Implementing good-better-best pricing will attract new business and boost profits, writes Rafi Mohammed for Harvard Business Review.
Price matters, but simply focusing on offering your product at a lower price than your competitors doesn’t work. You probably already know that. But rethinking your approach to pricing can bring multiple rewards.
In 2005, insurance company Allstate launched Your Choice Auto, a programme offering three new vehicle insurance policies. It provided alternatives to its ‘standard’ vehicle insurance policy: ‘value’ (priced 5% below its standard policy), ‘gold’ (priced 5% to 7% above its standard policy) and ‘platinum’ (priced 15% above its standard policy). By 2008, had sold 3.9 million Your Choice Auto policies, and was selling 100,000 per month.
Your Auto Choice is an example of good-better-best (G-B-B), a tried and tested tiered approach to pricing that, should you choose to adopt it, could benefit your business.
WHY ADOPT G-B-B?
Pricing consultant Rafi Mohammed – author of The Art of Pricing: How to Find the Hidden Profits to Grow Your Business and The 1% Windfall: How Successful Companies Use Price to Profit and Grow – identifies three elements of G-B-B: offensive plays, defensive plays and behavioural plays. Each will benefit your company in a different way.
OFFENSIVE PLAYS
Going on the attack is the most exciting part of adopting G-B-B.
1) Create a ‘best’ product-offering. This will persuade your existing customers to spend more or attract a multitude of new customers wowed by your new high-end offering. You can expect this best version to account for up to 40% of sales.
2) Create a ‘good’ product-offering. This will attract price-sensitive customers who were previously unable to afford your product. This will limit the need for frequent discounts and sales, both of which can have a negative effect on pricing power in the long term.
Uber’suberPOOL shows the effectiveness of a well thought-out ‘good’ offering. Several customers share a car going in the same general direction, which means multiple pickups and dropoffs, and therefore a longer journey, but for as much as 50% below a standard uberX. UberPOOL now accounts for 20% of all Uber rides.
3) Create a ‘new best’ product-offering. For example, in 2015 Patrón Spirits introduced Roca Patrón, an exclusive tequila produced using the tahona process, in which the agave is crushed with a two-tonne chunk of volcanic rock, and sold for US$69 per bottle.
It is projected to sell 60,000 cases in 2018, and since its introduction, sales of Patrón Spirits’ lower priced tequilas have risen. Roca Patrón created what Lee Applbaum, the company’s chief marketing officer, calls a “brand halo”.
4) Create a lower-priced ‘good’ product-offering. For example, Apple Inc’s iPhone SE, which sells for US$349, compared to US$999 for the iPhone X. It’s cheaper, but it’s still Apple Inc and it’s still an iPhone, which means extra revenue from iTunes and App Store sales, iCloud storage and accessories.
DEFENSIVE PLAYS
Sometimes you have to protect yourself from the competition.
1) Do not lower your prices. Struggling in the face of competition from a low-cost rival? Don’t panic and enter a race to the bottom. Sales might drop by 15%, but if you lower your prices, 100% of customers will be paying less.
2) Be cautious. Don’t be tempted to launch a “fighter brand”, an entirely new low-cost product designed to go head-to-head with a low-cost competitor. It is a big risk and will drain your resources. Creating a new ‘good’ productoffering is a better option.
BEHAVIOURAL PLAYS
G-B-B can play into consumer psychology.
1) Help your customers focus. Packing multiple features into a single productoffering can confuse your customers. Adopting G-B-B will encourage them to better understand which features they value and are willing to pay for.
2) Offer your customers choice. If your customers have a choice of product offerings they will feel empowered and focus on making that choice rather than on the price.
3) Take advantage of the ‘Goldilocks principle’. If people are offered three options, they have a tendency to go for the middle option.
HOW TO BUILD YOUR G-B-B OFFERINGS
You are aware of the benefits of G-B-B; now it’s time for you and your team to start thinking about your product offerings in detail. It’s time to brainstorm.
1) Decide how many offerings to create. You have to decide how many products you are going to offer. This should be simple. We’re talking about G-B-B, so three is the magic number. Customers like choice, but not too much choice.
2) Pick the features you’ll include. More difficult is choosing what features each product offering should include. You can use what Mohammed refers to as a “value barometer” of 13 common attributes to assess the merits of potential features. For example, if a product attribute is service, your ‘good’ product offering would offer a basic level and your ‘best’ offering would offer a high level.
3) Find your ‘fence’ attributes. When you have a list of potential features for each of your three product offerings, it is time to analyse them. Does the feature have mass appeal? How would adding or subtracting it affect the cost of creating the product offering? Is it a “fence” attribute, i.e. an attribute that prevents existing customers opting for a cheaper offering?
These “fence” attributes are what you are looking for. Perhaps the biggest risk of G-B-B is existing customers choosing the lower-priced offering. “Fence attributes prevent this, by making the downgrade a difficult, unpleasant, or painful choice,” writes Mohammed.
4) Conduct a cost-benefit analysis. Now you have identified the fence attributes, you must conduct a cost-benefit analysis. The features of your ‘best’ product offering should have a high appeal but not cost too much. You want to keep high margins on your best product offering. “When devising best bundles, companies need to be realistic about the attributes they can include,” writes Mohammed.
The features of your ‘better’ product offering should have high and deep appeal, i.e. customers consider them vitally important, and be somewhat costly. This means most existing customers, used to certain features of your current product offering, will not be willing to trade down to your good product offering, but those who do will get a significant discount.
For example, The New York Times adopted G-B-B when it introduced digital subscriptions in 2011. The physical paper acted as a fence between the best product offering, i.e. a print subscription and a subscription to the all-access digital edition of the paper, and the better product offering, i.e. a subscription to the all-access digital edition of the paper.
5) Limit feature difference. When it comes to choosing the features of each product offering, there are some rules. No more than four features should differ between good and better, and better and best. Be consistent. If it’s in better, it must be in best. If it’s in good, it must be in better.
6) Set pricing. When it comes to pricing, the good price should me no more than 25% less than the better price, and the best price should be no more than 50% more than the better price.
You will have to conduct customer research, but Mohammed suggests 10% to 20% of revenue will come from good, 25% to 50% from better and 30% to 60% from best.
IT’S EASY IF YOU KNOW HOW
When it comes to what Mohammed refers to as “the realpolitik of institutional change”, G-B-B has a significant advantage. “The simplicity of of the G-B-B strategy makes it highly compelling to senior executives,” he writes.