2014-11-04 11:30:24 Pricing Strategy English https://quickbooks.intuit.com/r/us_qrc/uploads/2014/10/iStock_000025557252Small.jpg https://quickbooks.intuit.com/r/pricing-strategy/tiered-pricing-works/ How Tiered Pricing Can Benefit Your Business

How Tiered Pricing Can Benefit Your Business

3 min read

Hope Oriabure-King, owner and operator of Black-Tie Babysitting in Dallas, Texas, says having a flat rate doesn’t work well for her customers, especially those who are looking for affordability. “If one flat, advertised price doesn’t fit your budget, you won’t call,” she says. “With tiered pricing, it gives us the opportunity to explain the value of our services and validate our prices.”

Oriabure-King’s strategy works well for a variety of businesses. According to Caron Beesley, a contributor to the U.S. Small Business Administration’s blog, depending on what products and services you sell, it might make sense to consider tiering your pricing so you can hook buyers and then “add options that ultimately will help increase your bottom line.”

LiveAnswer founder and chief executive Adam Boalt says tiered pricing is a necessity for his company, which offers six tiers of service and monthly subscriptions ranging from $45 to $950 for customers who use LiveAnswer to provide phone support for their businesses.

“Most customers want tiered pricing, and it gives them viable choices,” Boalt says. “And for business owners it means stability with recurring revenue.”

Boalt, who is based in Miami, says tiered pricing also gives businesses a way to equate customer lifetime value, a metric that will have “less volatility for bank loans and investors.”

Richard Storm, a photographer in New York City and owner of NY Photo NY, says tiered pricing is also a must in a competitive market. Offering tiered-priced packages, such as his $175 intro package for 65 pictures and nine retouches, has helped boost revenue. First, customers would buy an introductory package and then would upgrade to a more expensive package. “I’ve had past clients who will call me up say, ‘I really liked the way this came out, so I’ll book your next package,’” he says.

Beesley also advises small businesses to be realistic about pricing by accounting for costs — which may require pricing their initial services or products higher. Many small business owners “unwittingly underprice” because they underestimate costs and lack  a larger company’s team of  efficiency experts to cut waste. If cut-rate prices are the answer, than you need to offer a bare-bones alternative.

Storm says coming up with a his initial pricing was an exercise in trial and error. At first he first offered his services free to build up a portfolio, then started charging upwards from there, often looking at competitors’ rates for comparison’s sake. He learned early to stay away from hourly rates, because he said hourly blocks didn’t work for him. Frequently he would finish in less than an hour and felt as if he was merely wasting time so a client felt like he or she received enough service. Instead he decided to price packages based on the number of shots and retouches rather than a ticking clock. In that way, he worked fewer hours and could fit in more of his set-rate packages.

However, Storm says he also requires a deposit on most of his packages after being burned a few times by no-shows.

Storm says tiered pricing works best when you offer a service that can be augmented or pared down. “If you are offering a variety of things, then tiered pricing will benefit you,” he says.

Boalt agrees. “People like to have options,” he says. “The starter package [at LiveAnswer] is a higher cost per minute than three tiers up,  but customers like to see a menu of packages.”

Oriabure-King says that most of her clients, wedding and event planners who need child care options, appreciate her tiered pricing — even if they decide not to work with her business.  “For example, a bride only expecting two children at her wedding would still have to pay the same price for our minimum of 5 children [$175 an hour] so she may rethink professional childcare for her event,” she said. “They appreciate this honest type of consulting.”

Oriabure-King’s five-year-old business is doing well, and now she’s targeting evening networking events for child care. “Just because you’re a parent doesn’t mean you can’t be social,” she says.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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