Decoy or Anchor?

Blair differentiates between decoy pricing and price anchoring, which are two different techniques that are often confused for each other, and can increase your average proposal value in multi-option pricing when used appropriately.

Links

“Decoy or Anchor?” article by Blair Enns for winwithoutpitching.com

“The Perils of ‘Good/Better/Best’ Pricing” 2Bobs episode

Transcript

David C. Baker: Pricing decoy or anchor. Well, I have been familiar with a high anchor. You can't see my air quotes right now, but I have been familiar with a high anchor for many years. This is the first time I've ever heard of decoy pricing. Should I be embarrassed? That's the first question today.

Blair Enns: No, I was going to say it's a fad.

David: Not about that. Maybe other things.

[laughter]

Blair: Should you be embarrassed, yes, about not hearing about decoy pricing? I wrote this post that we're going to talk about decoy or anchor, comparing these two pricing techniques, because I had a bunch of clients, a bunch, maybe two, refer to all forms of three-option pricing as decoy pricing, the idea that there's a decoy. I was cringed at that word. We can talk about why that is. I wanted to make the distinction between adding a third option as an anchor and adding a third option as a decoy.

They both have this effect of moving the average selected price to something higher, either the middle option or the higher option. On average, when you use a decoy or a high anchor properly, your average proposal value, your average settled price goes up. The difference ends there, though. There's something about the decoy. When you're on the end of decoy pricing, it doesn't feel good. You sense you're being manipulated. That was the point of this post.

David: You're the duck flying down to meet other ducks.

[laughter]

David: Shit, I just got shot at. That wasn't fair. Maybe explain what decoy pricing is in terms of the three options where that fits and all that.

Blair: A decoy is a replica duck. It's painted. You put it out in the field. You sit there, and you're duck blind. [quacks] You call the ducks, and the ducks in the air see these ducks on the water. They come in on land, and then you fill them full of lead. [laughs] That's what a decoy is. You want to talk about decoy pricing?

David: Let's say that somebody gets three options, and one of them is a decoy. Where is the decoy in those three options, and what's its role?

Blair: The decoy is like this throwaway fake thing that is inserted in the middle. It's always inserted in the middle. The goal of the decoy is to move you from choosing the cheap option to the expensive option. A classic example is movie theater or popcorn. I don't have a movie theater anywhere near me. I don't know what movie theater popcorn goes for anymore. In the post, I wrote the example. Say small is $4, medium is $7, and large is $7.95. A few people emailed and said $4 for popcorn. You haven't been to theater lately?

David: Yes, right.

Blair: The point is if the small is $4, the medium is $7, and the large is $7.95, you're almost always going to choose the large, $7.95. The medium is the decoy because you're thinking, "Well, for an extra $0.95, I can get 25% or 50% more popcorn. Even though I'm not hungry, it's like the maximum value option. You will skew towards the large.

David: Yes, maybe I'll make a friend, and I can share my popcorn.

Blair: [laughs]

David: The $0.95 is worth the risk.

Blair: Yes, but the medium was never there to be purchased. If you're comparing small versus medium and you can't decide, "Oh, should I go smaller or the medium?" you're going to look at the large and go, "Well, large is the best value. Even though I'm not that hungry, I'm going to buy the large." That's decoy pricing. Now, the problem I have with decoy pricing is I am that person who goes into the theater. The decoy nudges me to buy the most expensive option, and I spend the next 15 or 20 minutes resenting that I've been manipulated by this pricing. Can you identify with that?

David: No, because I just gladly do the $7.95. [laughs]

Blair: Because you don't care about money. [laughs]

David: Let me summarize this in layman's terms and tell me if this is accurate. A decoy is in the middle. It nudges you to the high and makes that high one acceptable, but an anchor makes the middle acceptable because it seems so reasonable against the high. They're doing different things, and they're pushing you in different directions, right?

Blair: Yes, they are. We'll come back to the anchor and unpack that a little bit more. I want to talk about this pretty famous study that almost everybody quotes on the decoy effect. It's by Dan Ariely. I thought he had originally worked with The Economist magazine and changed their prices, but it turns out I reread that part of the book this morning. He was teaching at MIT Sloan School of Business.

He would put these options to subscribe to The Economist magazine in front of his students, and then he would measure what they selected. Without a decoy, he would put forward these options. Two options, no middle decoy. You could subscribe to the print-only version of The Economist magazine for $59, or you could subscribe to the print and online version for $125.

David: Just two options.

Blair: Two options. Without a decoy in the middle, 68% of the people took print-only, 32% took the print and online. Print and online was $125, but he then added a decoy in the middle, where it was online only for $125. It's so clearly a decoy because it's the same price as getting the print and online. You can have the print only for $59, you can have online only for $125, or you can have print and online for $125. What do you think happened?

David: Well, I presume more people picked the print and online.

Blair: Yes, 84%, where, previously, it was 32%. The decoy moved, I don't know, I'm not good at math, a whole lot of people, over 50% of the people, from choosing the cheapest option to choosing the most expensive option by putting this fake option in the middle.

David: Have you done much reading on whether this applies to professional services? This example and the one about popcorn are retail purchases. You're purchasing something. Does this work with the service side?

Blair: Well, I haven't done any reading on it, but I have a strong opinion on it. My strong opinion on it is the manipulative effect of this. My opinion is pricing like this on products or transactional services, there's a little bit of collateral damage, but people move on from it fairly quickly. Like I said, I'm a little bit resentful for about 15 minutes after I buy the large popcorn because I see what they're trying to do with that pricing. It's so fake, it's ridiculous. Why is it even there?

David: You don't feel that way about high anchor pricing?

Blair: No, we'll come back to that. Imagine I share a three-option proposal with a prospective client, and I say, "For your budget, $10,000, we can do this," or "For $15,000, we can do this, plus that," or "For $15,000, we can do this, plus that, plus the other thing." The client would look at me and go, "What the fuck is the point of the middle option? You're messing with me," and they would be absolutely right. I'm absolutely messing with them.

It's there as a form of manipulation. Whereas, yes, the high anchor is a nudge, but we'll unpack this. I don't see it's a manipulation at all. I see it as you, the professional, the expert, living up to your obligation to challenge the client to think bigger. Let them decide whether or not they want to think bigger about the project and invest more in the project. I see a high anchor almost as a professional responsibility and not as much as a nudge, and certainly not a tactic whose sole purpose is manipulation.

David: We were doing an episode a while ago, and it was called The Perils of 'Good/Better/Best' Pricing. There were lots of things that were interesting in that episode. The one thing that really struck me that I had never thought of is the fact that high anchor is just not more of the same. It should be a different approach to it. That's one difference with a high anchor because in this decoy pricing, it's just more or less or whatever, it's the same thing. With high anchor pricing, it's not more of the same. It's a different approach, typically, right?

Blair: Well, not always. It can be more of the same. As I'm fond of saying, the lowest expression of this three-option pricing is three different buckets of different sizes or different amounts of inputs or outputs. It's still valid. It's just the lowest expression of this idea. The highest expression of it would be three entirely different ways of doing business together.

David: Okay, got it. When I see people talk about a high anchor, I don't hardly ever see anybody express that high anchor as an entirely different way of doing business. It's just a bigger bucket.

Blair: Yes, I think that's the norm. I would like people to move beyond that if they're able. If we go a little bit deeper into the high anchor, the key difference between a decoy and an anchor is the anchor is the additional third option. Let's say you're already working with options, and you're scoping out an engagement for a client. You think, "Oh, there's legitimately two different ways we could do this. There's the quick and dirty, less expensive one, and there's the more elaborate one." You're considering putting two options in front of the client. Then you read Blair's book, Pricing Creativity: A Guide to Profit Beyond the Billable Hour. Ding, ding, add, add, add, insert.

David: [laughs]

Blair: This is my ad read voice. You think, "Oh, I see the power of a high anchor." If I can add an anchor at a third more elaborate, more expensive option, and it's only the anchor if I start with that, if it's the first one that I talk about. If I can add that, then I can push the client to maybe spend more. A key point I would add about this is you're not just pushing the client or nudging the client to spend more. You're nudging the client to think bigger about the opportunity in front of them because, very often, our listeners will be scoping out a project for a client, or they might meet with an existing client.

The client is explaining the project to them. They're positioning the project as something that's tactical, that should get done quickly, and with limited budget. As the client is describing the project, the expert doing the intake is thinking, "I can't believe you're thinking about it this way. There's a massive opportunity. We could think bigger. You could invest more. We could take some more time. You could actually really create a meaningful amount of value here if you thought about the project differently."

In those scenarios, I think you have a responsibility to push your client to think bigger, not to make them think bigger. In a three-option proposal with a high anchor, you're not trying to talk the client into any one of the options. The anchor is there to do its job. You start with the anchor with language like, "I first brief my team to think creatively and expansively about what's the most that we could do or deliver the highest degree of certainty that we can help you create this value. We've come up with a novel solution. It's fairly elaborate and expensive. It's priced at really big number."

Then, if the client came to you with the stated budget and they had a stated deliverable they were looking for, you would go to that option next, and then you would go to something in the middle. Now, what you're doing with the high anchor is you're challenging the client to think bigger about the situation. You're not trying to convince them that this is the one that they should take. You should never be in that position.

When you're putting forward a three-option pricing, you're just expressing a range of how they could do this, how they could think about this at different price points, and then you facilitate a discussion about the pros and cons of each. You're not trying to convince them to take the anchor. In fact, the job of the anchor is actually to make the middle one look more palatable, although some people will choose the anchor from time to time. I just don't see it as manipulative, the way decoy pricing strikes me as manipulative.

David: Yes, I think there are some of us who have manipulative buttons that are popped up everywhere that see manipulation. We're more sensitive to manipulation than other people. There might be a little bit of collateral damage for those people. I think I'm one of those people where I automatically distrust this sort of thing. I was trying to put myself in the shoes of the person you were just talking to in that simulation a minute ago.

I wouldn't react negatively to that, especially if right after that, you graciously went on to talk about the budget that I had expressed to you, what that would get me, right? Then you would let me bring the conversation back to that out of curiosity and says, "Oh, that's really interesting. Hey, before we go on, can I ask you a question about the big thing?" If I bring us back to that, then I wouldn't feel sold to, right?

Hopefully, there's enough of an intriguing set of possibilities in what you bring to me that I would want to bring it back. I'd never want somebody to be pressing me to take that bigger one. It's not just about the options. It's about how you present them and whether you're a confident salesperson, and you're listening carefully and paying attention to the signals that the person you're selling to is sending to. I think that'd be critical.

Blair: Conversely, if there was an option that I was presenting to you that was just clearly bullshit, was fake, I knew you were never going to take it, that's manipulation?

David: Yes, for sure. To put a proposal like this together takes a lot more work on your part, because you do have to understand my situation well enough to come up with something that is not manipulative, that does follow the contours of what I'm facing, matched with the contours of what I'm willing to accept, my risk aversion, all that kind of thing. There's a note in your article about people retreating from the dangers of the edges to the safety of the middle. Can you apply that to these discussions, too?

Blair: Yes, so the principle is called extremeness aversion. I feel like I talk about it in every second or third option. That's this idea that when we're presented with options, we retreat to the safety of the middle. As you pointed out, what you're doing with the high anchor is you're moving the client's safe zone from their budget. Client comes to you. They've got a budget. You come back with a proposal, and you say, "Okay. Well, here's what we can do for your budget, but I have this other option that's more expensive than your budget." If it's just two options, here's one at your budget, here's one higher than your budget.

Where's the client's safe zone? It's their budget. If you add a third one, even higher, now, you're invoking this principle of extremeness aversion. In my eyes, you're effectively moving the client's safe zone from their budget to the middle option, because the danger of the budget option now becomes the danger of under-buying. There is always the danger of over-buying in the most expensive option. Faced with three options, you're leaning towards the least expensive one. The danger is that you will under-buy. Therefore, the safe zone moves to the middle, and that's extremeness aversion at work.

David: Yes. You can flip that around, too. There's quite a sinking feeling when you realize a client would have bought a lot more from you than they did. [laughs] Like when they misunderstand something, they just misheard something. Whatever they thought they heard was much higher than what you said, and it didn't faze them. It's like, "Oh, goodness, I just undersold this." I've had that happen before in an earlier life.

Blair: I remember the year. It was 2012. I was pricing a speaking engagement overseas. They asked me for the price, and I said $2,500. They talked for a minute, and then they said, "Sorry, did you say $25,000 or $2,500?" I was like, "Oh, I said 'thousand.'"

[laughter]

Blair: I left a digit on the table. We've all been there. We've all been there. There's something you said earlier that caused me to want to bring this up. There is a caveat to this idea that decoy pricing is manipulative and that you should opt for high anchors instead of decoys. The caveat is, and it's more relevant as more time goes by, because as more time goes by, more agencies are productizing their services and effectively becoming product companies.

They've got this suite of services. AI is forcing that because it's killing the labor-based pricing model. There's this natural transition to everybody productizing their services. If you're productized services sold at scale, and that doesn't include most agencies, but it can include a lot of them. If you have a more affordable product that is sold at scale that people can buy on your website, I think decoy pricing is perfectly acceptable.

I think there's no lasting damage. I think the negative effect of a decoy effect when you're experiencing it on a website in a purchase situation, as opposed to in a sales conversation where you're being sold to, I think it's not that meaningful. It's like my popcorn experience. It's not that meaningful, and it doesn't last that long. I think if you are selling products and people can buy those products on your website, then go ahead and use decoy pricing if you think it's more effective than a high anchor.

David: In general, decoy pricing would maybe apply to that small exception you just mentioned. Don't confuse that with high anchor or anchor pricing. Anchor pricing in your methodology has quite a valuable role to it. What am I missing? Are there other times when decoy pricing would make sense, or probably not? You don't want people to confuse the two either.

Blair: Well, sold at scale products that are purchases rather than sold. When you really only have two clear options, and you can't think of a high anchor, then you could consider putting a decoy in the middle to nudge people from the cheapest option that you have to the more expensive one.

David: You talked a lot, not just today but in other episodes and in your writing, and the stuff that you talk about in front of groups, that you want to present yourself as the expert that you would want to hire. The sale is the sample, right? As we apply that to this, would it be fair to say that if you're hiring an expert, you don't want the expert just to let you self-diagnose? You want them to think bigger. Maybe not force that option on you, but to at least help you think bigger about what could be, and that's what the high anchor could be. Is that what you mean by acting like the expert you want to hire?

Blair: Well, that's part of it, so I think any expert has-- Obligation might be a little strong, but I don't know. I'm quite comfortable with the idea that you have an obligation to challenge your client to think bigger, to expand their range of options. I don't think there's anything manipulative about it. It starts to become manipulative when you start building a case and trying to convince them to buy the most expensive one.

Because if they're going to buy the most expensive option or anything over their budget, they're taking on risk. You need to acknowledge the risk they're taking. You shouldn't be in a position to force them to take that risk on. Also, this idea that because I think decoy pricing in the sale of professional services is a little bit manipulative, in that you're putting something forward that, by definition, is fake.

David: That's what decoy means.

Blair: It's a decoy. You're putting forward an option that you have no intent on them buying, and you know it does not make sense for them to buy. What does that say about you, the advisor, that would be working with this person?

David: Right, okay. Now, I see what you're saying, yes.

Blair: If the sale is the sample of the engagement, and you're putting forward these disingenuous options, what does that say about your character and what you're going to be like to work with?

David: Yes, okay. Anything else we should add here?

Blair: I have this urge to go duck hunting, but I've never hunted ducks in my life.

David: You're just going to shoot my decoys.

[laughter]

David: Thank you, Blair.

Blair: Thanks, David.