Episode #0022 - What is good better best pricing?

In this episode of Pricing College - we discuss the segmentation strategy known as good, better, best. It is a simplified strategy that helps companies begin a sensible customer segmentation strategy. We discuss products and services such as whiskey and SAAS providers. Today we're going to talk about a price segmentation concept called good, better, best. The reason we're going to talk about that today is that often people use fixed pricing, one fixed price for their customers, and because of that they have to discount and sometimes you don't have to discount to drive volume or revenue. So today we're going to talk about pricing segmentation in terms of good, better, best and what it is. In a previous episode, we had covered an introduction to price segmentation but one of the questions we had back was, where do you start if it's your first introduction to segmentation of your customer base? where's an easy way to start? I suppose in Good-Better-Best (GBB) you can always argue the simplistic method of segmentation really with three categories. It's something that we're nearly all used to seeing whether online through software as a service system or in many other systems like a car or, gold, silver or bronze categories.  Just think about it in terms of when you get your car washed, they’re using Good-Better-Best (GBB). There is car washing plus that'd be the good version, the better version would be plus wax, and the best version would be all of those three plus a polish and maybe a clean inside the car as well. The segmentation strategy certainly in the software as a service, it's often tailored by restricting numbers or usage or some measurement component, whether it's the number of times you're on the website, the number of users who can log in and the number of pages you can see etc. That method is restricting people to tailor through a segmentation strategy to the size of your business to your exact requirements. That's something you should look at, and that is a simplistic watered-down version of more complex segmentation, but something that can be very applicable and quite easy for you to understand when you're starting. So, why do companies use it? Well, it's a good way to spread out the price points across different products and basically what you're offering is the same sort of service or product, but with add on benefits and add on value. What you're trying to do is rather than a discount from your higher value, the best version, you're showing your customers that there are other things that they can choose if they're not prepared to buy the best version, then maybe they should go to the better version and that way you don't have to discount. There’s a couple of things I'd like to cover on this topic, it can often give people an introduction to a product or service that can select the good, or in other words, the worst version, and they can go with that, get a tester and then potentially upgrade to business or gold or whatever the higher category is, that's the first thing. The other thing I'd say about this is, and you will very often see this online. It can be an anchoring component with this approach whereby as people go through the buying cycle, you are being presented with three options, and with those three options whether you like it or not there will be an anchoring concept.  Just thinking about whiskey and tequila brands that have done this. Initially, they launched many of their products with the highest value brands, that’s the best. What they found is that people didn't automatically understand completely before drinking, maybe they’re new to whiskey and they were probably waiting for promotions and discounts to buy. So what they do is they bring out the lower-grade versions that were still high quality but not as good as their best version. And what they found is overall it increased the value brand perception of the brands as more people got into tequila again, they started to consider these brands as more of an artisan by simply adding three or four more types of variations of the product. I think a famous example of that is probably the scotch whisky brand Johnnie Walker, which I think is one of the major mass-selling brands in the world, and they operate at a colour-coding scheme. I think I pretend not to know too much about whisky. It might say too much about me, but I think red is the standard or what do you call the introductory version, then you have the blue label and Black Label. I can't remember which is more expensive there. But it's almost the red is the mass market one with which you'll get people knowledgeable about the product, and in theory, you're moving up the value chain if you can progress people into the black or the blue labels. The interesting thing about whiskey in this kind of context, fundamentally you're selling. A procurement professional might even tell you it's the same product you're selling, a volume of a liquid that looks very similar from external and the actual differences in it to the naked eye is quite small but the differential can be higher as age,  that log was capped, was its single malt, all these sorts of things. So when you're looking at segmentation it's about, what is your product? Why are people buying it? and how can you use a simple segmentation strategy to implement that? Looking at the advantages of using Good-Better-Best (GBB) as opposed to fixed pricing. You can drive more revenue by offering more choices. You can also take a more defensive approach when your competitors have launched a similar product to yours at a reduced price but when you look at their product it's a lower grade version of what you're offering. So you can demonstrate that by offering more range but in a very structured way, you can say yes Mr customer if you want that product you can have it, but it doesn't have these extra benefits or features. So there you don't have to discount, and you defend your value. And then finally, the advantage is that from a consumer psychology point of view, you're offering your product in a very structured way. Often in B2B, customers bundle a lot of value into their offers, and as a result, they undersell their offer, and the customers don't know what they're buying and all the extra benefits and features and value drivers that they're receiving. You don't get paid what you should be getting paid. I think in a future episode, we're going to cover menu pricing and I often see that the Good-Better-Best (GBB) strategy can often be presented in a menu format. One of the things with that is you can often be driven psychologically subliminally to the middle offer, that can be something that the company who's selling can use techniques to proactively move you into the middle offer or it could even be the highest offer which is a decoy pricing method that we'll cover in a future episode. But what I'd suggest to anyone listening is when you're looking or buying any new product or service just look at the Good-Better-Best (GBB), the three-tiered pricing approach that is offered to you and think why are they doing that? What is the methodology? And are they using psychological nudges etc to move into a position that potentially you don't need to be in? Another classic example of this that we will probably mention in a future episode is a mobile phone plan where people are through a sense of fear or shortage that they'll go over the limit, tend to buy packages with much higher data amount than they ever require. So overall, Good-Better-Best (GBB) is largely applied in B2C but there's no reason that it can't be applied to B2B,  there's often a reluctance to do that as fixed pricing is the only way forward. But just remember if you do that fixed pricing, then it doesn't give you much room to do anything else and then you're forced to almost discount and promote segmentation in terms of price and your customer groups are essential here, and there's no reason why B2B companies can't do it. And this approach can be tailored, it can make you invest more in the value of your product offers. The classic example was the Johnnie Walker whisky were slight changes, things that might seem slight but to aficionados that can be huge, those changes by evaluating products you can help solidify this segmentation strategy. And the other thing you can do is simply tailor it by taking things off the table for where more of service where it's more like, that the software as a service approach, it could be taking things away rather than other things in and so you can work with data for both ways, and it's something you probably need to spend time working on and developing.