Pricing is one of those topics you agonise over. You worry you’re charging too much, or suffer because you’re charging too little. You struggle to land clients because they feel you’re overpriced, or because your low prices give the impression you’re the cheap option, rather than positioning you as the superstar you are.
Getting your prices right is both incredibly important and difficult.
A great option is to use a tiered pricing structure. At first you might resist this as it seems like a more complicated, more confusing option when figuring out your prices is complicated enough.
But, when done right, a tiered pricing structure will tempt your clients and convert them where a single price would put them off – no matter what that price might be.
What Is Tier Pricing
Tiered pricing is a simple way of making almost any product or service more appealing.
On a simple level, tier pricing is a way of offering your product or service at different price points.
It’s a popular option you will encounter in many businesses, for both products and services. Whether you’re choosing how many channels you’ll get with the TV package, or selecting between free, 3 day, or next day delivery, you’re seeing tiered pricing in action.
The Benefits Of Tiered Pricing
Although there are several benefits to tiered pricing, the biggest and arguably best is that you will, quite simply, make more money.
Your ideal clients will pay up to the amount they can afford.
They can’t pay more than they have in their bank accounts, no matter how much they might want to. So if your price is set at (for example) $10,000, and you have a chunk of leads who really want it, but can’t afford more than $1000, you could reduce your price.
That would get them to buy.
But then you’re losing out every time someone who would have happily paid $10,000 buys in at only $1000.
Likewise, a chunk of your leads will happily pay more than $10,000. They will still buy from you, but you’re missing out again, because they value your work, and would pay double your asking price in a heartbeat.
The solution is really simple: offer your service at three levels, and you will convert more clients.
Better yet, every client you convert will pay you the rate they choose, based on what they need and what they can afford.
Tiered pricing widens your audience without broadening the scope of your ideal client, or forcing you to step outside your niche.
There are two things people appreciate more than anything: choice and value.
Tier pricing allows your leads to choose between you and you, rather than choosing between you and your competition.
Whereas with a single price you might miss out to competitors who offer budget options or are positioned as a luxury brand. With tier pricing you win regardless of the choice they make, because you are presenting a budget, standard, and luxury option.
Giving people a choice is not only beneficial because it gives them more opportunities to choose you, it’s a psychological benefit too.
Having a choice ensures that, whichever option they choose, your clients will feel they have received higher value.
It doesn’t matter if that value comes from getting a bargain, getting a luxury, or feeling they’ve saved money without needing to get the ‘budget’ option.
Beyond that, clients who buy in at a low level when they can afford it give you the opportunity to catch them early, transforming them into loyal clients who will upgrade when they can afford it, and repeatedly buy from you in future, resulting in a much higher client lifetime value.
How Profit Plays Into Tiered Pricing
Before you create your tiered pricing structure, you first need to settle on a price for your offering. Pricing any product or service can be tricky and there are a lot of factors that go into it. But, a huge factor that I want to highlight here is the role of profit in your pricing.
The Profit First method that I use and teach to all my clients is central to this as it highlights an important issue that many entrepreneurs face when setting their prices.
Normally, rather than pricing to attain a profit margin they desire, people price according to their level of expenditure, what they believe people will pay, and various other elements, always leaving profit at the end of the equation as the last piece of the puzzle. Profit becomes an afterthought. We are quite accustomed to the idea of accepting whatever is left over as our profit. It’s easy to understand why, because the equation used to calculate profit literally places it at the end:
You need to flip the equation when you are pricing your services so that it instead places profit first, before expenses:
It’s important to get totally clear on your goals and big dreams for your business, and decide how much profit you’re aiming to earn when you are setting your prices.
If you know how much profit you are aiming for, you can minimise your expenses and increase your sales price to ensure the amount of profit you earn matches your goal. That way, you know how much money you can afford to spend on expenses, without cutting into your profit, and how much you need to charge as a baseline for your product or service.
It’s super-important to know your baseline price before you create your tiered pricing structure.
If you’re panicking at this point because you’ve just realised you’re going to have to raise your prices in order to get anywhere near the profit you want to achieve, don’t worry. Raising prices can have a positive impact on your brand, as it can improve the perceptions your audience have of your business; you shouldn’t assume people will view a price rise negatively.
The Complexity Of Setting Prices
While you’re calculating your baseline price, remember that while factoring the level of profit you want to earn into your pricing is very important, it’s not all there is to it.
It also isn’t all about the costs you incur delivering that product or service, although again, these are a factor.
In addition to profit and expenses your price needs to account for factors like the value your clients receive (which is often far greater than the practical costs you incur!), and the value of the intellectual property you are giving your clients access to when you share this offer with them.
These are just two of the very intangible aspects of your business that should go into deciding your prices – if you price based solely on your expenses and the amount of profit you want to earn, you’re very likely underpricing yourself.
For example, if I offer a service that will help my clients earn millions of dollars every single year, that service is of far greater value to them than the literal time I spend delivering the service, and the costs I incur to do it. If I calculate the value of my service based only on these factors, I’ll end up with a price that reflects an hourly rate, plus the profit I want to earn, plus expenses.
And yet, the value of what I’m offering is the creation of a multi-million dollar business.
It’s tough to put a price on that!
So before you dig into creating a tiered pricing structure for your offer, make sure you’ve really considered all the angles when it comes to the value that service is providing, and exactly what constitutes a fair price for that value.
How To Create A Tiered Pricing Structure: The Trident Method
Who’s seen The Little Mermaid and remembers King Triton, Ariel’s father, and his big shining golden trident?
Triton (and indeed a lot of mythical deities) carries a trident for a really good reason; they’re very cool and incredibly powerful.
Believe it or not, that applies in business just as much as it does stories of gods, kings, and mermaids. Having a ‘three pronged’ approach works in so many contexts:
- Beginner, intermediate, expert
- Beginning, middle, end
- Bronze, silver, gold
- Too hot, too cold, just right
When creating a tiered pricing structure the safest option is what I refer to as the Trident Method – a three-pronged approach that offers customers a budget option, your core offer (the option you actually want them to buy), and a choice that’s far too expensive for most people but intriguing enough that those who can afford it will happily pay extra for it.
To create a Trident pricing structure for your business, you need to follow two very simple steps:
- Take the price you calculated as the baseline for your service – that is the ‘middle’ option, which I will refer to as your ‘core offer’ (the one you want people to buy!).
- Bookend that offer with two other options that make the real price a lot more appealing, while simultaneously catching clients who like a bargain and clients who like to know they have the best-of-the-best.
Getting Your Core Offer Right
Your core offer is the level in your pricing structure that includes your standard offering, at the price you calculated based on how much profit you want to earn.
Take some time and list out all the benefits and features that come with your offer (you can download my FREE Tiered Pricing Worksheet to help you with this!), and quantify how much each aspect costs you in:
- Intellectual Property
When you’re putting together your marketing materials, you’ll include the price you have set, as well as all these the benefits and features, but leave the literal cost breakdown out.
That is something you will use to decide on your ‘bookend’ tiers…
Simplifying It For The Basic Option
For your basic option take another look at that list of benefits and functions and highlight the core aspects. Which aspects are utterly essential for this offer to deliver the result it promises, and which go above and beyond that core solution to add extras? These are the benefits and features you will include in your basic package. The rest, you will leave out.
If you’re struggling here, consider which elements are essential so you retain all the basic functionality of your offer (it still needs to solve your clients’ problem!), and which serve as something that goes beyond that core functionality.
By streamlining your basic option you will make your core option appear even better in comparison, because it provides extras that will make life even better/easier for them your ideal clients.
Try to focus on elements that have tangible costs, for example, they require extra time, additional materials, or special software/systems you will need to pay for.
Once you’ve settled on what you’ll be removing, calculate the costs involved in providing those aspects of the service, and subtract the costs from the price of your core package.
Let’s say your core offering is priced at $10,000, and includes a weekly coaching call, and an aspect that is delivered using a software system that costs $100. If you switch that weekly coaching call to a monthly coaching call, the cost of delivering that element is cut by three quarters. Meanwhile, you’ve completely removed the need to pay for the software system.
Remember, your profit comes FIRST so you are not reducing the amount of profit you make overall – the idea is to retain the same profit margin on this tier as your core package, and reduce the amount you charge for it by reducing the associated expenses.
Remember, pricing has a lot more to it than simple cost analysis.
The value you are delivering to your clients will still be high, even at the basic level. So while your literal expenses may have reduced, the value you are delivering has not diminished by very much, and that is an intangible benefit that you can’t put a price on. So you should not discount the price by the full amount due to the value you are still providing.
Not only that, you need to consider the perception you are creating with these price variations. A reduction will still make your basic package very appealing, without accidentally giving the impression that your core offering – which is, remember, the one you want people to ideally go for – is over-priced.
At the same time, it will boost your profits on the basic option in a totally ethical way.
You’re earning a higher profit margin on this level, but you’re also providing an essential service at an affordable price, solving their problem without forcing them to go outside their budget.
This is the power of the trident method – you naturally drive everyone to the level they can afford, ensuring you are catching and helping people who need your solution, even though they can’t quite afford your true price.
Add Some Sparkle To The High-Priced Package
Your highest tier option really isn’t about raising your prices.
You’re offering the same service at a higher price, but only because you’re going to be providing extra value at this level.
Your clients won’t be paying more for exactly the same thing. They will be paying more for the same thing with a lot of extra value added.
You may be raising prices overall if you have set the price of your core offer higher than it currently is, and it’s the perfect opportunity to raise prices, so you should definitely consider it! But that is a price increase that applies to all three of your tiers, not just to top one.
Don’t think of your top tier as being extra-expensive, but rather as having extra value.
There are two ways to add value to your top tier offer:
- Add additional bells and whistles that incur extra expenses for you.
- Add extra value that costs you little or nothing in terms of expenses (this is preferable!).
Adding Value, Not Expenses
It may sound impossible to create extra value without incurring additional expenses, but there are a few great ways to do it that are either complete cost-free, or incur a small initial cost that is never repeated, but provides huge value to all your clients.
Here are a few ways to increase value without increasing expenses:
- Give access to pre-created content that is high-value and highly helpful (e.g. a webinar, video tutorials, an inspirational/motivational audio talk, downloadable PDFs etc.).
- Give access to an online members area with exclusive content/features unavailable to lower tiers.
- Give access to an exclusive Facebook group or other social platform that provides a community/support/networking opportunity etc.
Once you’ve figured out the value you’re adding, put a number of it but don’t factor that number into your pricing.
You can then use the value price of the extras you are offering as an incentive.
The amount these extras are costing you should be added to the price of the tier. The amount they are worth should be used in your marketing to help sell the service!
Let’s say the value of the extras you are offering (when factoring in time, expenses, intellectual property, and the benefits your clients will reap as a result of them) is $50,000.
It’s unlikely people would pay an extra $50,000 for your higher tier, because they can get the solution they need from your core offer and the extras that come at the next level up are add-on bonuses.
But they’ll happily pay another $5000 for those extras. By setting the price at only $5000 more and using the value price of $50,000 in your marketing, your clients will feel great thinking they’ve saved money and gained lots of value.
In actuality they haven’t saved anything, because the value price is not a literal amount you are spending by providing these extras, but the total value of those extras. You can give people the feeling of getting a great bargain without losing anything.
One Important Note:
Make sure the amount you increase the price of this tier by is at least as much as any literal extra expenses you will incur. For example, if it will take you extra time, factor that in, or if you will need additional software, add the price you will need to pay for that.
Creating Healthy Boundaries
It’s worth mentioning here the importance of establishing healthy boundaries as you setup your tiers. By boundaries, I mean the limitations you place on what you are willing to do when delivering your service, at every level, and what constitutes reasonable expectations on the part of your clients.
Avoid offering ‘free’ bonuses that will cost you a lot of time, and lead to a lot of unreasonable expectations, such as:
- A promise of fresh exclusive content on a weekly or monthly basis – that will be very time-consuming to create, and will need doing repeatedly, rather than as a one-off.
- Unlimited email support.
- A social group that requires you to be very active or pay on an ongoing basis to have someone manage it.
If you are offering anything of this nature set clear boundaries. For example:
- No expectation of new content beyond what already exists, so that anything you do add is an even bigger bonus.
- A monthly check-in call rather than unlimited email, so they have a more personal touch and you can cap the time required at, for example, half an hour per client.
- A group with automated posts and content and one powerful thing to get the group members to engage and do your work for you, for example, a monthly Facebook Live, time capped at 1 hour/month.
When done right, tiered pricing is extremely beneficial for your business.
Profit First can benefit the growth of your business from DAY ONE!
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