Abstract Vertebrate pigmentation patterns are highly diverse, yet we have a limited understanding of how evolutionary changes to genetic, cellular, and developmental mechanisms generate variation. To address this, we examine the formation of a sexually‐selected male ornament exhibiting inter‐ and intraspecific variation, the egg‐spot pattern, consisting of circular yellow‐orange markings on the male anal fins of haplochromine cichlid fishes. We focus on Astatotilapia calliptera , the ancestor‐type species of the Malawi cichlid adaptive radiation of over 850 species. We identify a key role for iridophores in initializing egg‐spot aggregations composed of iridophore‐xanthophore associations. Despite adult sexual dimorphism, aggregations initially form in both males and females, with development only diverging between the sexes at later stages. Unexpectedly, we found that the timing of egg‐spot initialization is plastic. The earlier individuals are socially isolated, the earlier the aggregations form, with iridophores being the cell type that responds to changes to the social environment. Furthermore, we observe apparent competitive interactions between adjacent egg‐spot aggregations, which strongly suggests that egg‐spot patterning results mostly from cell‐autonomous cellular interactions. Together, these results demonstrate that A. calliptera egg‐spot development is an exciting model for investigating pigment pattern formation at the cellular level in a system with developmental plasticity, sexual dimorphism, and intraspecific variation. As A. calliptera represents the ancestral bauplan for egg‐spots, these findings provide a baseline for informed comparisons across the incredibly diverse Malawi cichlid radiation.