Why doing Good-Better-Best Prices Instead of Finding the Perfect Price?

SeaWorld Orlando Dine with Shamu

I have just learned that what is considered as the best restaurant in the world _el Bulli_ was actually unprofitable. Why? Because the restaurant was only open from June to December for a total of 8000 clients a year. Each client used to pay the same price -$250- for a 25 dishes meal. It means that one dish cost approximately 10 euros! It’s less than a pizza in Madrid! But the restaurant was booked one year in advance (in fact it was booked the before its closure period).

Technically, it means that they didn’t find the equilibrium price. The demand was much more superior that the supply for this price. But the question is : Is finding this price the better solution for a company?

I do believe that Rafi Mohammed is right when he says that “even if you can determine your product's perfect price, you end up in what I call a "Pricing Catch-22": no matter what price you set, you'll inevitably create missed profit opportunities. Some people would have paid more, while others would have purchased if only the price had been lower”.

 

On a graph, it means that you try not to find the perfect price, but you try to do the integral of the demand curve. In that way, you can fix all the demand of your customers.

 

But what does that mean? We can take two examples to illustrate that. Usually, it works quite well for entertaining companies. We can take theme parks such as Sea World Orlando or Disneyland Paris in France. Both of them have an equilibrium price which is about $60 a day and per person. The idea is to find a new offer without changing the product. For Sea World for example, you can choose amongst an array of extra options (more than 17!) such as “animal interactions”, “exclusive tours”, “exclusive dining” and ”quick queue”. The normal admission is $80. With these options you can pay more than $500, just for one ticket!

 

Here is a graph I made showing what is happening. You target all your customers with different offers and different price. Ideally, the park can propose an offer per customer_ which is of course now impossible.

 

Another example is Disneyland Paris. The normal admission is 74 euros. At this price, you have people who buy them without problem (usually foreigners). But you also have the “francilien ticket” at 30 euros. At this price, you have to say which day you are coming at the park. You cannot change the date or the name on it. Doing this, both parks don’t really change their original offer _ they are still theme parks with attractions_ but they find a price for everyone interested by spending a day in the park.

 

With a good-better-best price strategy, you reach some people would have paid more that your original price, while others would have purchased if only the price had been lower. Moreover, customers are more comfortable with this pricing strategy. There is no more this kind of ultimatum: “you take it or you leave”. 

 

With a perfect price strategy, companies are missing significant profit opportunities. Customers are better served and profits are enhanced by serving new customers as well as reaping higher margins with a good-better-best price strategy.

You can read all the theory of Rafi Mohammed, pricing strategy consultant in his bookThe 1% Windfall : How Successful Companies Use Price to Profit and Grow256 pagesHarperBusiness; 1 edition (March 16, 2010)