Page 54 - Harvard Business Review, Sep/Oct 2018

The Good-Better-Best Approach to Pricing

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on and understand features and think about which ones they quickly understand its appeal. In my consulting work, I often
value—and how much they’re willing to pay for them. (See the suggest other pricing strategies but wind up helping implement
exhibit “Helping Customers Understand Good-Better-Best.”) G-B-B because it’s the option managers find the easiest to under-
An educational software company I worked with found that stand, explain, and get behind.
customers didn’t really grasp its myriad product features. So it
tested a G-B-B model that unbundled those features, creating a
Good offering (its core software), a Better one (the core software Brainstorming About
plus new electronic exercises), and a Best one (the core software Tiers and Features
and exercises plus one-on-one tutoring). Customer research
showed that the three-tiered model helped people differenti- When considering a G-B-B pricing structure, the first step is
ate the company from competitors—and indicated that half of to decide how many product versions to offer. As the name
potential customers would pay a premium for Better or Best. implies, the most common approach is three. In general,
(Because of a sudden leadership change, however, the G-B-B companies with a single existing product will designate it (or
model was never implemented.) something close to it) as Better, adding features to create Best
G-B-B can also shift customers from a binary “buy/don’t buy” and subtracting them for Good. But if taking away features
mentality to consideration of incremental value and spend- to create a Good offering isn’t feasible, companies can forgo
ing. This can work in two ways. First, customers prefer having that option and simply offer Better and Best.
choices to feeling under an ultimatum, so three differently Companies with complex products or a long buying cycle
priced options can give them a sense of empowerment. Allstate may be able to justify more versions. But too much choice is
CEO Thomas Wilson has identified this as a key benefit of the risky. In a well-documented study by Sheena Iyengar and
Your Choice policies, explaining that they moved people away Mark Lepper, researchers offered samples of jam to shoppers
from simply comparing Allstate’s prices with those of competi- in an upscale grocery store. When presented with six flavors,
tors. “If people [have] a choice in the conversation, they are not 30% of tasters made a purchase. When 24 options were on the
likely to switch [to a competitor] for $25 or $50,” he said in a July table, only 3% opted to buy. Researchers believe that when
2005 quarterly call. consumers have too many options, they become confused or
Second, when faced with multiple options, customers tend paralyzed with indecision—a phenomenon the psychologist
to decide more quickly whether they are going to buy some- Barry Schwartz explored in The Paradox of Choice.
thing, using their remaining time to focus on what. Having If a company is set on many offerings, it can be useful to
made that mental shift, they typically treat the Good version as group them in a way that turns consumers’ decision making into
a sunk cost, which makes them more amenable to upgrading. a two-step process. New York’s Metropolitan Museum of Art
Salespeople exploit this tendency all the time: For example, offers seven memberships. To minimize confusion, it divides
instead of detailing all the features of a $1,200 appliance, they them into two categories: Members Count plans ($80 to $600)
emphasize that “for only $200 more” than the entry-level $1,000 for people joining primarily because they want to visit the
unit, a buyer gets lots of extra bells and whistles. Rental car museum, and Patron Circle memberships ($1,500 to $25,000) for
companies highlight the full-size sedan you could be driving for those whose primary goal is philanthropic. Grouping member-
$12 a day more than the price of a subcompact. ships in such a way guides people toward a general category;
Companies can also use G-B-B to exploit the so-called once there, they can examine the G-B-B options in each.
Goldilocks effect: people’s propensity to choose the middle op- After a company has gotten a sense of how many tiers to
tion in a set of three. In his book Priceless, William Poundstone offer, managers can brainstorm about the features to include
recounts how Williams-Sonoma reaped unexpected benefits in each. Sometimes the decisions are obvious, but many of the
after launching a fancy bread machine priced at $429. That high- best G-B-B plans draw on unexpected features, as Six Flags did
end model flopped—but sales of the $279 model (previously the when manipulating wait times to create a consumer benefit for
highest-priced unit) nearly doubled. its Flash Passes.
A final argument for considering G-B-B relates to the real- To help companies consider a wide array of potential features
politik of instituting change. The simplicity of the G-B-B strategy and benefits, I use a tool called the Value Barometer, which lists
makes it highly compelling to senior executives. For change to 13 common product attributes that can be added, dropped, or
occur at any organization, top management must be committed, varied to create different perceptions of value. (See the exhibit
deploying political capital to sell others on the shift. Because “Pump Up the Value.”) Companies typically begin by identifying
managers have experienced G-B-B as consumers, they can features of the current offering that vary or would be easy to

110 HARVARD BUSINESS REVIEW SEPTEMBER–OCTOBER 2018