Joel Huber and Christopher Puto experimented with choice sets, and how different alternatives effected respondents choices. This experiment, as reported in William Poundstone’s book “Priceless”, is powerful evidence for why you should use good, better, best.
Huber and Puto asked students to choose a beer. Each beer had a price and a rating by a “beer connoisseur”. These are all summarized in the table below.
In the first test, they only asked the students to choose between the bargain and premium beers. About 67% of the students chose the premium.
In the second test they added the cheap alternative. Notice nobody chose the cheap beer. However, 14% more people chose the bargain beer. This would result in 5% less overall revenue just by adding the third alternative (assuming the same number of customers). This is not what you want to do as a company.
In the third test they didn’t have the cheap beer but instead included a super-premium beer. The 33% that originally purchase the bargain brand all moved up in their choices. Even though only 10% of respondents chose the super-premium, the act of including that choice would increase overall revenue by 15% (again assuming the same number of customers).
Here is your lesson: Add a higher end product to your portfolio. This one act increases your revenue. It increases your customers’ Willingness to Pay.
Although we haven’t discussed it here, this one act also increases your gross margin because your gross margin as a % should be higher for your more expensive products.
Look around you and you will see good, better, best everywhere. Apple products come in 3’s. Sears is well known for good, better, best. International travel has first class, business class, coach. How can you make your offering a good better best? Take heed. If you need to create a third offering, make it at the high end, not the low end. You will see an increase in profit.
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
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Photo courtesy of the National Cancer Institute