Page 56 - Harvard Business Review, Sep/Oct 2018

The Good-Better-Best Approach to Pricing

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the Rolling Stones sold seats for just $85, but those seats came
with a catch: Concertgoers wouldn’t learn their location until
arriving at the arena. That was a significant fence for many fans,
who would rather stay home than sit in a poor location. And
paperback versions of books previously published in hardcover
utilize an obvious fence: They appeal only to readers who don’t
mind waiting a year or more for the book. Companies seeking to
implement Good offers must find similarly effective fences.

Defining and Pricing Bundles
To choose the fence attributes that will separate their Good and
Better offerings, companies should look for features that have
both wide and deep appeal (meaning that most customers want
them and consider them vitally important) and are somewhat
costly to produce. The combination of high appeal and high
cost means that if the feature is part of the Better but not the
Good offering, relatively few people accustomed to Better (that
is, existing customers) will consider Good—but those willing
to do without the feature can enjoy a significant discount. For
instance, when the New York Times launched its digital subscrip-
tions, in 2011, it moved to a G-B-B model in which the physical
paper (which many subscribers were loath to discontinue, and
which is costly to print and deliver) served as a fence attribute.
That fence is effective enough to support a hefty price differen-
tial: An all-access digital subscription currently costs $324 a year,
whereas adding print delivery brings the price to $481 and up,
depending on location.
The same qualities—appeal and cost—that help companies
choose fence features will also guide them toward features that
belong in Best. Those should similarly appeal to a wide segment
of buyers, but ideally they will cost relatively little to include so
that the company can keep high margins on Best.
When Southwest Airlines created the Business Select
package as its Best offering, about a decade ago, it identified
high-appeal/low-cost items such as priority boarding, extra
frequent-flier miles, and free cocktails as amenities worth
including. Bundling those relatively inexpensive amenities
in a premium package delivered $73 million in incremental
revenue in the offering’s first full year.
High-appeal/low-cost Best features are often less about
the actual product and more about the customer experience.
For instance, quicker delivery time can be part of a Best offer.
And in some industries, guarantees or warranties can deliver
high perceived customer value at little cost, depending on the
hurdles that must be overcome to redeem the guarantee or on
the expected utilization rate. For example, the length of the
warranty is the major differentiator between Good, Better,
and Best versions of car batteries—products that behave fairly

112 HARVARD BUSINESS REVIEW SEPTEMBER–OCTOBER 2018