Solve the Sorting Problem: Implement Good, Better, Best to Fence High-Value Buyers and Expand Your Sales and Profits
Pricing Pointers, Issue #37
“Good, Better, Best” (GBB) pricing is the practice of selling progressively better versions of a product, or service, at progressively higher prices. This tactic is also known as vertical versioning, Goldilocks pricing, and quality-dependent pricing. The objective of GBB pricing is to increase your sales and profits by identifying differences in buyers’ willingness-to-pay for different levels of quality.
Leverage Customer Psychology to Solve the Sorting Problem
But GBB pricing is more than offering different quality levels at different price points. It’s a way of solving the sorting problem of identifying differences in customers’ willingness to pay and the fencing problem of preventing high-price buyers from purchasing lower-priced options. By offering different quality levels at different price points, customers self-select into the option that best suits them.
Three versions is typically favored because this structure taps into the psychological tendency known as extremeness aversion. When there are only two choices, there is no safe middle ground. So adding a third, more expensive choice (the “Best” option), helps buyers avoid extreme choices. This makes the second choice (the “Better” option) look more attractive and appear to be the safe choice. That is, avoiding the mistake of paying either too much or too little.
Define the Specific Roles for Each Product Tier
It’s important to have a “Best” version even if most buyers don’t purchase it. There are two reasons for this. First, the “Best” version serves as an anchor price, establishing a high reference point in the buyer’s mind that makes the “Better” option seem more reasonable in comparison. Second, it provides an option for the percentage of buyers who genuinely desire and are willing to pay for the highest quality.
The “Good” version serves as a defensive product. It allows a business to compete with lower-priced rivals and provides an option for price-sensitive customers or those seeking discounts. It can also be used as a downsell when customers resist the price of the “Better” or “Best” versions.
The key to an effective GBB pricing structure is that the offer at each price point must be clearly better than the one below it. But how does one achieve this? By varying quality attributes. These are product attributes where more (or less) of that attribute is consistently preferred by buyers.
For example, a streaming service offers two price tiers: a cheaper tier with ads and a more expensive tier that’s ad-free. The ads are an example of a negative quality attribute. All other things being the same, buyers prefer the service without the ads.
The equal price test is a useful tool to verify that the different versions offered represent different levels of quality and value in the minds of buyers. If you offered buyers two different versions for the same price, would pretty much every buyer pick one version over the other? If so, you’re on the right track. This indicates a clear difference in perceived value.
Structure Price Gaps to Drive Upgrades and Adoption
The price gap between the “Good” and “Better” options should be relatively smaller, making the “Better” option seem like a worthwhile upgrade for a modest increase in price. The price gap between the “Better” and “Best” options should be relatively larger, further enhancing the perceived value of the “Better” option as a sensible compromise.
If your business currently offers just one version, it’s often best to start by creating a lower quality, lower priced version. This “Good” version can attract price-sensitive customers and counter low-price competitors. Alternatively, one could add a higher quality, more expensive “Better” version to make your existing product the “Good” version.
The problem is sellers often provide so much quality in their existing product, they find it hard to add enough value to entice buyers to upgrade their purchase to their new, “Better” version.
This is why starting by creating a lower quality version (a downgrade) is often the best place to start. This approach makes the existing product the attractive “Better” option, and reduces the risk of offering too much relative value for the price with the “Good” option.
Keep in mind that offering exactly three versions is more of a guideline than a hard-and-fast rule. While three is a common and often effective number, businesses can also successfully use two or four versions. The key is to have a coherent and understandable set of options.
Shift Your Focus From Price to Psychology
The ultimate GBB insight is that profitability is driven by psychology, not solely by product attributes. You now have a framework to harness the power of anchors, fences, and extremeness aversion. Implement this mental shift to design versions that effectively segment buyers and maximize your sales and profits.