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New Year’s Resolution: Tiered Pricing

Everyone’s got a New Year’s resolution. if you’re anything like the rest of America, your list of resolutions looks something like this:
1. Get jacked
2. Get rich

And before you ask - yes, the data supports this:

While we can’t really help you get in great shape, we can help you get your money up (ironically, we’re gonna do this by taking a look at the fitness industry)!

Since January 1st, gyms have been packed, and everyone is pumping iron, riding high on the thought of becoming the best version of themselves. Gyms are raking in the dough, but how exactly do they do it? What parts of customer psychology is the fitness industry able to exploit?

Of course, gyms spend a ton of cash on advertising campaigns and effectively sell the dream of having an envy-inducing physique, but they also use a tiered pricing method to make that final sale. Let’s look at an example with Crunch Fitness:

Around this time of year, Crunch knows that everyone wants to invest in themselves, but if they push their prices too high, they won’t be able to convert these motivated individuals into paying customers. 

The solution is to personalize the membership plans: for those willing to spend more, Crunch offers more amenities, and for those with budget constraints, they offer a basic plan. There’s a steep discount for the basic plan, and for those willing to pay more, Crunch shows how much value members will receive for just $10 - $15 more per month.

Let’s look at this graph from a customer’s perspective:

It seems like the most expensive plan is worth it. The Peak Results plan isn’t that much more on a per-month basis, and you get a ton of perks! Not only will the extra amenities like small-group training help you stay on-pace with your goals, but the extra cost will make you commit to achieving your goals. Sounds like a steal!

Now, take a look at this graph as a marketing-guru-in-training:

All of the standard benefits of joining a gym are actually covered in the basic plan, but by visualizing the data in this chart, Crunch increases the perceived value of their most expensive product (throwback to last week!). It may look like the “Peak Results'' plan has significantly more to offer, but the offerings are actually either the least relevant products (spray tanning, red light therapy, etc.) or simply modifications to products offered in lower-tiered plans (group fitness classes vs small group training).

As we can see, Crunch is a bit sneaky with their tiered pricing plans, but the key takeaway here is that they’ve mastered personalization and upselling!

They personalize the experience by showing that they know what you want and have a plan that specifically fits your needs.

They also upsell their products by showing you how many more amenities you could get with just a little higher price.

Crunch isn’t the only one taking advantage of tiered pricing structures, and there’s plenty to learn from some other big-time marketers.

With software companies, the structure is usually straightforward because of the low cost to deploy products. Most software providers break their offerings into something like the following:

• Standard: single user, looking to try this product for the first time, willing to pay for the basic tools

• Pro: still single user, but is willing to pay for some of the advanced tools

• Enterprise: teams or large corporations looking to integrate the entire suite of tools 

Although this makes sense and keeps things simple, there isn’t much personalization and is frankly quite dull. (boo!)

For a good real-world example, let’s look at a bit more creative approach, Zoom:

Caption: Zoom makes all of their offerings personalized, and they leave room for upselling at all tiers.

It’s important to categorize your offerings in ways that make it clear which kinds of people should buy at each tier. After a quick scan of the offerings, a potential customer knows which plan is right for them and/or their team. Zoom keeps their pricing personalized and offers opportunities to upsell:

Personalization:

• Monthly and annual subscriptions - cost flexibility

• Five different plans for different customer profiles

Upselling:

• Upsell opportunity from individual users in the “trying it out” phase to advanced users who want access to the premium tools

• Upsell opportunity from small teams in the “trying it out” phase to advanced businesses who want access to premium tools

• Flexibility with enterprise accounts

While Zoom does a great job at tiering their offerings, not everyone is in the software business, and it can be tricky trying to figure out how to tier your pricing if your products have a fixed cost associated with producing them.

Good news - if you’re not in the software game, you have the opportunity to get even more creative! I recently came across the pricing strategy for a consumer company called Rent the Runway. The company is a premier fashion rental service that utilizes a subscription model to drive its sales. (Read more about their cool origin story here.)

Just like Zoom and Crunch Fitness, Rent the Runway offers a tiered breakdown of its prices - but with a twist.

Runway approaches personalization differently from many of its competitors. Instead of having different product offerings for each tier, they keep it all about quantity. Customers at each tier are getting the same thing (designer clothing), but those that pay a higher price are getting more of it! Their personalization is all about making it affordable for the customer, and upselling is baked in.

This month at Beyond 9to5, we’re all about finding ways to maximize your revenue with a few simple changes to your pricing strategy. If you haven’t yet integrated tiered pricing into your business strategy, it’s time to start today! And if you already have, congrats! You’re already a step ahead, but maybe it’s time to shake it up and get even more creative with how you deploy your tiers!

Week 1: Price Outside the Box
Week 2: Tiered Pricing (This week)
Week 3: Free Trials
Week 4: Packaging

Want to discuss this week’s topic with other readers? Join LoopNation, our free community!

Our big questions being discussed this week are:

1. Is it ever a good idea to NOT adopt a tiered pricing strategy?

2. How do you tier your pricing?

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