"We will not head down below $30,000. We have Toyota and Scion to handle that price level for us." – Jeff Bracken, Lexus Group Vice President, 2013[1].

The good-better-best pricing strategy involves offering customers a line of products that vary in price and quality. Customers gravitate towards the version that matches their desired quality and price level, in essence, self-segmenting themselves with their buying behavior. To implement good-better-best pricing effectively, the manager must do two things. First, each product's price should correspond to its quality. The manager must set prices and price differentials at levels that match the quality differences of the products in the line. Second, customers should be able to differentiate between adjacent products. If the product line's adjoining price-quality differences are too close to each other or not meaningful to customers, they will gravitate towards the cheaper, lower-margin product. If price-quality differences are too far apart with an astronomically high price, the same thing will happen. Customers will shy away from the high-priced product, resulting in lackluster sales.

To effectively implement a good-better-best pricing strategy, the manager must start by understanding the current state of the products in the line. The list price map is a visual aid to do this. It displays the prices and quality of each product offered by the company using a graph and grid format. The map can also include this information about the product lines of selected competitors.

Figure 1. The generic list price map

The list price map provides a concrete picture of a brand's good-better-best pricing strategy or a well-defined market. For established brands, the list price map shows each product's current list prices, along with its features and constraints. For startups and projects involving the launch of entirely new products, the map displays hypothetical products and prices.

The list price map's main purpose is to provide a comprehensive at-one-glance view of the list prices (or regular prices) and quality of all products available to customers from the cheapest to the most expensive offerings. Figure 1 shows the generic list price map. Many pricing consultants and practitioners use a version of the list price map, calling it the "price ladder" or "pricing ladder." It is a popular consulting device with a long history. The phrase is synonymous with good-better-best pricing for some users[2].

The list price map uses customer-centric data. It displays information about the features and constraints from the customer's perspective. It includes the features and constraints that are meaningful to customers and are widely used in buying decisions. The list price map is developed using the following four-step method.

Step 1: Define the list price map's scope.

The manager can construct the list price map at the desired specificity. In its most restrictive form, the map is limited to the company's offerings in one particular category. In broader formats, it includes the offerings of a specific competitor, or all major offerings in the marketplace in a category. In the process of constructing the map, the manager's first step is to choose its specificity.

A list price map that only has the company's offerings is called the Brand List Price Map. A map that also includes competitors' offerings is called the Market List Price Map or the Category List Price Map. For a category- or market-level map, the manager should clearly identify which competitors they want to include. See the Amazon Music list price map for an example of a brand list price map and the Streaming Music list price map for an example of a category list price map.

Step 2: Identify the features and constraints that are meaningful to customers.

In the second step, the manager identifies and lists the features and constraints they want to include in the list price map. Constraints are conditions that the customer must fulfill or limitations of the offering that detract from customer value and lower its price. Features are the functions or utilities that add value and increase the price.

Figure 2. The Amazon Music List Price Map

In the Amazon Music list price map shown in figure 2, the requirement of an Amazon device for use and the "limited to students" restriction are constraints. The ability to stream ad-free music, a library of more than 50 million songs, the ability to stream HD music, and the availability of community playlists are features.

In the streaming music list price map shown in figure 3, two competitors of Amazon Music, Spotify, and Apple Music, are also included. When these services are considered, one additional feature, a bundle of Hulu and Showtime services with streaming music, is added to the feature list. This is a feature that is offered only by Spotify in its student plan.

Step 3: Identify the good-better-best products and collect information on each product's prices, features, and constraints.

In the third step, the manager identifies the good-better-best products and collects information about each version's constraints, features, and prices. The map has a customer-focused emphasis. Consequently, this information is usually collected from sources that are readily accessible and widely used by customers, such as websites, apps, and retailers. For this reason, technical specifications and operational criteria of products are excluded on the basis that regular customers don't use them.

Step 4: Plot the offerings on the X-axis and prices on the Y-axis.

In the last step, the gathered information is entered into the map. The price information is plotted on a simple graph, as shown in Figures 1-3. The presence or absence of each feature and constraint is marked in a grid below the graph. When a constraint or feature is present, it is marked by a check-mark. When it is absent, it is marked by a “X.” Once the grid is complete, all the information about good-better-best products for the brand (and competitors, if relevant) is available at a single glance. The list price map is ready to use. Other information like unit sales, percentage sales (across the category), sales growth, gross margins, and other relevant variables can be added to the list price map to augment it if the manager so chooses.

Figure 3. The Streaming Music List Price Map

Uses of the List Price Map

The list price map is a versatile visual tool. It can be used for many different purposes. Here are four common uses of the map, although this list is by no means exhaustive.

1. Conduct an audit of the brand's current good-better-best pricing strategy.

The manager can use the list price map to consider whether the number of products in the product line is appropriate, whether the price differentials between adjacent products is reasonable, whether the price range (from the lowest-priced product to the highest-priced product) is comprehensive, and whether the incremental addition of features from the good to the better option and from the better to the best option justifies the prices.

2. Set up an effective good-better-best pricing strategy for a new product.

This use of the list price map is beneficial for a startup that is still in the process of deciding what features it will include in its different product versions, how they will differ from one another, and their prices. Mapping out the hypothetical products in the list price map can help startup founders in their decision making process. If the startup is entering an established market, the list price map can be augmented by adding key competitive products first before setting up the company's hypothetical products.

3. Identify key differentiators (or deficiencies) of a product and establish whether its corresponding price premium (or discount) is reasonable.

The list price map provides the manager with specific information about where each product in their product line stands relative to one another and competitors. It allows the manager to identify its unique features and ascertain whether the right price is being charged. In the streaming music list price map, we can see that Amazon Music has HD music not offered by its competitors. The company charges a substantial price premium relative to its next-best-option ($12.99 vs. $7.99), but the differential is smaller than its competitors' next-best-options ($12.99 vs. $9.99). Given that music connoisseurs value HD music, is there room to raise the HD plan price to align it with the significantly higher value? Alternatively, the $7.99 individual plan could be increased by a dollar to $8.99 and still compare favorably to the Spotify and Apple Music plans. These are the types of decisions that are facilitated by the list price map.

4. Identify opportunities and crowded areas of the market.

The fourth use of the list price map stems from the bird's eye view it provides the manager of the areas where the available products are clustered and where they fall short. Considering the streaming music list price map again, we can see that not offering Community playlists is a significant shortcoming in its competition with Spotify from Amazon Music's point of view. Spotify can charge a $2 price premium based on this feature. (Apple Music also has this shortcoming, but its pricing likely reflects its robust device ecosystem and brand strength). On the other hand, Amazon Music has a unique opportunity with its device-constrained plan. It could combine the HD Music feature to create a differentiated offer at a profitable price.

Other considerations in using the list price map

Beyond the tangible features and prices of good-better-best offers, the manager should consider the consumer psychology implications behind the information displayed in the list price map. As one example, research shows that the best products in the product line, particularly when they are over-priced, can act to make other lower-price, lower-quality items in the product line appear attractive and high value. Even if the features don't justify the price premium for the high-priced product, the sales boost to the other items in the line needs to be considered and calculated[3]. Additionally, excessively priced products can signal brand expertise and convey brand prestige[4].

In the streaming music list price map, it appears that none of the offers are particularly egregiously priced. Any of the three brands have the opportunity to develop a significantly higher priced version, say at $24.99 if they can introduce powerful new features.  Relatedly, offering a loss-leader economy version to attract new customers to the brand or to initiate relationships with future high-potential customers may make sense even if the entry-level option's price is lower than it should be.

The list price map is a static representation of the good-better-best pricing strategy of a product line or a category at one point in time. When the brand or its competitor introduces new features, new versions, or changes regular prices, the map needs to be updated. Relatedly, the list price map is suited to categories where firm reference prices exist. Examples of such categories include fast food restaurant chains, software, and consumer packaged goods.  In situations where prices change frequently and consumers cannot form strong reference prices, the list price map will be hard to draw and be of little use.

Endnotes

[1] Synder, Jesse (2013), “Lexus: No interest in $30,000 models,” Automotive News, 88(6598), 12/9/2013. [2] The idea behind the price ladder can be traced to Alfred Sloan and his “ladder of success” at General Motors Corporation in the 1920s. Based on the motto, “a car for every purse and purpose,” GMC introduced five different brands, in ascending order of price and quality – Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. The idea was to offer variety to customers and have them choose the one they could afford. As their means improved, they would upgrade to more expensive brands, in effect, remaining GMC customers for life. See Lury, Giles (2017), “A ladder to success,” The Prisoner & The Penguin. Available online at: http://www.theprisonerandthepenguin.com/?p=915 [3] Although this phenomenon, popularly known as the “decoy effect” has become widely known, see this paper for the original research discovering its occurrence: Huber, J., Payne, J. W., & Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. Journal of Consumer Research, 9(1), 90-98. [4] Allard, Thomas and Mansur Khamitov (2020), “The Surprising Upside of Expensive Products that Don’t Sell,” Harvard Business Review, Available online at: https://hbr.org/2020/10/the-surprising-upside-of-expensive-products-that-dont-sell.

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