Pricing Strategy: Tiered Pricing (Theory)

This is part 2 of our 2nd week on Pricing Strategy. Previous segments are available on our archives page

Tiered Pricing (Theory)

Last week we talked about how value-based pricing should be the cornerstone of your pricing strategy inputs. Today we are going to expand on that concept and discuss how there are typically multiple types of customers that fall within your ideal customer profile. For each customer segment, you can tailor your product and tier pricing, i.e., charge a different price for each tailored product, for each scenario, to maximize revenue. In order to effectively tier your prices, you will need to understand your product’s usage and value.

Product Usage
In order to create tiered prices, you will first need to understand the customer segments that are using your product. In addition to thinking more granularly about your ideal customer profile (e.g., what is the customer’s industry and how do you reach these customers), you should also answer questions, such as the following, to explore how you could potentially gate your product:

  • Which features are customers using the most? The least?
  • How many users are logging in from each customer?
  • How many times a day is your product being used by each user?
  • How much data is being processed by your product?
  • What level of customer support is being used by each customer?

While the exact questions will depend on what your product does, these questions provide a starting point and guidepost as you explore your customer segmentation. You should be able to collect this information by tracking what users are actually doing with your product.

Product Value
The second part of tiered pricing is understanding how much value each of the gated features is worth to each customer segment. This value determines how much each customer segment is willing to pay for the product tailored to her / his needs. This data is collected via the approaches we discussed yesterday.

Putting it All Together
Once you’ve quantified your customer segments, you’re ready to construct your pricing tiers. When doing so, remember to keep the options clear and simple in order to make it as easy as possible for your customer to make a purchase. You want to help your customer choose the product / price combination that fits her / his needs as quickly and simply as possible. Paying close attention to how many different pricing tiers are offered is critical for streamlining tiered pricing. Though the number of tiers can vary based on metrics like your number of customers, you want to make sure there are enough to meaningfully differentiate your product but few enough that customers do not get frustrated and just buy the cheapest option or give up all-together.

Tomorrow, I’ll provide an example of tiered pricing using Doug’s Desserts’ online subscription service.

Recipe of the DayCook’s Illustrated Key Lime Pie (free trial / subscription required; I do not receive any compensation for this link)