I learned of the three-tier pricing strategy many years ago, but I never gave it much thought in regards to the design industry. Until recently that is.A few months ago I came across it again while reading a business book. A day or two later I was watching a YouTube video, and a designer mentioned using a three-tier pricing strategy in his design proposals.
Maybe there's something to this I thought and I decided to give it a try. And you know what? It works. I’ve used it on several proposals recently with great results.
What is a three-tier pricing strategy?
A three-tier pricing strategy is when you offer three different pricing choices for essentially the same service or product but with different options which increases the value for each one.
Look at this example of a fictional web hosting company using a three-tier pricing strategy.
I know you’ve seen this type of pricing strategy before.You’ve probably also noticed that companies usually highlight the middle price as the “recommended” or “most popular” one according to the seller.That’s because it’s the option they are hoping you will choose. The other two are there to help you come to that decision.
Why a three-tier pricing strategy works
There are two main reasons why this type of pricing strategy works.
- It gives the purchaser options to choose from, which makes them feel more in control of what they are buying.
- It showcases the value of what the purchaser is buying making their choice easier.
In the above web host example, the buyer sees three options.
One that’s good for one website, another for three websites and a third for unlimited sites.
It also shows escalating value options at each tier.Tier 2 offers more advanced security plus backups and an SSL Certificate where Tier 1 doesn’t.Tier 3 offers super advanced security PLUS daily malware monitoring. It also provides daily backups instead of only monthly and a Wildcard SSL Certificate over a standard SSL Certificate.
By offering these three options to a potential client, the hosting company is altering the purchaser's mindset.Instead of giving the client one option and having them ponder “is this a good value for me?” they are given three options and instead ask themselves “which one of these is the best value for me?”
A single pricing option requires a yes or no decision.But by introducing the variables in three-tier pricing, you force the client to contemplate their decision making them feel more in control of their buying choice. And when a client feels in control of their buying choice there's less chance of them deciding to shop elsewhere.
The other benefit of the three-tier pricing strategy is how it educates the client on the value of what it is they are buying. They see what their money is getting them.
The client came to the website looking for web hosting for their one site. But now they are shown that there are different values available to choose from when it comes to hosting a website.Even though tier 2 allows up to three websites, the added value included with that option may persuade the client to choose it even though they only have one site to host.
You can almost predict the outcome
The great thing about a three-tier tier pricing strategy is that you can practically guarantee what option a client will choose.Why do you think so many sites highlight the “recommended” or “Best Value” option? It's because they made it the most tempting of the three.Some people call that middle tier the “anchor price” or the “pillar price”. You base your entire strategy on that price.
How a three-tier pricing strategy works
This pricing strategy doesn’t work very well if you charge an hourly rate based on your time. For it to work, you should be using fixed, project-based or value-based pricing.
You start by figuring out a price for your ideal proposal and what benefits/value to offer with it. That's your anchor price. It should be the best value for the price.
Once you’ve determined your anchor price, you create a lower priced option with fewer benefits/value. Make this more economical option close in price to your anchor price.You wan the client to look at the first two options and come to the conclusion that tier 2 is the better deal even though it costs more.For Tier 3, you set the price significantly higher and offer a lot more value with it. But most clients can usually do without the added benefit offered in Tier 3.
When a client looks at the three tiers, there’s a good chance they choose Tier 2, your anchor price.Most people will see the cost vs value of Tier 2 as the better bang for their buck.
Most will skip over Tier 1 because they don’t want to be the person who chose the cheap route. It’s a prestige thing.Tier 3 is there to show the client there are more expensive options, making them feel like they are getting a bargain by choosing Tier 2.
Automobile manufacturers embrace this strategy. Most cars are available in three models. A base model, a deluxe model, and a Luxury model.Which model do you think sells the most? It's the deluxe model — the one in the middle.
There's nothing wrong with the base model vehicle. It will get you from point A to B just fine. But even though the deluxe model cost more, it comes with extra options. All those bells and whistles are usually enough to get people to choose the deluxe model.
That’s three-tier pricing at it’s best.
Not many people will choose tier 3, The luxury option, but embrace those who do, they really want to work with you.
Also, keep in mind, you do not want to underprice Tier 1. Make sure that if a client does choose that first option, you are not losing money on it.Trust me; those car manufacturers are still making good money any time they sell a base model vehicle.
Implementing a three-tier pricing strategy for your design business
So how does this apply to your design business?Let’s look at two examples using website and logo design. Keep in mind that you can apply this same principle to any design project.
When quoting on a website design, you may want to offer something like this.
Tier 1) $1,500
Design a website based on the content and material provided by the client and install it on the server of their choosing. The client will be responsible for all maintenance and upkeep of website after launch.
Tier 2) $3,000 + $600/year for maintenance
Design a website. Provided content will be edited by a professional copywriter ensuring maximum SEO impact. Submit website to Google and other directories for faster indexing. Provide site security and manage monthly updates, maintenance and backups.
Tier 3) $9,000 +$2,400/year
Everything from Tier 2 plus Keyword monitoring and SEO rank tracking.
The idea here is to show the client how much value you bring when you partner with them.
If all they want is a website, you’re happy to design one for them and be done with it. However, if the client wants a partner that has their best interest in mind, someone who will make sure their website keeps performing optimally and help their business grow, they can have that for nominal extra investment.
When quoting on a logo design, you may want to offer something like this.
Tier 1) $750
Design a logo and provide it in colour and B&W in the necessary file formats.
Tier 2) $1,500
Everything from Tier 1 plus a style guide showing how to strategically use the logo to build a cohesive brand across the entire company. This style guide will help the company create a positive brand recognition strategy as a foundation upon which to build their business.
Tier 3) $5,000
Everything from Tier 2 plus a full day strategy workshop presented at the client's place of employment. This workshop will explain the new brand to the company’s staff, teaching them the proper use of the new brand to achieve brand synergy throughout all levels, from part-time employees all the way up to top management.
When you look at all three tiers, you can see that the best value is Tier 2. A Logo and Style guide.The idea here is to illustrate the value the client receives by working with you. They should be hiring you for more than just a logo design. But if a logo is all they want, you’re happy to design one for them.
Give it a try.
I hope you can see the value in implementing a three-tier pricing strategy.I can tell you that of the last dozen proposals I sent out using this strategy, three clients decided not to hire me. From the nine who did, one chose my Tier 1 and eight chose my Tier 2.
One was ready to choose Tier 3 for their website design, but I convinced them after further review that Tier 2 was a better choice for them, Idon’t believe they need the service I was offering in Tier 3. But I did tell them we can review it again in the future. They appreciated my honesty very much.
Are you using a three-tier pricing strategy?
Let me know if you plan on implementing a three-tier pricing strategy. If you already use this strategy, I would love to know how it's working for you. Let me know by leaving a comment for this episode.
Questions of the Week
Submit your question to be featured in a future episode of the podcast by visiting thefeedback page.
This week’s question comes fromChristopher
On several episodes, you mention the “discovery phase” where you ask questions and do research on your potential client.
Can you elaborate on what kinds of research and the types of questions to ask? As I only do web design and not logo/graphical design, I would appreciate a focus on web sites.
To find out what I told Christopher you’ll have to listen to the podcast.
Tip of the weekAsk cold calling clients if you can add them to your email list.
Sometimes cold calling doesn’t work because the client doesn’t need your services at that time. But there's no way to know for sure. One thing that may help is by asking the prospect if you can add them to your email list to keep them informed of exciting projects you're working on.
If the prospect agrees you'll know they have an interest in you and could become a client in the future.
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