Marketing
The Good-Better-Best Approach to
Pricing
by Rafi Mohammed
From the Magazine (September–October 2018)
Dan Saelinger
Summary. Companies often crimp profits by using discounts to attract pricesensitive customers and by failing to give high-end customers reasons to spend
more. A multitiered offering can use a stripped-down product (the “Good” option)
to attract new customers,... more
For decades the auto insurance industry operated on a simple
assumption: Consumers are highly price-sensitive, and most will
buy the least-expensive plan they can find. But in the early 2000s
Allstate conducted some research that caused it to revisit that
assumption. Price does matter, it learned, but there’s more to the
story: Many drivers worry about being hit with premium hikes if
they’re in an accident. And drivers with clean records want to be
rewarded.
Armed with those insights, in 2005 Allstate launched Your Choice
Auto. The program relied heavily on modifications to a feature in
the company’s standard policy (which it continued selling) called
accident forgiveness, in which drivers who went five years
without accident claims would have no premium increase after
their first accident. It introduced a Value plan, priced 5% below
Standard, that didn’t include accident forgiveness. A new Gold
plan, priced 5% to 7% above Standard, offered immediate
forgiveness (no five-year wait) along with a deductible rewards
feature in which repair costs borne by the driver would decline by
$100 for every year of accident-free driving. And at the highest
end, a new Platinum plan (15% above Standard) also included
forgiveness for multiple crashes and a safe-driving bonus under
which credits were issued for each accident-free six months.
Consumers were enthusiastic: By 2008 Allstate had sold 3.9
million Your Choice policies and was selling 100,000 new ones
each month. A decade later the pricing plan remains attractive: In
2017, 10% of customers chose the Value plan, and 23% chose Gold
or Platinum. The company has no doubt that Your Choice drove
significant incremental growth. “There were a lot of skeptical
people in the company,” recalls Floyd Yager, one of Allstate’s
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 (G-B-B)
pricing. There’s nothing new about the concept of adding or
subtracting product features to create variably priced bundles
targeted to customers of varying economic means or those who
value features differently. It’s been nearly 100 years since Alfred
Sloan introduced a “price ladder” to differentiate Chevrolets and
Buicks from Oldsmobiles and Cadillacs, creating “a car for every
purse and purpose” and powering General Motors to overtake
Ford. In the modern era, G-B-B pricing is evident in many product
categories. Gas stations sell regular, plus, and super fuel.
American Express offers a range of credit cards, including green,
gold, platinum, and black, with varying benefits and annual fees.
Cable TV providers market basic, extended, and premium
packages. Car washes typically offer several options, separated by
services such as waxing and undercoating.
Yet many companies and industries haven’t adopted tiered
pricing—and there’s little rhyme or reason to which have, which
haven’t, and why. G-B-B is a strategy every company should
consider. In my consulting work, I routinely see it used to
simultaneously attract new high-spending customers and priceconscious ones, dramatically boosting revenue and profits.
(Disclosure: Among my clients is Harvard Business Publishing,
the publisher of this magazine.)
Although G-B-B is conceptually simple, implementation can be
tricky. If new offerings aren’t constructed and priced correctly,
existing customers will trade down, hurting profits. In this article
I outline why G-B-B can benefit many firms. Then I present a
step-by-step guide to devising, testing, and launching the strategy
in a way that boosts profits and reduces the threat of
cannibalization.
Capitalizing on G-B-B
G-B-B’s benefits come from three approaches: offensive plays
aimed at generating new growth and revenue, defensive plays
meant to counter or forestall moves by competitors, and
behavioral plays that draw on principles of consumer psychology,
whatever the competitive landscape.
Going on the offensive.
Offensive plays can help brands grow revenue in at least four
ways. First, companies can dramatically lift margins by creating a
high-end Best version that persuades existing customers to spend
more or attracts a new cohort of high spenders. In my work with
companies, managers consistently underestimate customers’
willingness to spend and the number of customers who might
upgrade to Best, even at prices that were previously unthinkable.
Across a range of industries, it’s not unusual to observe up to 40%
of sales landing 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 options to
the standard admission ticket, with prices varying by day and
location) to bypass lines and thus enjoy more rides. The Gold
Pass, which costs as much as $80 a day on popular weekends,
reduces waits by up to 50%; the Platinum Pass, which can reach
$135, reduces them by up to 90%. “It’s amazing, actually, how
many people pay for this,” then-CFO John Duffey told analysts
shortly after the new passes were rolled out, in 2011. Many Flash
Pass purchasers are existing customers who decide to upgrade,
but some are new customers who had previously been put off by
the notoriously long lines for rides.
Second, and at the other end of the spectrum, a low-priced Good
offering can make a product accessible to price-sensitive or
dormant customers for whom the existing product line (which
typically then becomes a Better offering) is out of reach. And it
can limit the need for discounts or sales on the existing product or
service—a crucial advantage, because frequent sales can erode
long-term pricing power.
A low-priced Good offering can make
a product accessible to more
customers.
Uber has shown continued creativity and success with its Good
versions. The company began in 2010 as a black-car luxury
service, and it still offers several high-end options. But in 2014,
hoping to lure price-sensitive riders, it launched uberPOOL, in
which riders share a car with strangers going in the same general
direction. Unlike the traditional uberX service (in which riders
have a midsize sedan to themselves and go directly to their
destination), uberPOOL trips involve multiple pickups and dropoffs of other passengers, so there’s additional travel time; in
exchange, the service is priced as much as 50% below uberX.
UberPOOL now accounts for 20% of all Uber rides—and in some
cities it accounts for more than half of all trips. The company has
begun experimenting with Express POOL, which costs 30% to
50% less than uberPOOL and requires riders to walk a few blocks
to a central pickup location. Uber’s story shows that even after
implementing a G-B-B strategy, companies should continue
exploring innovations that might lead to new, lower-priced
versions of Good.
A third way that G-B-B can increase revenue is through a new
Best offering that boosts the entire brand. In 2015 Patrón Spirits
debuted a line of Roca Patrón tequilas made by the tahona
process, which uses a two-ton wheel hand-cut from volcanic
stone to extract juice from cooked agave. The result is a sweeter,
earthier, more complex spirit than tequila produced by
automated means. Even at $69-plus a bottle, Roca Patrón has
exceeded sales expectations: It is projected to sell 60,000 cases in
2018, which would make it the world’s seventh-best-selling
premium tequila brand.
And the benefits go beyond that revenue: Sales of lower-priced
Patrón tequilas have risen sharply. Lee Applbaum, Patrón’s chief
marketing officer, cites research showing that Roca has boosted
perceptions of the overall Patrón line as artisan-crafted (from 60%
of consumers surveyed to 64%), made by a small-batch producer
(47% to 58%), and fitting an image people want to convey (59% to
65%). “The details of the expensive and laborious way that Roca
Patrón tequilas are manufactured create a brand halo that
reinforces important attributes…for the entire Patrón line,” he
says.
Fourth, a lower-priced Good version can spark ancillary revenue
from related or complementary goods and services. Consider
Apple’s SE phone, which sells for just $349 (roughly a third as
much as the iPhone X). Every SE sale stimulates additional
revenue through purchases on iTunes and the App Store,
payments for iCloud storage space, and sales of cases, chargers,
and other accessories.
Playing defense.
Sometimes G-B-B isn’t about aggressively seeking new revenue—
it’s about protecting a brand’s exposed flank. When faced with a
low-cost rival, many companies’ knee-jerk response is to drop
prices, but that’s often a mistake. When the price holds firm, 15%
of sales, say, might be lost to a low-cost competitor, but 85% of
customers are still paying full price—whereas if the price is cut,
100% of customers will be paying less. Another common response
to cheaper rivals is to launch a “fighter brand”—a discounted
product with entirely new branding. Classic examples include
Procter & Gamble’s Luvs diapers and Intel’s Celeron computer
chip. (See “Should You Launch a Fighter Brand?” HBR, October
2009.) That may work well, but the resources needed to create a
new brand can be enormous.
In many cases, creating a new Good product is a better defensive
strategy. Two of my B2B clients (in financial services and
industrial parts) held significant market share and enjoyed
healthy profit margins when new entrants began offering inferior
products at rock-bottom prices. Customers seized on the
disruptive entry as an invitation to negotiate, threatening to
defect from my clients unless granted a discount. Although
reluctant to lose any market share, both clients resisted the
impulse to discount their core offering. Instead, they quickly
rolled out cheaper Good versions that closely matched the new
entrants’ stripped-down products. When offered those options,
most customers backed off their demands for a discount and
continued buying their existing offering at full price; they had
been bluffing and weren’t actually willing to trade down to a
lesser product. Implementing a Good version calls such bluffs—
something a straight discount can’t do.
A caveat: This defensive maneuver can have mixed results. In
2015 Town Sports International, a chain of fitness centers whose
memberships averaged $40 to $90 a month, began losing
customers to competitors such as Planet Fitness, whose monthly
fees are as low as $10. To fight back, TSI retained its existing
membership plan and prices while launching a new plan—priced
as low as $19.99 a month—that excluded or restricted some
benefits, such as towel service and access to fitness classes. This
staunched the membership decline: TSI gained 64,000 new
customers in 2015. But the stock price plummeted, same-club
revenues fell, and the CEO resigned. Still, the new Good
membership may have been the best possible response in a tough
environment. By steering clear of a simple discount or a price war,
TSI ensured that many members continued to pay their existing
monthly fees, and the company avoided a devaluation of its
primary offering.
Drawing on consumer psychology.
Some G-B-B strategies aren’t specifically aimed at luring new
customers or defending against competitive threats; they’re
more-general responses to consumer psychology.
For instance, companies often jam multiple features and
attributes into a single product, but this can confuse and
overwhelm customers. A G-B-B plan helps potential buyers focus
on and understand features and think about which ones they
value—and how much they’re willing to pay for them. An
educational software company I worked with found that
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
plus new electronic exercises), and a Best one (the core software
and exercises plus one-on-one tutoring). Customer research
showed that the three-tiered model helped people differentiate
the company from competitors—and indicated that half of
potential customers would pay a premium for Better or Best.
(Because of a sudden leadership change, however, the G-B-B
model was never implemented.)
Helping Customers Understand Good-Better-Best
Once a company has created a multitiered offering, it
needs to help customers understand the various
options. This ...
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G-B-B can also shift customers from a binary “buy/don’t buy”
mentality to consideration of incremental value and spending.
This can work in two ways. First, customers prefer having choices
to feeling under an ultimatum, so three differently priced options
can give them a sense of empowerment. Allstate CEO Thomas
Wilson has identified this as a key benefit of the Your Choice
policies, explaining that they moved people away from simply
comparing Allstate’s prices with those of competitors. “If people
[have] a choice in the conversation, they are not likely to switch
[to a competitor] for $25 or $50,” he said in a July 2005 quarterly
call.
Second, when faced with multiple options, customers tend to
decide more quickly whether they are going to buy something,
using their remaining time to focus on what. Having made that
mental shift, they typically treat the Good version as a sunk cost,
which makes them more amenable to upgrading. Salespeople
exploit this tendency all the time: For example, instead of
detailing all the features of a $1,200 appliance, they emphasize
that “for only $200 more” than the entry-level $1,000 unit, a
buyer gets lots of extra bells and whistles. Rental car companies
highlight the full-size sedan you could be driving for $12 a day
more than the price of a subcompact.
Companies can also use G-B-B to exploit the so-called Goldilocks
effect: people’s propensity to choose the middle option in a set of
three. In his book Priceless, William Poundstone recounts how
Williams-Sonoma reaped unexpected benefits after launching a
fancy bread machine priced at $429. That high-end model flopped
—but sales of the $279 model (previously the highest-priced unit)
nearly doubled.
A final argument for considering G-B-B relates to the realpolitik
of instituting change. The simplicity of the G-B-B strategy makes
it highly compelling to senior executives. For change to occur at
any organization, top management must be committed,
deploying political capital to sell others on the shift. Because
managers have experienced G-B-B as consumers, they can quickly
understand its appeal. In my consulting work, I often suggest
other pricing strategies but wind up helping implement G-B-B
because it’s the option managers find the easiest to understand,
explain, and get behind.
Brainstorming About Tiers and Features
When considering a G-B-B pricing structure, the first step is to
decide how many product versions to offer. As the name implies,
the most common approach is three. In general, companies with a
single existing product will designate it (or something close to it)
as Better, adding features to create Best and subtracting them for
Good. But if taking away features to create a Good offering isn’t
feasible, companies can forgo that option and simply offer Better
and Best.
Companies with complex products or a long buying cycle may be
able to justify more versions. But too much choice is risky. In a
well-documented study by Sheena Iyengar and Mark Lepper,
researchers offered samples of jam to shoppers in an upscale
grocery store. When presented with six flavors, 30% of tasters
made a purchase. When 24 options were on the table, only 3%
opted to buy. Researchers believe that when consumers have too
many options, they become confused or paralyzed with
indecision—a phenomenon the psychologist Barry Schwartz
explored in The Paradox of Choice.
If a company is set on many offerings, it can be useful to group
them in a way that turns consumers’ decision making into a twostep process. New York’s Metropolitan Museum of Art offers seven
memberships. To minimize confusion, it divides them into two
categories: Members Count plans ($80 to $600) for people joining
primarily because they want to visit the museum, and Patron
Circle memberships ($1,500 to $25,000) for those whose primary
goal is philanthropic. Grouping memberships in such a way
guides people toward a general category; once there, they can
examine the G-B-B options in each.
After a company has gotten a sense of how many tiers to offer,
managers can brainstorm about the features to include in each.
Sometimes the decisions are obvious, but many of the best G-B-B
plans draw on unexpected features, as Six Flags did when
manipulating wait times to create a consumer benefit for its Flash
Passes.
To help companies consider a wide array of potential features and
benefits, I use a tool called the Value Barometer, which lists 13
common product attributes that can be added, dropped, or varied
to create different perceptions of value. Companies typically
begin by identifying features of the current offering that vary or
would be easy to vary, but the tool’s real power is its ability to help
firms come up with out-of-the-box options that could be
increased, decreased, or tweaked.
Pump Up the Value
A crucial step in devising Good-Better-Best bundles is
choosing attributes to add, drop, or vary to create
different ...
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Once the brainstorming is complete, a company can begin
analyzing the potential features it has identified. Three questions
are key: Does the feature have mass appeal or low appeal? How
would adding or subtracting it affect the cost of producing the
good or offering the service? And is it a “fence” attribute—one
that constitutes a barrier preventing existing customers from
crossing over to something cheaper?
Many managers start by focusing on the Best option, because of
its obvious potential for revenue growth (and because imagining
new high-end features is fun). But they should begin by
identifying and analyzing fence attributes—often the most
challenging task in G-B-B implementation.
The goal of adding a Good offering is to pick up new budgetminded customers without losing revenue from existing ones. (In
a perfect world, not a single customer would move from Better to
Good.) Indeed, one of the biggest risks of shifting to G-B-B is that
existing customers will migrate to the new lower-priced offering,
cannibalizing revenue and margins. Fence attributes prevent this,
by making the downgrade a difficult, unpleasant, or painful
choice.
Examples of fence attributes abound. In cable television, ESPN,
CNN, and HGTV are always included in “extended basic” (the
Better offering) because many existing viewers highly value at
least one of those channels, and losing access makes the idea of
trading down to basic (the Good offering) anathema. Hotels offer
discounted “no cancellation” reservations; the lack of flexibility
creates a fence for many travelers. During a recent tour, 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 subscriptions, 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 differential: An allaccess 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 highappeal/low-cost items such as priority boarding, extra frequentflier 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 predictably. But some
products, such as tutoring services and weight loss programs,
require customer involvement to achieve success. Because of that
uncertainty, companies generally aren’t willing to guarantee
them, even as part of Best packages and even if consumers would
highly value guarantees.
When devising Best bundles, companies need to be realistic about
the attributes they can include. During brainstorming, it’s natural
to dream big—but as dreaming turns to planning, vigilance is
needed to weed out features that may be difficult to execute well
or that could delay the launch. It’s also important to be judicious
about the number of attributes. It’s tempting to throw all the
latest and greatest features into Best, but this can result in
unnecessary complexity and an unrealistically high price.
After completing the cost-benefit analysis of the various features,
it’s time to design and assign tentative prices to the G-B-B
bundles. Two rules of thumb for design: To ensure sharp
distinctions between offerings, no more than four attributes
should differ between Good and Better and between Better and
Best. And it’s important to maintain a consistent progression of
benefits from Good to Better to Best—beneficial features in Good
should be retained in the higher-priced offerings so that every
step up the ladder is a clear improvement.
Some rules of thumb can similarly help with pricing. Companies
should pay close attention to the price gaps between Good and
Better and between Better and Best. In my consulting, I strongly
advise against setting a Good price that’s more than 25% below
Better, and I recommend that the Best price should not exceed
Better by more than 50%. Although customers’ perceived value
must be the North Star, companies must also consider how many
customers might opt for Good, Better, and Best and what the
margins of each package will be. As a starting point—before
conducting customer research—many companies estimate that
10% to 20% of revenue will come from Good, 25% to 50% from
Better, and 30% to 60% from Best. The actual mix will depend on
how many attributes vary between versions, the degree of
differentiation achieved, and the price spread.
It’s never too early to think about names for the G-B-B options;
those are essential in helping consumers quickly identify which
version best meets their needs. Lisa Krassner, the chief member
and visitor services officer at the Metropolitan Museum of Art,
says that the very clear names of the three Members Count
options, each delineating a particular benefit—With Early Views,
With Evening Hours, and With Opening Nights—have been key to
the offerings’ success.
Bringing in Research
Many companies conduct formal research to see whether their
intuitive sense of what customers want is on target. The timing
and scope will depend partly on organizational culture: Some
data-driven companies do several rounds of testing, starting soon
after the brainstorming step, while other companies wait until
they’ve created tentative G-B-B bundles and prices. (Still others
proceed without any formal research.) Regardless of timing,
companies can draw on three sources of data:
Expert judgment.
Experienced executives, salespeople, and other frontline
employees have a good understanding of customers and their
needs. They’ve watched people balk at prices, and they often have
a sense of when customers would pay more. When setting G-B-B
prices, companies should collect and factor in the views of these
in-house experts. Although that may feel unscientific, my
experience with clients shows that in-house expert judgments
often reliably predict data gathered during more-formal testing—
and many companies design and implement effective G-B-B
strategies using only those judgments to drive bundle and pricing
decisions.
General market research.
Basic insights can be gained by asking customers to respond to
potential features and prices in quantitative or qualitative surveys
(the questions can be added to existing post-purchase satisfaction
surveys). Simplicity is crucial: A survey item might say, “We’re
excited to roll out this premium feature for $79. Would you be
interested in making this purchase, and why or why not?”
Modifying the questions to test customers’ interest in a
discounted Good product instead can yield insights into fence
attributes and the risk of cannibalization.
Conjoint analysis.
This common research technique involves giving subjects a series
of binary product choices, each with different features and prices,
and asking which they prefer. It can be a powerful tool: If the
choices are constructed well and enough data is gathered,
researchers can gain a clear sense of which attributes or features
customers want, how much they will pay for each, and which are
fence attributes. It isn’t foolproof: As with any market research,
results can be flawed or biased, particularly by the composition of
the customer sample that responds. Still, especially for companies
desiring strong quantitative evidence before bringing a G-B-B
strategy to market, positive results from a well-designed conjoint
analysis can provide comfort and affirmation.
Once research has helped a company finalize feature and pricing
decisions, it’s time to launch the G-B-B offerings. Early results
should be watched carefully and adjustments made as needed.
Compared with other product attributes, pricing is often easy to
alter on the fly.
CONCLUSION
Most companies could implement some form of G-B-B. Every
company already offers the equivalent of a Better offering, and
even if some firms can’t implement both Good and Best, many
could gain new customers, additional revenue, or both by adding
either a Good or a Best to their lineup.
The companies with the biggest challenges in designing a full GB-B lineup are those whose products have few distinct features
and/or features that can’t easily be modified, making it hard to
identify effective fence attributes and move down market with a
Good bundle. In other cases, executives may be too fearful of
cannibalization (or skeptical about the effectiveness of fences to
limit it) to sign off on a Good offering. (Some B2B companies that
decide against explicitly marketing a Good product may devise a
compromise: quietly offering a Good version to budgetconstrained clients on a case-by-case basis, with the goal of
establishing new customers or saving existing ones and upselling
them in the future.) Even if a Good option is not viable in any
form, exploring a G-B-B strategy may prompt companies to
introduce a Best offering, which can deliver new revenue.
As strategies go, shifting to G-B-B pricing may seem simplistic,
but many companies have discovered that it’s more powerful than
it appears at first blush. Jim Roth, a senior vice president at Dell
EMC, was in a fast-food restaurant at Chicago’s O’Hare airport
when he realized that the bundled value meals on the menu board
made it easier for him to order. That caused him to reflect on his
own company’s pricing and bundles. Dell EMC ultimately created
Good, Better, and Best versions of its deployment support for B2B
customers—and found that customers buying those bundles
generally spent three times as much as they had previously spent
on that type of after-purchase support. Dell EMC thus joined the
many other firms who have recognized that G-B-B could help
them serve their customers better—and boost their bottom line.
A version of this article appeared in the September–October 2018 issue (pp.106–
115) of Harvard Business Review.
Rafi Mohammed is the founder of Culture of
Profit, a consultancy that helps companies
develop and improve their pricing strategies.
He’s also the author of The Art of Pricing: How
to Find the Hidden Profits to Grow Your Business
(Crown Business, 2005) and The 1% Windfall:
How Successful Companies Use Price to Profit
and Grow (HarperCollins, 2010).
 @cultureofprofit
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