one demonstration of that habit.

Applying it to three pricing plans

Pricing plans for a service are the easiest small-business case. Picture a low monthly plan and a high one, with a middle plan about to be added.

There are two broad ways to place a decoy:

• Put a slightly worse plan right below the plan you want to sell. It includes most of what the target plan has, costs only a little less, and lacks one or two features.
• Put an expensive plan above the plan you want to sell, so the target looks reasonable by comparison.

The first resembles the setup in the research. The second is usually discussed as price anchoring. They are easy to mix up, so decide which one you are aiming for before you design the page.

Whichever you use, make the decoy plan something a real customer could sensibly buy. If some people truly need it, you can serve them well.

Disputes and limits

The decoy effect is well known, but it does not reproduce everywhere. Later researchers have reported smaller effects, or none, when the setup changes. A choice task in a lab differs from a real purchase.

It also may not help when customers do not compare details, or when they have already decided what to buy. Products that people compare carefully before buying are more likely to be affected by how the options are laid out.

There is an ethical side too. If you build an option purely to make customers choose something they would not otherwise pick, and you would not want them to notice, you risk trust. A good test is whether you can explain who each plan is for.

Testing it carefully

Change only one thing at a time. If you alter the price, the feature wording, and the plan order together, you will not know which change mattered.

Also keep the comparison periods equal. The first and second halves of a month, or a busy and a quiet season, bring different customers. Take periods of the same length before and after the change, and put the number of times each plan was chosen side by side. While counts are small, a gap of a few could be chance, so extend the period rather than drawing a conclusion early.

If you see no effect, that is not necessarily a failure. It may mean your customers read the details closely and the explanation of each plan matters more than the layout.

What to do next

1. Write down your current plans and what a third one could add.
2. Pick the one plan you most want to sell.
3. Draft two layouts in plain text: one with a weaker plan just below it, one with a pricier plan above it.
4. Check whether the decoy plan has genuine buyers.
5. After changing the layout, record which plans people choose for one to two months and compare.

If you are unsure how to display prices or describe offers under consumer protection rules, check with a qualified professional.