What Is Decoy Pricing and How Can It Work for Your Business?

If you’ve ever upgraded your coffee size for just 50 cents more, or chosen between iPhone models from Apple, you’ve experienced decoy pricing.

This pricing strategy persuades you to spend more, or buy a specific product by giving you false price options to compare against. You feel like you chose the best value product, but your decision was influenced.

Learn how decoy pricing works and how you can use it to your advantage to improve sales for your brand.

What is decoy pricing?

Decoy pricing is when businesses show customers different price options to guide them toward a specific product (the target). By adding a slightly worse-value option (the decoy), the target product seems like a better deal. This pricing strategy works because we naturally avoid products that seem inferior or poor value.

When businesses use decoy pricing, they're trying to change how we see our choices. Sellers use this psychological effect to make customers view the higher-priced, more profitable item as the best value for money.

How the decoy pricing strategy works

When consumers shop, they compare options. Businesses show specific choices to make shoppers see the products in a certain way. They don't show all options, just the ones that help guide the shopper’s decision.

The setup

Think of decoy pricing like three characters in a story:

1. Expensive option: This high-priced choice makes the middle option seem cheaper.
2. Target product: This is what the business wants you to buy.
3. Decoy: This slightly cheaper option is designed to make the target look better.

Putting these side by side helps customers compare value and price. Your goal is to make your target product look like the best balance of cost and quality.

The decoy’s role

Your decoy should be designed to look less appealing than your target product, even though it's only slightly cheaper. 

For example, if your target product costs $100 with good features, your decoy might cost $90 but offer much less value, making that extra $10 seem worth spending. 

The difference could be in quality, quantity, or extras included. The decoy makes your target product look like the smarter choice.

The purchase

Decoy pricing works because of a mental bias called the "decoy effect." When customers see a clearly inferior option (your decoy), they naturally prefer what seems like the better deal, even if it costs more than they planned to spend. 

The decoy changes how customers see value, making your target product appear to be in the sweet spot. This helps you guide customers toward the product you want to sell while letting them feel they've made a smart decision.

Is decoy pricing ethical?

It depends on how you use it.

Decoy pricing walks a fine line between helpful guidance and manipulation. When used honestly, it can help customers find the best value. But if used to trick people, it can damage trust and raise ethical concerns.

When it’s okay

• All options are real products with real prices.
• Nothing is hidden or fake.
• It's similar to displaying products attractively in a store.
• Customers still choose freely, just with a gentle push toward what may be better value.

When it’s questionable

• Creating fake options that are purposely bad just to make another option look good
• Hiding important differences in small print
• Using made-up discounts or price levels

No specific laws ban decoy pricing in the US, Canada, UK, or EU as long as all options are real and honestly described. However, if you cross into misleading advertising or unfair practices, you could face repercussions from the regulating bodies in each area.

The bottom line: Decoy pricing itself isn't illegal, but how you present it matters. Being dishonest about prices or features could be considered deceptive, depending on where you are.

The consumer psychology of decoy pricing

Decoy pricing works by understanding how people make buying decisions. Like anchor pricing, it uses consumer psychology to influence how customers see value compared to price. Here's how it works:

1. Cognitive bias

Humans tend to prefer certain things based on their personal experiences, which is known as cognitive bias. 

When sellers set prices, they try to influence how consumers see choices, knowing they usually buy with limited product information. This means we often make assumptions and choose what feels most familiar.

2. Compromise effect

Most people avoid extremes and prefer middle options. When shopping, they usually pick the middle-priced choice as a good balance. 

For example, if software subscriptions cost $50, $100, and $150 monthly, many buyers will choose the $100 option. Since the price gaps are equal, the choices seem balanced in the customer's mind.

3. Attraction effect

Different price gaps can make one product seem more attractive than another. Economists call this the "asymmetric dominance effect," in which one specific price gap is designed to stand out. 

For instance, a software companie might price their Pro package just $5 more than Premium, while Premium costs $50 more than Basic. This makes upgrading to Pro look like a better deal than upgrading to Premium. Sellers use uneven pricing to highlight higher-priced but better-quality products.

Decoy pricing examples 

There are various ways to employ decoy pricing that may help your business generate more sales.

Subscription plans

Let’s say you offer tiered pricing options for your software:

• Basic Plan: $10/month – Limited features
• Standard Plan: $20/month – More features
• Premium Plan: $22/month – All features

The Standard Plan becomes the decoy. It pushes customers toward the Premium Plan, which feels like a no-brainer for just $2 more.

A well-known case study from The Economist used this strategy to offer three subscription types, dramatically influencing consumer choices.

Product bundling

Say you run an ecommerce store selling phone accessories. You want to sell more high-margin bundles that include multiple products. Here's how you might set up your pricing:

• Phone Case Only: $25
• Wireless Charger Only: $35
• Bundle: Phone case + wireless charger: $40

In this case, the phone case and charger sold separately are priced to make the bundle feel like a steal (a $60 value for $40). But you use the Phone Case Only option as the decoy, because:

• It’s not enough value for the price.
• It helps anchor the perception of the bundle as better value.
• The charger adds high utility for just $15 more.

Customers are nudged to choose the bundle, spending more than they originally intended, but feeling like they’re saving.

Volume-based

Imagine you’re a wholesaler of custom notebooks for businesses. You sell at three price tiers:

• 100 notebooks: $400 ($4.00/unit)
• 250 notebooks: $875 ($3.50/unit)
• 300 notebooks: $900 ($3.00/unit)

The 250-unit tier is the decoy—for just $25 more, the customer gets 50 more notebooks and a lower per-unit cost. Most customers will choose the 300-unit tier, which increases your sales volume and efficiency.

Charm

Although not strictly a decoy pricing method, charm prices rely on the consumer’s tendency to see a price just below a round number as more appealing, such as $49.99 rather than $50. Consumers see the first digit, which influences their price perceptions. If a basic price is $30 and the middle price is $40, a premium price of $49.99 might draw more buyers.

Decoy pricing case study

To show how the decoy effect influences the decision-making process, consider this well-known case study conducted by behavioral economist Dan Ariely. Ariely analyzed a real-world example from The Economist magazine, which offered three pricing tiers for its subscriptions:

• $59 for an online-only (web) subscription
• $125 for a print-only subscription
• $125 for both print and online access

At first glance, the print-only and combined print and web subscriptions seem oddly priced. Why would anyone choose the print-only version when they could get both for the same price?

That’s the point. Ariely presented this exact setup to a group of MIT students and asked them to pick one. The results were telling:

• 16% chose the cheaper web subscription
• 84% chose the print + web bundle
• 0% chose the print-only option

Then, he removed the print-only option—the decoy product—and gave another group of students only two choices: online-only or print + web. This time, the results flipped:

• 68% chose the web subscription
• 32% chose the print + web bundle

The higher-priced option lost its appeal by removing the reference point that made the bundle appear to be a better deal. The asymmetrically priced decoy (print-only for $125) had made the combo look like a bargain, even though most consumers were otherwise content with online access alone.

This experiment became one of the most cited in marketing research and consumer behavior circles. It showed how powerful a strategically placed decoy product can be in shaping consumer choices—even getting people to pay more for something they didn’t originally value.

Five steps to implement decoy pricing strategy

1. Choose the target product
2. Research the competition
3. Create a pitch
4. Draw contrasts
5. Track the results

If you want to try decoy pricing, keep in mind the strategy is meant to influence consumers without deceiving them. Here are five important steps when using decoy pricing.

1. Choose the target product

The target product or service is the one you really want to sell. It should be something familiar to your consumers, allowing them to make easy comparisons.

2. Research the competition

Studying your marketplace rivals can offer insight, and may influence how you use a decoy strategy. It’s important not to coordinate pricing with your competition, a practice known as price fixing that is illegal in most regions.

3. Create a pitch

Develop a sales pitch highlighting the target product’s quality, focusing on the key features and attributes that make it worth a higher price. The pitch needs to be factual.

4. Draw contrasts

Position the target product against other choices, ideally two: a low-price, low-value product, and the decoy, which can be a bit less expensive than the target product but of lower quality. Count on the decoy effect to nudge consumers in a particular direction—in this case, toward the higher-priced target product.

5. Track the results

Check regularly to see if your pricing strategy is working. Decoy pricing is meant to boost sales and profit margins by encouraging customers to buy higher-priced products. Be prepared to modify the strategy— some trial and error may be necessary to get the right balance for you and your customers.

Pros and cons of decoy pricing

Decoy pricing can bring some substantial benefits to your business, including:

• Attention: It draws customers and increases their interest in your products or services, particularly your higher-priced products.
• Efficiency: A decoy option can speed up consumer decision making, because the decoy allows shoppers to compare against your target product.
• Increased sales: It has the potential to boost sales, as an experiment with magazine subscriptions demonstrated. People were offered a $59 digital edition or a $125 print subscription. Most went for the cheaper online choice. When a third choice was presented, a combination of online and print for $125, almost everyone bought the combination.

At the same time, decoy pricing has some potential risks. These include:

• It’s not foolproof: Getting an accurate read on your customers’ psychology can be difficult. You may use a decoy pricing strategy correctly, but your target audience may respond in unexpected ways. That’s why it’s worth testing and adjusting the strategy as you learn how customers react.
• Customer dissatisfaction: Overuse of decoy pricing may lead to customer dissatisfaction. They may feel they are being misled about the quality of your products for the price they paid. Consumers also face choice overload when presented with too many options.