Imagine that low cost competitors enter your market and some of your customers start grumbling about your prices being too high. Their quality and service isn’t as good as yours, but they are significantly cheaper.
How would you react?
If you do nothing, you risk losing some of your customers.
If you drop your prices, you erode your profitability and dilute your brand.
Neither of these options is particularly desirable, but there may be an alternative. Instead of choosing between all or nothing, you could offer a low cost, no frills option for price-sensitive customers while still providing high quality and exceptional service for those who are prepared to pay a premium.
Tiered pricing (sometimes referred to as “Goldilocks” or “Good-Better-Best” pricing) isn’t just a defensive tactic for protecting your business against cut-throat competitors. You can also use it to create new growth opportunities. Just as some customers may be very price-sensitive, there may be others at the opposite end of the spectrum who are prepared to pay much more for additional value.
This isn’t just good in theory. A recent Harvard Business Review article shares several case studies of companies that have successfully implemented tiered pricing. Even those offering seemingly commoditised products or services (like auto insurance) have experienced dramatic growth after changing how they price.
It’s tempting to stick with one-size-fits-all price structures. They are easy to understand and administer, which are important benefits when starting out. However, as your business grows, they can hinder your progress and make it increasingly difficult to capitalise on new opportunities.
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