A third option can flip the choice, even if it's inferior
Present a customer with two options, a high-end and a budget, and they often split: some choose each. The decision feels rational; they're making a real trade-off. But introduce a third option, the 'decoy,' that's clearly worse than the high-end (same price, fewer features), and something unexpected happens: the high-end option suddenly looks like the obvious choice. The decoy didn't attract customers (almost no one chooses it). Instead, it reshapes the mental landscape: the high-end is no longer just 'expensive,' it's now 'all the features at the price.' The budget option feels thin by comparison. Overall revenue per customer rises even though the decoy is almost never chosen.
Why the third tier shifts behavior
With two options, the customer is comparing relative value. With three, they're anchored by the decoy (which they reject) and then comparing the remaining two. The decoy must be asymmetrically dominated: worse than the high-end in every way, or at least the same price while worse. It must not be worse than the budget option, or it devalues the entire product. This is why SaaS pricing often adds a mid-tier between Free and Pro: the Free tier begins to feel inadequate (you'd outgrow it), and the Pro tier becomes the natural choice.