How to Use Three Tiered Pricing to Boost Your Sales
Three tiered pricing is a popular and effective strategy for selling products or services online. It involves offering three different options or packages to your customers, each with a different price and value proposition. The goal is to persuade more customers to buy from you, and to increase the average order value.
But how do you create a successful three tiered pricing strategy? What are the benefits and challenges of this approach? And what are some best practices and examples to follow? In this article, we will answer these questions and more. Let’s get started.
KEY TAKEAWAYS
Three tiered pricing is a strategy for selling products or services online by offering three different options or packages to your customers.
The benefits of three tiered pricing are that it can increase conversions, revenue, and retention by appealing to different segments of your market and capturing more value from each one.
The steps for creating a successful three tiered pricing strategy are: identify your target market and segments, define your value proposition and differentiation, create your pricing options and tiers, optimize your pricing page and presentation, and test and refine your pricing strategy.
The frequently asked questions about three tiered pricing are: what are some examples of businesses that use it, how do I choose the right prices for my options, and how do I encourage customers to upgrade to higher-priced options.
A tip for using three tiered pricing is to optimize your mid-priced option as much as possible.
What is Three Tiered Pricing?
Three tiered pricing is a type of price discrimination, which means charging different prices to different customers based on their willingness to pay. By offering three options, you can appeal to different segments of your market and capture more value from each one.
The three options are usually:
low-priced option
A low-priced option that provides the basic features or benefits of your product or service. This is also known as the “good” option, and it targets the price-sensitive customers who are looking for a bargain or a minimum viable solution.
mid-priced option
A mid-priced option that provides more features or benefits than the low-priced option, but not as much as the high-priced option. This is also known as the “better” option, and it targets the majority of customers who are looking for a balance between quality and price.
high-priced option
A high-priced option that provides the most features or benefits of your product or service, and often some additional perks or bonuses. This is also known as the “best” option, and it targets the premium customers who are looking for the highest quality or value, and are willing to pay more for it.
The idea behind three tiered pricing is that by offering a range of options, you can:
- Increase conversions by providing more choices and flexibility to your customers, and reducing the risk of losing them to competitors who offer similar products or services at different prices.
- Increase revenue by encouraging customers to upgrade to higher-priced options that provide more value and satisfaction, and by creating a contrast effect that makes the mid-priced option seem more attractive and reasonable compared to the low-priced and high-priced options.
- Increase retention by creating loyal customers who are happy with their purchase and feel that they got a good deal, and by reducing the likelihood of buyer’s remorse or dissatisfaction.
How to Create a Successful Three Tiered Pricing Strategy
Creating a successful three tiered pricing strategy requires careful planning and execution. Here are some steps and tips to follow:
1. Identify your target market and segments
Before you create your pricing options, you need to understand who your customers are, what they need, what they value, and how much they are willing to pay for your product or service. You can use market research, customer feedback, surveys, interviews, personas, etc. to gather this information.
2. Define your value proposition and differentiation
Next, you need to determine what makes your product or service unique and valuable compared to your competitors. What are the main features or benefits that you offer? How do you solve your customers’ problems or fulfill their desires? How do you communicate this value in a clear and compelling way?
3. Create your pricing options and tiers
Based on your value proposition and differentiation, you can create your three pricing options or tiers. You need to decide what features or benefits each option will include, how much each option will cost, and how you will name each option. You can use tools like spreadsheets, charts, tables, etc. to compare and contrast your options.
4. Optimize your pricing page and presentation
Once you have your pricing options ready, you need to design and optimize your pricing page and presentation. You need to make sure that your pricing page is clear, concise, attractive, persuasive, and easy to understand. You can use elements like headlines, subheadings, bullet points, images, icons, testimonials, social proof, guarantees, etc. to enhance your pricing page.
5. Test and refine your pricing strategy
Finally, you need to test and refine your pricing strategy based on data and feedback. You can use methods like A/B testing, split testing, multivariate testing, etc. to measure the performance of your pricing options and make adjustments as needed. You can also use tools like analytics, heatmaps, surveys, etc. to collect data and feedback from your customers.
TIP
A tip for using three tiered pricing is to optimize your mid-priced option as much as possible. This is because most customers tend to choose the mid-priced option as a default or compromise choice. Therefore, you want to make sure that your mid-priced option provides enough value and satisfaction for your customers, and that it stands out from the other options.
Three-Tiered Pricing: A Statistical Report
Three-tiered pricing is a pricing strategy that offers customers three different levels of service or product features at three different price points. This strategy is often used by SaaS companies to cater to different customer segments and needs, as well as to encourage upselling and cross-selling.
According to a study by Price Intelligently, three-tiered pricing is the most common pricing model among SaaS companies, with 57% of them using it. The study also found that three-tiered pricing can increase revenue by 28% compared to single-tier pricing, and by 15% compared to two-tier pricing.
However, the effectiveness of three-tiered pricing depends on several factors, such as the value proposition, the differentiation, the positioning, and the anchoring of each tier. The study suggested some best practices for designing and implementing three-tiered pricing, such as:
- Aligning the tiers with customer personas and value metrics
- Offering a free trial or a freemium option for the lowest tier
- Highlighting the most popular or recommended tier
- Providing clear and concise information about the features and benefits of each tier
- Using decoy pricing or contrast effects to influence customer perception and choice
Global demand
The global demand for SaaS products and services is expected to grow at a compound annual growth rate (CAGR) of 11.7% from 2021 to 2028, reaching $272.49 billion by 2028, according to Grand View Research. The growth drivers include the increasing adoption of cloud computing, the rising need for digital transformation, the growing demand for remote work solutions, and the emergence of new technologies such as artificial intelligence, machine learning, and big data analytics.
The SaaS industry is also highly competitive and fragmented, with many players offering similar or substitute products and services. Therefore, SaaS companies need to adopt effective pricing strategies to differentiate themselves from their competitors, attract and retain customers, and optimize their revenue and profitability.
Three-tiered pricing is one of the most popular and proven pricing strategies for SaaS companies, as it allows them to segment their market, communicate their value proposition, and influence customer behavior. However, SaaS companies also need to constantly monitor their customer feedback, market trends, and competitive landscape, and adjust their pricing accordingly to maintain their competitive edge and customer satisfaction.
FREQUENTLY QUESTIONS
Q1: What are some examples of businesses that use three tiered pricing?
A: Some examples of businesses that use three tiered pricing are:
- Software as a service (SaaS) companies like Mailchimp, Shopify, Zoom, etc.
- Online courses or membership sites like Masterclass, Skillshare, Udemy, etc.
- E-commerce stores or subscription boxes like Dollar Shave Club, Birchbox, Stitch Fix, etc.
Q2: How do I choose the right prices for my options?
A: There is no definitive answer to this question, as the right prices depend on various factors like your costs, your value, your competitors, your customers, etc. However, some general guidelines are:
- Use value-based pricing rather than cost-based pricing or competitor-based pricing. This means charging based on the perceived value of your product or service to your customers, rather than the cost of production or the prices of your competitors.
- Use psychological pricing techniques like charm pricing, anchor pricing, decoy pricing, etc. to influence your customers’ perception and behavior. For example, you can use prices that end in 9 or 99 to make them seem lower, use a high-priced option to make the mid-priced option seem more reasonable, or use a low-priced option to make the high-priced option seem more valuable.
- Use price sensitivity analysis to determine how much your customers are willing to pay for each option. You can use methods like surveys, interviews, experiments, etc. to estimate the demand and elasticity of your options at different price points.
Q3: How do I encourage customers to upgrade to higher-priced options?
A: There are several ways to encourage customers to upgrade to higher-priced options, such as:
- Highlighting the value and benefits of the higher-priced options, and showing how they can solve more problems or fulfill more desires for your customers.
- Creating a clear and noticeable difference between the options, and showing how the higher-priced options offer more features or benefits than the lower-priced options.
- Adding scarcity or urgency elements to the higher-priced options, such as limited availability, time-sensitive offers, bonuses, discounts, etc.
- Offering incentives or rewards for upgrading, such as free trials, money-back guarantees, referrals, loyalty programs, etc.
References:
http://ncseonline.org/nle/crsreports/05jun/97-905.pdf
https://zenodo.org/record/894118
https://www.yalelawjournal.org/note/amazons-antitrust-paradox
https://hbswk.hbs.edu/item/is-performance-based-pricing-the-right-price-for-you
http://strategiccfo.com/wikicfo/absorption-vs-variable-costing-advantages-and-disadvantages/
https://www.priceintelligently.com/hubfs/Price%20Intelligently%20-%20The%20Anatomy%20of%20SaaS%20Pricing%20Strategy.pdf
https://www.grandviewresearch.com/industry-analysis/software-as-a-service-saas-market
https://futurefirm.co/tiered-pricing/
https://www.paddle.com/blog/tiered-pricing
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