Tiered Pricing – Pros and Cons and How to Implement It
Putting ‘Good, Better, Best’ Pricing into Action
How much more profitable could your business be if you could sell your services at higher prices? The answer is way more profitable, right?
Tiered pricing could be the answer to this conundrum. The strategy is successful for many reasons. It’s a great way to raise prices without losing customers. You may have even been ‘tiered priced’ without even knowing it.
In this article, you’ll learn how tiered pricing could help you sell your services at higher prices to your customers – and a few tactics to help you achieve this.
What is tiered pricing?
There are several definitions of tiered pricing, and it’s often confused with volume pricing. So, for example, you may read that tiered pricing is discounting price at set volume increments of service that you sell. This is not how tiered pricing works best.
Real tiered pricing is accomplished by offering different versions of your service at different price points, helping to grow your funnels to grow your business. You can do this by adding features, benefits or attributes to your service to create differentiation.
For example, I’m guessing that you have probably ordered from Amazon or another online retailer. When you get to shipping options, you are offered, say, a 5-7-day delivery (longest), 2-day delivery (standard), or overnight (express).
The longest delivery period is the cheapest option, while the express is the most expensive. In each case, your purchase will be delivered – but you are given an option of good/better/best, for which you will pay incrementally higher prices.
Among the best tiered pricing examples is how SaaS companies sell their products. They might offer a good product (a cloud-based video app), a better product (a cloud-based video product with 50GB of memory), and its best product (a cloud -based video app with an editing suite and 100Gb of memory). By having 3 tiers some people pay the top price (about 20%) some pay the bottom (another 20%) but 60% pay the middle price. Knowing this they could engineer their product bundles to make their best margin on the “better” product.
Psychologically, the customer feels they are getting a better product without overpaying for the best product that does the same job. They feel like they got good quality by not buying the cheapest one! The result? The SaaS company maximizes its profits and expands its customer base.
Implementing a tiered pricing strategy
Tiered pricing is relatively simple to implement, and in many cases will cost you no more to produce your service. In fact, it can be incredibly effective for service businesses as well as highly cost-effective.
For example, you’ve built out an on-line course as a DIY version of your services. . Your standard course is a great product. It is delivered online, via downloadable video lessons. The offer includes a host of downloadable productivity tools, and allows the purchaser to work at their own pace. You sell 10 of these each day, at $500 each. Daily sales of $5,000.
You decide to add another, better product. This includes all the buyer would get from your standard course, plus interactive sessions with a business coach and a monthly, one-to-one, half-hour coaching session for six months. You offer this at $1,500. You still only make 10 sales, but find that four of these are for the new, higher priced ‘Gold’ product. Your daily sales increase to $9,000.
Your success leads you to believe that there is room for an even more comprehensive package. You consider what you could add to the Gold product. You decide to offer your personal services, with a two-day online, interactive, one-to-one workshop. You price this at $5,000. Once more, you sell a total of 10 products.
Only this time you find that you sell six of your standard coaching packages at $500, three of your Gold packages at $1,500, and one of your new, Platinum packages at $7,500. Your total daily revenue increases to $15,000.
You have provided a way for people to pay more for your service, by delivering differentiated coaching packages, and, in the process, you have trebled your sales revenue from the same number of leads!
You don’t need to add new features to implement tiered pricing
In the above example, you have added new features to create two higher-value packages. I’ve found that many clients don’t need to do this. You may be able to create a tiered range from your current product.
Let’s say that your current service offers the following:
- An online course
- Access to online tools
- A monthly webinar session
- Advanced training modules
- Access to a productivity app
- A 30-minute one-to-one coaching session
- Business software tools
- A half-day business building workshop
- An end-of-course strategy session
For this package, you currently charge, say, $1,000. Now, let’s alter these packages as follows:
You now price your Silver package at $750, your Gold package at $1,000, and your Platinum package at $1,500.
5 steps to implementing tiered pricing
Here are the important steps to follow when implementing a tiered pricing strategy:
Use tiered pricing to value your service
Tiered pricing helps you to validate your offer. If you aren’t selling at your highest price point, then either it is too expensive or doesn’t offer enough perceived value. If no one is buying at the lowest price, your higher-priced packages are probably too cheap.
(A good rule of thumb is 20% of sales at the lowest price, 60% of sales at the middle price, 20% at the higher price.)
Design your tiered packages
Decide which features you will include in each package. What will constitute your good, better, and best packages? When thinking about this, consider offering:
- Higher quality
- Higher quantity
- Unique access to you, or your team
- Access for longer
- Advanced/one-to-one training
- Adding a guarantee at the top-tier
- Additional “bonuses” that don’t cost incremental time or money from you (A printable workbook, extra videos, etc.)
Write these down in different combinations before moving to the next step.
Create your packages
Should your top-tier package include all you have written down, or perhaps those that have the highest value?
Remove some of the highest-value features to create your middle-tier package, or offer less of certain features (for example, three one-to-one sessions instead of six).
Create a standard, lower-tier package that includes fewer of the features in your middle-tier package.
Now, before you move on, ask if each package:
- Will entice people to purchase
- Offers value to the customer
- Includes everything it should
Now, select a name for each of your tiered packages – names that help to distinguish between them and demonstrate the value that each offers.
Price each tier
There is an uncomfortable truth about pricing. You are unlikely to get it right the first time. You’ll need to price, launch, validate, and reprice. How do you first price your packages?
- Analyze your competitors’ prices
- Price your low-tier package (rely on your intuition)
- Double the price of your low-tier package for your middle-tier package
- Double the price of your middle-tier package for your top-tier package
Don’t overthink this. Remember, this is the steppingstone to price validation.
Launch, validate, reprice
Finally, launch your services. Review the sales you are achieving, and reprice accordingly. Remember:
If your top-tier package accounts for around 20% of sales, it’s priced well. If any of your packages are selling out of sync with the percentages I shared earlier, then adjust prices up or down as needed.
That’s it. You now have tiered pricing in place.
The pros and cons of tiered pricing
Tiered pricing has the power to increase your customer base and your revenues with little additional work from you (of course, depending upon the features within each tier). Here are the main advantages and disadvantages of a tiered pricing strategy.
It improves the buying experience
Tiered pricing makes it easy for customers to review what added value they will receive at each tier.
Customer alignment at all levels
Previously, you may have been marketing a service that some customers had a need for but could not afford. By offering a new, low-tier package, you make the cost of entry more affordable for new customers.
Similarly, you maximize the potential of reaching out to customers who are happy to pay more for higher-value services. In other words, at all customer levels, you leave less money on the table.
Customers are more likely to upgrade
Tiered pricing also allows customers to try your package, become satisfied customers, and upgrade to the next level as their needs grow. It’s a great method that helps reduce a customer’s risk.
It can be difficult for customers to decide
It’s important that you clearly lay out the value and features included in each package so that you don’t introduce doubt and confusion into the sales process.
You must consider the support needed
You must take care when adding features. If you add too many, or add features that need a high level of support, you may not be able to meet customer expectations – and that could be disastrous for your reputation and future sales.
So, should you employ tiered pricing?
Tiered pricing has many benefits. It really can help you reach new audiences, gain customers, and increase revenues and profits.
However, you must take care to ensure that you offer value at every tier. Additionally, you need to maintain a watchful eye on your sales in each tier to ensure that they are correctly priced. Get this right, and tiered pricing is a great way to maximize your sales and profits, as well as delivering value to your customers. Just ensure that you can deliver on the promises you make.
You want to know more about pricing? Download my eBook ‘How to Raise Your Prices without Losing Your Clients’.
Of course, if you have any specific questions or advice you need, please don’t hesitate to contact us.