“Should I give the customer options?” One price on an estimate asks a yes-or-no question: take it or leave it. Three prices ask a different one: which of these? That change in the question is the whole reason good-better-best estimates exist, and it is also why they can be done well or done in a way you would not want a customer to see through.
Two studies in consumer research explain what happens when a choice goes from one or two options to three. Both are worth knowing before you build your next estimate.
What the research found
The middle option gains
In 1992 Itamar Simonson and Amos Tversky published “Choice in Context” in the Journal of Marketing Research. Of the two hypotheses they proposed, one they called extremeness aversion: “the attractiveness of an option is enhanced if it is an intermediate option in the choice set and is diminished if it is an extreme option.” The authors use it to explain the compromise effect: an option gains share when it becomes the middle choice rather than an extreme one.
One of their tests used 35mm cameras, priced from a catalog, in a written survey given in a classroom. One group chose between two cameras, at $169.99 and $239.99, and split evenly: 50% each. A second group saw the same two plus a top-of-the-line model at $469.99. In that group, 22% chose the cheapest camera, 57% the middle one and 21% the most expensive. The cheaper camera, now the extreme at the bottom of the set, lost the most: from 50% to 22%. The middle camera rose from 50% to 57%.
The authors also report a retail example, which they explain with their other hypothesis, tradeoff contrast: an option looks better or worse depending on whether the tradeoffs among the other options in the set favor it. Williams-Sonoma, which sold one bread-baking appliance at $275, added a similar but somewhat larger model at $429. It did not sell many of the new model, but sales of the cheaper one almost doubled.
A weaker option lifts the one that beats it
Ten years earlier, Joel Huber, John Payne and Christopher Puto described the other effect in the Journal of Consumer Research (1982). An “asymmetrically dominated” alternative is one that is dominated by one item in the set but not by another: clearly worse than one option, without being clearly worse than the other. Their finding: “Adding such an alternative to a choice set can increase the probability of choosing the item that dominates it.” Simonson and Tversky call it the attraction, or asymmetric dominance, effect.
When it matters most
Simonson and Tversky add a limit that matters for contractors. They expected both of their hypotheses, tradeoff contrast and extremeness aversion, to have less impact when people have well-established preferences, and wrote that “when people are uncertain about the values of options, they are more likely to use the context in determining the ‘best buy.’” A homeowner who buys a water heater or a roof only rarely may not know what each level of the job is worth. The options you put in front of her are much of the context she has.
That is a reason to build the options carefully, not a license to steer. The research describes how people choose; it does not say any option is right for the customer. That part is your job.
Build the three from your own price rules
The honest version of good-better-best starts from the job, not from the price you want to land on.
- Better is your recommendation. Start with the job you would do if it were your own house, priced with your normal rules. That is the middle option.
- Good is a smaller scope that still solves the problem. Take out scope, not the parts that keep the work from failing. If you would not put your name on it, it does not go on the estimate.
- Best adds real value. A better material, a longer warranty you can actually back, more of the house covered, an add-on the customer asked about. Something the customer could point to after the job.
- Same margin on all three. Price every option from its own cost with the same margin. The options differ by what is in them, not by how much extra you keep.
The formula is the one you should already be using: price equals cost divided by one minus your margin. Markup vs. Margin explains why that formula and not cost times a markup.
A worked example
Say a plumber is quoting a water heater replacement and prices every job at a 40% gross margin. Working from his own costs for parts, labor at his loaded rate and disposal of the old tank, he lays out three options:
| Option | What is in it | His cost | Price at 40% margin |
|---|---|---|---|
| Good | Same-size tank, standard warranty, haul-away | $1,080 | $1,800 |
| Better | Good, plus new shut-off valve and supply lines, longer-warranty tank | $1,380 | $2,300 |
| Best | Better, plus a larger tank and a first-year flush visit | $1,860 | $3,100 |
Check the arithmetic: $1,080 divided by 0.60 is $1,800, and the same rule gives the other two. He keeps 40% of whichever one the customer picks. If she picks Good, the job still pays; if she picks Best, she gets more for more, not the same work at a fatter price.
Now the padded version. Suppose he priced Best at a 60% margin: $1,860 divided by 0.40 is $4,650. Nothing in the job changed; only the gap did. A top option priced that way exists to make the middle look cheap. The research suggests it might even work, and a customer who later compares prices may notice it.
Presenting the options
When one price is better
Three options are not always the right tool. An emergency repair with one correct fix should get one price. A small job, where the whole bill is close to your minimum charge, rarely has room for three meaningfully different scopes. And a customer who asked for one specific thing, in writing, deserves a price for that thing first; you can mention an alternative in a line below it.
Where options do fit, keep score. Note which option each customer picks over a season. If almost no one picks Best, it may not offer enough to be worth the extra; if almost everyone picks Good, your Better may not be explaining what it adds. Either way, the fix is in the scope and the words, not the margin.
The same pricing rules should sit behind every number a customer sees from you. If your website shows instant price ranges with NapkinPrice™, set its rates from the same costs and margin you use for the three options, so the range on the site and the estimate in the customer's hand come from one set of numbers.