In a competitive market, consumers are always looking for something that sets a product or service apart. We call this distinguishing factor the Unique Selling Proposition (USP).
Customers will assess the value of your product or service against a range of factors. As a consumer, you experience these choices every day. You choose what to buy, based on factors like price, quality, reliability, etc. As an unknown brand, you need to get customers to use your products or services; only then can factors like quality be assessed.
This guide will share how we’ve used introductory pricing and tiered pricing to provide us with a competitive edge. Specifically, we’ve used a tiered pricing plan. A tiered pricing plan can help your business make customer acquisition easier, so you can prove that your solution provides value. Only then can you establish your brand reputation. Let’s dive in.
What is a tiered pricing structure?
In simple terms, tiered pricing is the process of giving your customers the ability to purchase your product or service at different price points. Most businesses use tiered pricing to sell a product or service with more features at a higher price or lock a customer into a contract for a fixed period or at a minimum order value.
Here’s an example of a tiered pricing plan for a software company.
As the pricing increases, you get additional features. A portion of your customers will pay more to get access to additional features regardless of the price point.
You increase the chance of upselling to customers by improving the value proposition. For example, if an annual plan’s cost is significantly less than the monthly plan, some customers will opt to save money. On the other hand, if the added features have a lot of value and the price increase is small, the customer will likely choose the more expensive plan.
If you can upsell your customer, you increase the Average Order Value (AOV).
What is an introductory pricing structure?
With introductory pricing, you provide a low price to early adopters of your product or service. The special pricing is a trade-off for customers. Because customers will find it hard to judge your product or service quality, you reduce the cost to make the offer more appealing.
As you establish your reputation in the market, you increase the price of your goods or services.
The introductory pricing model is used all the time by startups. You’ll see lots of examples of introductory pricing on Kickstarter, and to an extent, deal sites like AppSumo.
With services, you can either keep customers at the introductory price or increase the price for all customers as you add more features. You’ll find examples of companies doing both of these things.
Should you keep customers at the introductory price point?
The benefit of ‘grandfathering in’ customers is that they need to pay more should they stop a contract and decide to use your services in the future. That trade-off means that your earliest customers are less likely to churn. However, introductory pricing is often provided at a ‘break-even’ price point or with a minimal profit margin.
On the other hand, if you increase the price for all early adopters, you’ll maximize revenue from your customer base but increase the chance of customer churn. I’ve had a company do this to me. I left the second time they implemented a price hike.
How I used tiered pricing & introductory pricing to grow my agency
I strongly recommend you define your USP before you start your business. If you can establish how to position your services and what makes your offering unique, customer acquisition will be easier.
I run an SEO company offering guest posting services so companies could profit from their blog. Before I started the agency, I conducted market research. After reviewing what competing companies were offering, I set out what I felt was an attractive USP:
I would provide ghostwriting guest post services.
Provide transparent and competitive pricing.
Use a pay on results business model.
Never ask a client to sign a contract.
Let’s focus on my tiered pricing and introductory pricing.
How I set my pricing structure
I had worked for an SEO agency before I set up my company. I understood what agencies charge and how they set up a contract. I wanted to offer a quality service at an affordable price.
In pursuit of strong initial growth, I decided to provide an introductory pricing offer to acquire clients and utilize tiered pricing to upsell clients.
Introductory pricing model example
The introductory pricing structure was as follows:
$100 per post for the first client
$200 per post for the next three clients
$250 per post for the next seven clients
Underpinning my introductory pricing was the idea that as the business grew and I established a reputation, the cost of my services would increase. I could afford to offer my service at a low cost initially because I had minimal overhead.
I know that as my overhead increased, I would increase the cost of service. However, it would be easier to increase the service costs once I had established my reputation.
Tiered pricing model example
To increase the average order value, I used a tiered pricing model. The model looked like this:
$200 for a single post on a site with a Domain Rating (DR) 50-59
$300 for a single post on a site with a DR 60-79
$400 for a single post on a site with a DR 80-89
$500 for a single post on a site with a DR 90+
$1,000 for a minimum of five articles a month on a site with DR 50+
The value proposition of upselling to a larger order for most clients is a no brainer. You can see how I tried to use a mix of tiered and introductory pricing to make customer acquisition easier.
When you have created what you feel is an attractive offer, you need to test the market.
I converted four clients in the first two months and locked in clients on the price they entered. When I had four clients, I increased the cost of five posts a month for the original client to $200 per post for five guest posts.
All of the clients who are on the $200 per post price plan will remain there.
At this point, I started charging $250 per post.
The tiered pricing structure remains in place. The tiered pricing encourages companies that fit my ideal customer persona to enter on my preferred pricing plan.
How you can use tiered & introductory pricing
An introductory pricing model makes sense if you are a startup or you are entering a competitive market. Providing a service that is cheaper than the competition is one of the easiest customer acquisition strategies.
That value proposition, more for less, will always be powerful.
The difficult decision you will face if you utilize introductory pricing is what to do with your existing customers once you change your offer’s cost. I chose to keep the majority of my clients in at the price point they initially entered. My clients have rewarded me for this choice by remaining with the company.
2 ways to grow your business with tiered pricing
Meanwhile, there are two ways you can implement a tiered pricing model to grow your business.
I used tiered pricing to attract my ideal customer and upsell the service. A single guest post’s cost is affordable, but the pricing structure is more attractive for customers with a higher budget.
You can also use tiered pricing to increase the lock-in period. You usually see this with SaaS businesses, such as an email automation platform we’ve been using.
The example above is an illustration of how you can tie tiered pricing plans to specific lock-in periods. Offering lower rates to customers who subscribe for a longer period rewards them for their loyalty and guarantees cash flow.
A company’s preference should be with a longer lock-in period. However, a paid monthly subscription should still be affordable and give users a glimpse into advanced features. The more attractive the annual plan is relative to the monthly plan, the greater the chance customers will purchase the more expensive option.
Whether you use the model I used with Launch Space or the one that the SaaS company above uses, tiered pricing models reward customer loyalty and increase their lifetime value.
Whether you’re a startup or an established player in your niche, tiered pricing will help make your business more competitive. A tiered pricing strategy allows you to effectively upsell customers so you can increase the average order value. The model is not going to be suitable for every business. Tiered pricing is frequently used by service providers, less so by companies selling goods.
A tiered pricing strategy can lower the cost of entry for new customers, reward long-term customers, or increase the average order value. Meanwhile, introductory pricing is most suitable for startups or businesses entering a new market. As I’ve shared in this guide, it’s possible to combine these pricing models.
The cost of your products or services will impact customer acquisition. Hopefully, this article has provided insights into why you should carefully consider pricing in your business plan and how to incorporate it as part of your USP to improve customer acquisition.
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Nico is a content marketing consultant and the founder of Launch Space. He works with clients that range from Fortune 500 companies to startups providing them with insights that help generate more traffic to their site and increase sales.