If you’ve read my post about the 5 product development mistakes that people don’t know they’re making, you have seen why not having product tiers can hurt your sales.
I kept it short in that post, but today I’m going to go into the details about how having price tiers can increase not only the number of sales you're able to make, but also the average expenditure per sale.
So, in today we'll go over a particular strategy for configuring price tiers to form a pricing ladder, often referred to as a good better best pricing strategy.
What is a good-better-best pricing strategy?
Well, simply put, it’s a pricing structure, where all the product versions share the basic features, and you gradually add features to create the improved, higher-priced versions, thus forming a "pricing ladder".
What is a good-better-best pricing ladder strategy? A good-better-best strategy is a particular case of product versioning where all the versions share the same basic features, and you gradually add features to create the improved, higher tier, higher priced versions.
The most common implementation uses 3 levels of product tiers: the basic no-frills offer is referred to as the "good" version. An intermediate offer with some add-ons is referred to as the "better" version, and finally, a third version with an even higher number of add-ons is referred to as the "best" version.
The goal of the strategy is to encourage the purchase of the middle, "better" offer.
Let’s say you have a basic version of a product or service. This basic product version is your “good” one.
This is a nice, simple version of your product that covers the basic needs, but that can be improved upon.
The “better” product version would then include all of what your “basic” version includes, plus something.
You might then have a third, “best” version, which included all of what the “better” offer includes, plus something.
And obviously, as you add features, you increase the the price of the improved product or service tiers.
That way, we’d have 3 product or service versions, each one improving on the previous, each priced higher than the previous, forming a features and pricing ladder:
Note that it’s very important that the versions always add to the previous, but no existing characteristics are changed.
When you start changing characteristics from one version to the next, your potential clients may not see it as an improvement anymore. Your idea of an improvement may not coincide with theirs. Therefore, it’s not a good-better-best approach anymore.
If each version doesn't just add to the previous, you’re forcing your customer to make a choice beyond just going with an improved version. Your product structure is no longer shaped as a ladder. And that’s exactly what we don’t want to do in this case. We don’t want to make the customer think harder.
Why does a good-better-best pricing ladder strategy work so well?
To begin, having product tiers simplifies the potential customer’s decision process; we'll se how in a minute. This makes it more likely that people will buy, since indecisions delay and deter purchases.
Then, the pricing tiers create a high anchor price through the price of the “best” version, increasing the chances that the “better” version’s price feels more acceptable. This increases the average expenditure per purchase (again, we'll se how in a minute).
And finally, because as with other types of product versioning, it allows to take advantage of different segments’ preferences and willingness to pay (WTP).
Let’s then see how this product and price tiering work to increase both the number of sales and the average sales ticket:
The good-better-best pricing ladder strategy and consumer psychology
Let’s start by taking a look at the psychological impact of a good-better-best marketing strategy on the purchasing decision.
The tiered price strategy impact on purchase decision-making
A good-better-best ladder-shaped offer simplifies the purchase decision-making, since:
On one side, we know that some potential clients are price-oriented.
We can simplify these people’s lives by having a simple, yet functional option available for them.
So, price-oriented customers have a lower priced option available. Those who are looking for only basic features and want to spend as little as possible, can clearly see which option is best for them.
And if you’d like to have more details about why this is important, check out my post about the negative impact of offering too many product options. In that post I go over how simplifying the purchasing decision improves sales.
On the opposite side, we know that some people always want the best possible option.
So, with quality-oriented customers in mind, we have an option with all the available features included.
These guys who always want the best, also know exactly which option to buy. Their decision process is very simple.
And then… there are those in the middle… and there are a lot of reasons to go with the middle option!
But… why is the middle product version such a great option for so many?
Well, the thing is, the middle product tier caters to a lot of potential customers’ needs, because:
When you don’t have a middle option, you’re making all these people’s decision process harder. They have to put in more work to buy from you.
And, another important thing is, that people don’t generally like “take it or leave it” offers.
So if you have only one option available, you may be forcing potential customers to go look for alternatives elsewhere.
People like to have freedom of choice. So, it may be a good idea to give them several options yourself, instead of forcing them to go elsewhere to see what else is out there.
Now that we have seen how the good-better-best pricing ladder can help customers choosing among products, it’s now time to see the second way in which it can help you.
The good-better-best pricing strategy and price anchoring
A good-better-best offer establishes a higher price anchor. This will lead to a higher expenditure per purchase.
And how does that one work?
Well, it’s been shown that having a higher priced “best” option available helps increase the sales of the mid-priced “better” tier versus the cheaper “good”, basic one. But why would that work?
Well, it happens because buyers change their line of thought from seeing the “better” version only as a more expensive version than the “good” one, to seeing it as cheaper than the “best” version.
So, if you only had the two lower priced tiers available (good and better), customers who purchased the “better” version might feel guilty that they were overspending. After all, they selected the most expensive option in the market.
This guilt can be decreased by the availability of the higher priced, “best” version. Why? Because now instead of “I’ve purchased the most expensive version in the market”, their line of thought becomes: “I’ve spent a bit more, but it could have been a lot worse. Compared to the “best” version, I’ve actually saved a lot of money”.
Another important aspect of this higher anchor, is that it helps strengthening the message that higher value comes at a higher price.
Want more features? Fine! But you have to pay more.
This is important, because it somewhat deters people from wanting large discounts, or a lot of freebies thrown in. When you show people how the additional features increase the product’s price, they stop expecting you to give them away for free. (Who hasn’t had that client?)
Anyway, the previous reasons may not seem like the most rational ones on which to base a purchase decision.
In fact, the general preference for the middle discussed so far seems to originate from a lack of information, from psychological aspects that have very little to do with selecting the best option for your needs, or even from not understanding the product in the first place. So obviously, this will not work for every type of product.
But, there's a lot more to the good-better-best tier pricing strategy.
The good-better-best pricing ladder's rational side
A good-better-best tiered pricing strategy allows to take advantage of different segments' preferences and willingnesses to pay (WTP).
Even from a rational standpoint, a good-better-best pricing ladder still makes a lot of sense, as it allows us to target different customer segments, even if all these behavioral aspects weren’t at play.
So, we still need to go over:
Let’s now take a look at the purely rational arguments to implement a good-better-best tiered pricing strategy.
Unfortunately, this is a bit more complex than the psychological aspects, so we’ll use an example to illustrate the point.
Defining a good-better-best pricing ladder strategy - Example
Let’s imagine that you’re a pastry chef with a popular dessert blog.
And you’ve been receiving a lot of requests from readers who would like to learn how you make the complex decorations you show in the photos of the desert recipes you share. Which left you wondering if they might be interested in a decoration techniques course from you.
But another burning question is… would they actually pay for it? After all, you’ve gotten them used to getting all your content for free.
And, if they’d be willing to pay… how much?
You contacted some of those readers who showed an interest in learning how you make your decorations, and you found that some of these would be interested in a course.
Unfortunately, some were interested in a course, but just as you feared, they expected it to be offered for free, like the rest of your content.
However, you did find others who were willing to pay for such a course.
So, you made draft course plan, and asked 10 of these willing to pay followers, if they could help you understand if the course you would be developing to meet their wishes, is in fact what they had in mind, and if it would be helpful for them.
Of course, amidst those questions about the course content, you included a few about its price.
Now, note that this is for illustrative purposes only. Reaching out to someone and just bluntly asking how much they would pay isn't a good idea. Pricing discussions must be included as a part of wider value discussion.
And, because pricing research methodologies have serious flaws, it's always a good idea to use at least two different questioning methods, such as that Gabor-Granger's, and Van Westendorp’s Price Sensitivity Meter. You can find more details about the right questions to ask in my post about the five questions you must ask you price your product.
Anyway, after you conducted your pricing market research, you got to the conclusions that among your readers' sample:
- 5 would be willing to pay up to $100 for your decoration course as you described it to them.
- 4 would go up to $150, and 1 would pay up to $200.
- So, you could price your course for $200; in that case, only one of the readers in your sample would buy, making you a total revenue of $200.
- Alternatively, you could price your course for $150. In that case, 5 readers in our sample would buy it. That’s the 4 that would buy for $150, plus the one that would buy for $200 (because if someone would buy for 200, at $150, s/he would buy too). In this second case, you’d have a total revenue of $150 x 5; that is, $750
- But, you could also price your course at $100. In that case, all 10 readers in your sample would buy it, for a total revenue of $1,000.
This is of course a small sample, but from the looks of it, your profit maximizing price seems to be around $100.
However, you can’t help to think about the fact that some people would be willing to pay $150, or even $200! But, you can’t charge different people different prices for the same course…
I mean… technically you might, but you don’t like that idea. This is of course a personal thing. I’m not convinced of the ethical part of it. I know that I don’t like it when it’s done to me, so… I prefer other forms of taking advantage of different willingnesses to pay. But again, as long as you keep it LEGAL (and beware of price discrimination laws in your market), you do what you want.
But back to our example.
Another interesting finding from these talks with potential buyers, is that they would like to have:
- A forum or Facebook group in which they could discuss tips and recipes with other decoration enthusiasts.
- And, monthly group calls to discuss doubts with you and connect with other students.
Considering these additional feature requests from your potential students, you decided to take your market research one step further.
Additional market research
So, you went back to the 10 readers and asked them up to what price could the “better” version be priced, for them to still prefer it over the “basic” course for $100, where:
- “Basic” is the course as previously described.
- “Better” would include the Facebook group membership for students.
And, following that, you asked them up to what price could the “best” option go. Meaning, up to what price would they still prefer to buy the “best” version instead of the “better” one.
In this case, the “best” option was similar to the “better” one, but additionally included a monthly group call will students.
And the results were
For the better version:
- You found out that one of the readers would be willing to pay up to $230.
- Two of them, would be willing to pay up to $180.
- Five would be willing to pay up to $150, one up to $110, and one would still only be willing to pay $100.
So, if you were to price your course at $230, you would sell to only 1 person.
For $180 to three, $150 to eight, $110 to nine, and for $100 you would sell to all 10.
And this is the rationale we’ve already seen before: people who’d be willing to buy at higher prices, would obviously also buy at lower ones.
With this information, we would then be able to calculate the total revenue that we would achieve at each potential price point.
And, following that, you had the same conversation regarding the “best” option. And these would be the results for the best option:
- One of the readers would be willing to pay up to $250 for the best option.
- Three would pay up to $200.
- Four would go up to $160,
- One $120, and
- One still wouldn’t pay anything more than $100.
Following the same steps as before, we get the total revenue per potential price point.
Apart from all these numbers, one interesting finding, is that while some people say that the Facebook group is a valuable feature, they aren’t willing to pay for it. And one is willing to pay only $10. And, a similar thing happened during the conversations regarding the group calls.
So, after these conversations, you decided to offer: The “Basic” product tier for $100. The “Better” product tier for $150. And the “Best” product tier for $200.
Revenue optimization strategy definition
If we sold the best option for $200, we would sell four courses to our readers’ sample. That would translate into a total revenue of $800.
And, if we were to price the better version for $150, we would also be selling four courses.
Why four courses? Because of the eight people who would buy the better option for $150, four of them would rather buy the “best” option for $200. So, they would have already bought the “best” option for $200, leaving us only with 4 readers left to buy the “better” version for $150.
That means that our revenue for selling the better version for $150 is 150 x 4; that is, $600.
Lastly, since four people would rather buy the “best” option for $200, and another four would rather buy the “better” option for $150, that leaves us with two readers in our sample who’d buy the “good” version for $100.
So, our revenue for selling the “good” version for $100 would be 100 x 2; that is, $200.
This means that our total revenue with this new structure, would be $1,600.
With this good-better-best pricing strategy, you get to:
- Charge higher prices to those customers who value additional features and are willing to pay for them. After all, they want higher value, they are willing to pay for it, you are willing to offer it, so it makes perfect sense.
- Have a lower priced option for customers with a lower budget, giving them a chance to buy. It’s possible that many might even prefer the better option, but their budget doesn’t allow for it. So, thanks to the different options available, they can still get to purchase a good version within their means.
- Expect to achieve a revenue of $1,600 from your 10 interviewees, instead of the $1,000 you would get if you offered only one version of the product.
One note of caution though: do note that this type of research methodology is too rational to capture the behavioral tendency to choose the middle offer that we’ve seen above.
Capturing the psychological aspects discussed there would require a different type of research methodology. This is just to illustrate the strategy.
So, in real life, the preference for the middle option may be a bit higher than the one resulting from interview data. In my experience, when you openly discuss prices with people, they pay an attention to them that they’re unlikely to pay in real life. And, they don’t like to admit to their irrational behaviors. Besides... everybody thinks they are the snowflake that always rounds up odd prices... right! 😀
Also, keep in mind that from “would buy”, to actually buying, there is a huge difference. That can’t be captured by this type of research either.
Always remember that the point of this small sample, one on one discussions, is just to get a rough idea of the price ranges we should be working with. These small samples aren’t representative of your entire audience, so they’re not suitable for price optimization. They’re just a starting point. You can check out this post about quantitative vs. qualitative market research for more details on this.
But back to our strategy.
Good-better-best pricing ladder key success factors
To make sure that your good-better-best strategy is successful, there are some important aspects that must be paid attention to.
One, is that for the strategy to be successful, it’s important that the “good” version isn’t already great.
If your basic offering already includes everything most of your customers want, you aren’t creating an incentive for them to choose the higher priced, improved versions.
So, it’s important that the price and value of the different versions are aligned. The higher prices must be backed by the corresponding higher value for the customer.
If this isn’t the case, your strategy has to rely only on behavioral aspects, and those may not be strong enough to drive a significant number of people to buy the higher priced versions. And the point of this strategy is actually to increase the number of people buying the middle option.
Another important detail is that just because it’s usually referred to as a good-better-best strategy, this doesn’t mean that you need to do it with three versions. You can have more, as long as the logic behind the versions remains the same. However, be careful if you want to have more than 4 versions.
Adding versions adds complexity, and you are forcing customers to think harder. Thinking often delays purchase (sometimes indefinitely).
So, giving people more options in hope that somebody finds at least one that matches their preferences, instead of attracting more customers, might drive them away as they are more worried about making the wrong decision. In this post about choice overload I go into more detail regarding this odd phenomenon
So… that’s it for today! I hope the post was helpful!