Page 52 - Harvard Business Review, Sep/Oct 2018

The Good-Better-Best Approach to Pricing

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offered immediate forgiveness (no five-year wait) along with a Yet many companies and industries haven’t adopted tiered
deductible rewards feature in which repair costs borne by the pricing—and there’s little rhyme or reason to which have, which
driver would decline by $100 for every year of accident-free haven’t, and why. G-B-B is a strategy every company should
driving. And at the highest end, a new Platinum plan (15% above consider. In my consulting work, I routinely see it used to
Standard) also included forgiveness for multiple crashes and simultaneously attract new high-spending customers and price-
a safe-driving bonus under which credits were issued for each conscious ones, dramatically boosting revenue and profits.
accident-free six months. (Disclosure: Among my clients is Harvard Business Publishing,
Consumers were enthusiastic: By 2008 Allstate had sold the publisher of this magazine.)
3.9 million Your Choice policies and was selling 100,000 new ones Although G-B-B is conceptually simple, implementation can
each month. A decade later the pricing plan remains attractive: In be tricky. If new offerings aren’t constructed and priced correctly,
2017, 10% of customers chose the Value plan, and 23% chose Gold existing customers will trade down, hurting profits. In this article
or Platinum. The company has no doubt that Your Choice drove I outline why G-B-B can benefit many firms. Then I present a step-
significant incremental growth. “There were a lot of skeptical by-step guide to devising, testing, and launching the strategy in a
people in the company,” recalls Floyd Yager, one of Allstate’s way that boosts profits and reduces the threat of cannibalization.
senior vice presidents. “But we demonstrated that car insurance
doesn’t have to be about being the lowest-price game.”
Your Choice is a classic example of Good-Better-Best Capitalizing on G-B-B
(G-B-B) pricing. There’s nothing new about the concept of G-B-B’s benefits come from three approaches: offensive plays
adding or subtracting product features to create variably priced aimed at generating new growth and revenue, defensive
bundles targeted to customers of varying economic means or plays meant to counter or forestall moves by competitors,
those who value features differently. It’s been nearly 100 years and behavioral plays that draw on principles of consumer
since Alfred Sloan introduced a “price ladder” to differentiate psychology, whatever the competitive landscape.
Chevrolets and Buicks from Oldsmobiles and Cadillacs, creat- Going on the offensive. Offensive plays can help brands
ing “a car for every purse and purpose” and powering General grow revenue in at least four ways. First, companies can dra-
Motors to overtake Ford. In the modern era, G-B-B pricing is matically lift margins by creating a high-end Best version that
evident in many product categories. Gas stations sell regular, persuades existing customers to spend more or attracts a new
plus, and super fuel. American Express offers a range of credit cohort of high spenders. In my work with companies, managers
cards, including green, gold, platinum, and black, with varying consistently underestimate customers’ willingness to spend
benefits and annual fees. Cable TV providers market basic, and the number of customers who might upgrade to Best, even
extended, and premium packages. Car washes typically offer at prices that were previously unthinkable. Across a range of
several options, separated by services such as waxing industries, it’s not unusual to observe up to 40% of sales landing
and undercoating. on the Best option.
For example, visitors at Six Flags amusement parks can buy
one of three Flash Passes (Regular, Gold, and Platinum add-on
► Idea in Brief options to the standard admission ticket, with prices varying by
day and location) to bypass lines and thus enjoy more rides. The
► THE PROBLEM ► THE IMPLEMENTATION Gold Pass, which costs as much as $80 a day on popular week-
Companies often crimp profits Key steps include identifying ends, reduces waits by up to 50%; the Platinum Pass, which can
by using discounts to attract “fence” attributes that will reach $135, reduces them by up to 90%. “It’s amazing, actually,
price-sensitive consumers and by prevent current customers from how many people pay for this,” then-CFO John Duffey told ana-
failing to give high-end customers trading down from the existing lysts shortly after the new passes were rolled out, in 2011. Many
reasons to spend more. offering; carefully choosing Flash Pass purchasers are existing customers who decide to
features and names to create
► THE SOLUTION clear differentiation and value; upgrade, but some are new customers who had previously been
put off by the notoriously long lines for rides.
A multitiered offering (typically with and setting prices using feedback
three options) can use a stripped- from in-house experts and, Second, and at the other end of the spectrum, a low-priced
down product to attract new when possible, drawing on Good offering can make a product accessible to price- sensitive
customers, the existing product to market research. or dormant customers for whom the existing product line
keep current customers happy, and (which typically then becomes a Better offering) is out of reach.
a feature-laden premium version And it can limit the need for discounts or sales on the existing
to increase spending by customers
who want more.

108 HARVARD BUSINESS REVIEW SEPTEMBER–OCTOBER 2018