Why “Good-Better-Best” prices are so effective


SeaWorld Entertainment, is operator of SeaWorld theme parks, recently filed for initial public offering (IPO).

The most famous of their water attraction is the view with the whale Shamu. SeaWorld indicates that one of the key growth strategies in the future will be “to increase per capita expenditure in the water park through new and enhanced offerings by providing our guests with additional and expanded offers at various prices.”

So the next time you visit SeaWorld, be prepared to choose amongst an array of admission options ranging from Shamu (good = lower price), Shamu-Plus (better = higher price), and Shamu-Premium (best = highest price).

When most managers think about pricing, they harken back to their days: a rote downward sloping demand curve and an asterisked point labeled “perfect price”. At the same time, the ideal price is such that it does not make sense to raise price (because the extra per unit profit is overshadowed by lost sales) nor discount (because increased sales don’t compensate for lower profit margin). Under this approach, pricing has traditionally been thought of as a simple search for one perfect price.

If your company views pricing in this manner, you are short of profit. But more importantly, even if you can determine your product’s perfect price, you end up into the pricing called “Catch-22”. Regardless of what price you set, you inevitably lead opportunities for the profits lost. Some people would have paid more, while others would have purchased if only the price had been lower.

The way to break out of this Pricing Catch-22 is to offer good-better-best prices. Instead of creating missed pricing opportunities with a single price, this multi-price versioning strategy empowers you to capitalize on a downward sloping demand curve. Having an array of price points — low to high — allows customers to choose which price works best for them. At a gourmet restaurant, for instance, dining high rollers (those at the top of the demand curve) opt to dine at the chef’s-table (best) while those on a budget (a newly married young couple celebrating an anniversary, for example) arrive before 6:30 PM for the early-bird menu (good). By allowing customers to select the experience that works best for them, companies benefit by reaping higher margins from some customers relative to others. Equally important, it also develops its business, serving budget minded customers. Early-bird diners would probably not come if this discounted option is not available.

One more benefit of “good-better- best” is customers feel more comfortable with this pricing strategy. Few of us take well to ultimatums, which is exactly what offering a single price is: “Here’s the price, take it or leave it” In case, good-better-best is accommodating: “If the price is too high, consider our good version” or “You may appreciate the features of our best option.”

When this strategy is implemented, it is often surprising how many customers choose the best option and its bottom line effect. In 2007, for instance, Southwest rolled out its Business Select ticket version. For $10 to $30 above the normal ticket price, customers received additional amenities — chief of which is priority boarding. In the first year, according to the estimates, this best version increased Southwest’s revenue by $100 million and operating profit by 10%. In addition to reaping higher margins from high-end flyers, Business Select also generated growth by targeting new customers. I, for instance, rarely flew Southwest due to its no-assigned-seat policy. But since Business Select reduces this seating free-for-all, I now fly Southwest more

If your company believes that the price strategy is simply for ideal price search, it’s missing out on significant profit opportunities. Customers are better served and profits are enhanced by serving new customers as well as reaping higher margins.

Source: www.u-b-s.ru

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