Tiered pricing works because it makes it easier for your prospects to choose, and buy. So what is tiered pricing? Why does it work? And how do you use it effectively?
What you’re about to read are insights that were gained over many years working as an agency founder, freelancer, and consultant. I made my share of pricing mistakes, something I was reminded of quite recently.
Whatever You Do, Don’t Use the C-Word in Your Proposals
I was browsing some old printouts stored in a box and came across a stack of papers from a decade ago. Back then I was one of the owners of an agency. It turned out to be an old proposal for a project my agency had pitched. The project was laid out in plain text, Georgia 12 points, and Arial, with numbered headers. Barely any graphics used to explain concepts or ideas. The final page had the title “Cost Overview” printed in large type at the top followed by a table of estimated hours for design, development and project management… yep, there it was: COST. In bold print.
Yep. I’m honestly surprised we got away with it. But we didn’t know better than not using the word cost.
I do know better now. I know for example that price sends a whole different message. I’ve also picked up a thing or two about presenting prices. I’d like to share some of the lessons I’ve earned since those days. The truth is, there are far better ways to present your price. Ways that don’t make your client question the financial sanity of the project.
The answer: tiered pricing.
What Is Tiered Pricing?
Tiered pricing is a way to bundle features of what you’re selling into packages. Each package is sold at a different price. If a client needs more or less, they cannot buy that specific feature but have to choose a different package instead. The packages aren’t equal in value or features, thus come in tiers. A frequently used version of this is the gold, silver and bronze tiers used in many different industries.
What you might not know is that tiered pricing also works surprisingly well for those who sell services.
Why You Should Use Tiered Pricing
Tiered pricing is incredibly effective.
Tiered pricing is simply one of the most powerful ways to present an offer in a compelling way and encourage a buyer to commit. This is possible thanks to so-called behavioral heuristics that we can apply in the design and presentation of our tiered offer.
As discussed in the recent interview about nudging, behavioral heuristics are “rules of thumb” or mental shortcuts that we unconsciously rely on for almost every decision we make. These have evolved as a way to simplify decision-making. They usually present themselves to us as “gut feeling.” We make decisions all the time without thinking about it and in most cases, these heuristics do the mental legwork for us.
The Psychology of Tiered Pricing
In this post, we will describe some of these heuristics and how you can use them to write winning proposals. We will also cover other aspects of the psychology behind the effectiveness of tiered pricing. We will finally wrap it all up with an example you’re free to copy. You can download this free example of tiered pricing design which you can modify and use in your own business.
Reducing Resistance to Choose by Minimizing Decision Fatigue
There’s a trending idea in decision-making psychology known as decision fatigue. It holds that making decisions depletes mental energy and that individuals have a limited supply of such energy, i.e., willpower.
Whether that is true or not (the jury is still partially out on it), I’m sure we’ve all suffered the feeling of powerlessness that comes with having too many options. It makes intuitive sense that providing fewer options can help a person make up their mind. Especially if those fewer options are already tailored to their needs, which appeals to their sense of being confirmed and needs seen to.
How You Can Use Decision Fatigue
In tiered pricing, decisions have been made for the prospective client. You do indeed take away some of their freedom. However, by grouping features into tiers, you also radically reduce the challenge of choosing. It’s important to remember that the buyer always has the option not to make a choice.
Choosing anything you offer, even the cheapest option, is better than the buyer refraining from choosing at all. It’s in your interest to make it as easy as possible to choose what you’re offering.
Effectively Communicate the Effort Spent Producing the Feature
According to the heuristic of “effort,” items that have required more effort to produce are inherently more valuable. In the interview on nudging, one suggestion we offered for indicating effort would be to label an app as “handcrafted.”
While you can apply this to most forms of pricing, it’s far easier to do it using tiers. Using the tiered table format for presenting your offer, you can more effectively describe what the features provided are and what value they offer the buyer.
How You Can Use Effort
Instead of writing this: ”Site search with keyword suggestions.”
Write this: “Tailor-made full website search with manually weighted keywords to ensure customers can easily find the most important content.”
These richer descriptions aren’t about trying to impress your client with advanced terminology. That doesn’t work. Technical verbiage doesn’t impress serious buyers. The point is that in the age of automation, manual effort counts more than ever. You need to emphasize that manual expert work you’ve put in and why it’s valuable to the client.
If you need help writing your effort-hinting copy, feel free to post a question in the comments. I’ll try and help as much as I can.
Capture More Value Using Bundling
One of tiered pricing’s killer features is that it lets you take advantage of a pricing technique called bundling. In tiered pricing, each tier is a bundle. Using bundling, you can combine a set of products or services into a bundle and put a price on that. This helps reduce decision fatigue for the buyer, as we discussed previously. But it also allows you to steer the buyer’s choice and what they are buying.
As described in our guide to value-based pricing, bundling enables you to charge for more than the specific delivery you’re making. Using bundles, you can include items that are valuable to the client but may be tangential to what you’re delivering. These items could even be freely available, yet still part of the bundle.
How You Can Use Bundling
You can take advantage of bundling by grouping features into one bundle per tier and adding tangential features. Examples of such tangential, yet valuable, features that you can bundle along with your deliverables are:
- Access to blogs that provide insights or analysis that the client finds valuable.
- Newsletters letting the client easily stay up to date.
- Webinars you provide that lets the client quickly get a rundown of an emerging technology, tool or method.
- Free or discounted entrance fees to conferences which provide a way for your client to quickly get up to date, find partners, suppliers, and network.
- One-on-one consultation. This is a sales opportunity for you and also lets the client ask questions for free, making it a win-win.
Using Anchoring to Adjust the Buyer’s Mental Price Point
A while ago I had to go shopping for a tuxedo for a black-tie event. I didn’t own one and I hadn’t been able to find one during the months leading up to the night. So I had to go to a store find one with the right fit and of classic cut that would survive well past the latest trends. After hearing what I was looking for, the salesperson did what every good salesperson does. She showed me one of the most expensive ones in the store. She probably knew I was looking for a different price range. Instead of showing me a tuxedo in that range right away, she tried anchoring.
We previously discussed anchoring in our interview with Tommy Lindström about nudging. In the context of pricing, by using the heuristic of anchoring, you can influence a buyer’s idea of the price they’re willing to pay. The theory is that we all have a mental range estimates of what is typical or reasonable and applies to many different aspects of our lives, prices being one. The first example we see will become an “anchoring point”, or benchmark, we use to evaluate all the examples that follow.
How You Can Use Anchoring
By presenting the highest price as the first piece of information, you will make the following prices seem low to the buyer. The buyer will use the first price as a baseline to evaluate the following prices.
In tiered pricing, this is particularly easy to do since you can present your tiers in sequence starting with the most expensive one. Just like the tuxedo store salesperson did when showing garments to me.
Taking Advantage of Fluency by Improving the Buying Experience
A tiered pricing offer with just the right amount of information is the equivalent of a modern and minimalistic store design – a smooth experience. A massive text-intense proposal with long lists and dense blocks of text analogous to an old messy, though perhaps classy, store.
How You Can Use Fluency
Visual design and copy matter more than most people think. An attractively designed tiered pricing offer will be more successful in winning bids than one that hasn’t received any attention at all what design is concerned. Attractive design is subjective and what one client likes may not match what one prefers. For high profile cases, I recommend you spend the time to do the research and design the offer to meet the clients’ expectations. Hire the services of a visual designer if needed.
Things to consider when designing a tiered pricing offer
Take a good look at the following:
- Colors: Are they appealing and effective? Are they readable for those who are color-blind? Color-blindness affects 10% of the male population and you don’t know who will be looking at your proposal. Use a color-blindness simulator to color-blindness-proof your design.
- Typography and Layout: Are headlines clear and is there enough of a visual hierarchy? Is it clear what items belong together?
- Information: Read the text critically and pretend you don’t have any prior knowledge. Do items require additional explanation? Is it clear what’s included? Is it clear whether prices include or exclude applicable taxes?
- Tone: Is the text written in a positive and helpful tone or is it defensive? Don’t write your proposal the way you’d write a legal document (which a lawyer will interpret in the case of disagreement or conflict). Instead, imagine putting a smile on the potential client’s name when they read your offer.
Don’t List Features, Instead Describe Jobs and Benefits
I’ve used the term features throughout this post for simplicity’s sake. But just to be clear, the best marketing and pricing focus on benefits. You should describe your offer terms of the benefits it provides to your client.
Those with a background in marketing are probably familiar with the idea of thinking in terms of features, advantages, and benefits. This refers to the fact that features provide advantages that in turn give benefits. This idea is probably best illustrated with a quote by Theodore Levitt, a legendary Harvard professor of marketing, who famously said:
“Nobody wants a 1/4 inch drill – what they want is a 1/4 inch hole.”
We can break it down into features, advantages, and benefits like so:
Feature: Rotating drill bit.
Advantage: Being able to make holes in walls, fast and easy.
Benefit: Being able to redecorate a home by mounting shelves on walls.
“Upgrade your user, not your product. Don’t build better cameras — build better photographers.” — Kathy Sierra (source)
Help Your Client Be the Best They Possibly Can
If we apply this to you, dear reader, your role isn’t to build apps, providing advice, creating digital marketing plans or designing blogs. Your job is to help your client be the best they possibly can at what they do.
Clayton Christensen, a well-known professor of marketing, has more recently reformulated this in under the name of Jobs-To-Be-Done (JTBD). In terms of JTBD, every product or service performs a job for the buyer. The buyer “hires” the product to perform the job and thereby obtains the benefits.
The question you need to ask is: When a client purchases your services, what jobs do they need performed?
To deliver a proposal that punches above its weight, make sure you put the focus on problems the client has admitted to having. Once you have identified the painful spot, all you need to do is to apply pressure. This works well since resolving pains is usually more highly prioritized than achieving gains.
Put a Value on the Benefits When Pricing Your Tiers
Setting a price is difficult. There’s no way around that. Most companies rely on gut feeling or guesswork. Others employ pricing consultants that carry out anonymous market research to determine what potential clients are willing to pay for an equal offering. Chances are you don’t have the budget for, or cannot motivate, a €40,000 consulting fee.
The Key to Pricing Is Understanding Where Your Clients Are Coming From
The good thing is that you get quite far just by taking pricing seriously. The starting point is understanding what your clients and potential clients value highly. I recommend that you first read our post about value-based pricing. It describes a method to gain insights into your clients’ pains and gains. This will help you reason about what problems you solve for them, which enables you to understand the value that you bring.
8 Questions That Make You Better at Tiered Pricing
- What is the cost the client suffers if this problem (pain) isn’t fixed or mitigated?
- Does the client have other options? What are the competing solutions or providers? Note that your competitors aren’t just fellow agencies or consultants. Doing nothing is also an option.
- Is the client in a tight spot? In “nuclear event” situations, you can usually command a rather high price to solve a critical problem.
- Does this client value speed, quality or availability? Are there things you can do to improve fluency and hence help you command a higher price.
- Consider the entire client journey. The deliverables are just part of what you provide. What can you do to make the whole experience more valuable?
- What is the bare minimum price you can afford to accept? Use estimation techniques to estimate your costs.
- What is your dream price?
- Do you believe in the price? Can you look the client in the eyes and honestly and confidently say you’re worth it? Just because you can charge more doesn’t mean you should. Pricing isn’t about tricking people. It’s about creating a mutually beneficial transaction.
These questions are relevant to pricing generally speaking. Pricing is one of my favorite topics and we’ll revisit it on this blog again soon. Make sure your subscribe to our newsletter to be notified.
To arrive at a number, make a hypothesis about the value you’re providing as perceived by the potential client and put a price on that value. Bring it to someone whose honesty you trust, such as a spouse or business advisor, and get their candid feedback. Your mom is probably not a good choice.
Expect Trial and Error
Have realistic expectations. You won’t get the price right the first time. It takes practice. However, keep in mind that almost every consultant, freelancer, and agency underestimate how much they can charge. You can almost always charge more than you do now. You’ll be surprised!
If you have any questions, feel free to use the comments section below. I’ll read every comment. Promise!
Free Tiered Pricing Design Infographic With Heuristics
I’ve also created an infographic which summarizes the heuristics covered in this post and illustrates how they can be used.
Download PDF: Tiered Pricing With Options Template
Free Tiered Pricing Template
To save you time, I’ve created a fictitious pricing example to you can use as a template. It’s available as a PDF and a Powerpoint file you can download and edit yourself.
Download PDF: Tiered Pricing With Options Template
Download Powerpoint PPTX: Tiered Pricing With Options Template
How do you see yourself using tiered pricing? Does it seem difficult or easy?
Please post a comment. I read all the comments.
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