The Magic of Tiered Pricing

Sam Dunn on June 18th, 2009 Posted in Business

Want more pricing help? This is day four of our five part series on pricing clients. You can find the rest of the articles on the Pricing Bootcamp splash page

The Benefits of Providing Pricing Tiers

Handing out a quote sends a few messages to the recipient, however subtle they may be.

1. Establishes the number is not random, shows that each item has worth affecting the overall price tag.
2. Allows the client to veto or accept a particular package, rather than the entire project.
3. Demonstrates a willingness to work with the clients budget.

The Psychology of Choice

Let’s say that one day you wake up with a craving for an ice cream cone, consequently wander over to your local ice cream vendor, and see the follow sign:

• $2.00 – Ice cream cone
• $3.00 – Ice cream cone w/ sprinkles
• $4.00 – Ice cream cone w/ sprinkles and fudge

So my ice cream goer, the options you see before you are a classic example of tiered pricing. While you may have come in with a general desire, an ice cream cone, you are now faced with unanticipated variations that also fill that need.

Assuming you enjoy everything on the menu, you might talk yourself into spending the extra dollar because you like sprinkles, not wanting the cheapest cone anymore because it is inferior for not having them. On the same note the middle option is also justified by the fact that it is not the most expensive choice, therefore you are saving another dollar by not choosing fudge and sprinkles.This is dubbed irrational decision making because no matter which ice cream you select, you are spending money, not saving it.

It is the fact that the options are displayed in tiered form that makes you believe that you are either saving or spending more money, it is all relative to the menu prices of this one particular ice cream shop. If you had come in to a menu which simply said “$3.00 for an ice cream cone”, none of this thought process would have taken place. You would have decided whether or not $3.00 was a fair price based solely on your idea of what fair means.

In the context of the web world, you  can strategically use tiers to control the clients definition of what an acceptable price range is for a project. Provide options so that instead of the client dwelling on spending $XXX, they appreciate saving $XXX by choosing the middle tier over the premium one.

Those curious for more on irrational decision making might be interested in a recently released TED Talk, where Dan Ariely addresses this idea.

Crafting Your Price Tiers

Your tiers should be conducive to this kind of thought process, providing options and justifications for each. Each tier should have a substantial increase in benefits, and be a price that reflects your personal/company worth.

Economy Tier (Desired client feeling: Content, but still hungry)

Bare bones, functionality but not all the features and frills the client might necessarily want. It sets the baseline standard for the other tiers, but leave them wanting to move up a tier. This option is meant to accommodate clients that are interested, but might be very financially guarded and scared off by higher prices. It can serve to lay down a foundation for future work with the client, as a sort of “let’s start with this” beginning.

Standard Tier (Desired client feeling: Full, but still thinking about desert)

This should for all intents and purposes fulfill and the basic requests of the clients, making it exactly what they asked for. If they had mentioned being possibly being interested in a particularly complex feature, hold off putting that into this category, that’s premium material.

Premium Tier (Desired client feeling: Stuffed)

If the client asked for it, dreamed about it, or might want it – include it here. This is your “stretch goal” package, it serves to make the lower two seem more affordable and give lavish spenders a place to put their money.

Start Tinkering

The above outline for each tier is just a sample with which to build off of. There is no rule that says three tiers is the magic number, find one that works for you. In any case, I challenge you to try using tiers to adapt your pricing to what the clients will pay, who knows, the results could be surprising.

Want more pricing help? This is day four of our five part series on pricing clients. You can find the rest of the articles on the Pricing Bootcamp splash page