Goldilocks pricing to eliminate discounts and maximise profits
18 Oct 2015
Setting your prices to capture maximum value and avoid discounts is critical to business success. One approach is to use multi-level or tiered pricing; for example a typical multi-level pricing system has 3 levels (good, better, best) or (silver, gold, platinum). Also known as Goldilocks pricing, this approach works on the principle that customers tend to avoid extremes and go for the middle option.
In this article, we explain how to design a multi-level pricing system using the latest research in behavioural psychology, to help maximise your profits and circumvent tough pricing negotiators. Arm your sales people with a logical and flexible pricing system that enables them to vary the price-value equation, rather than discounting your high value offerings.
Creating your offerings
In order to cover all bets, you need 3 or more options so customers self-select the value they are prepared to pay for.
Buyers can be roughly divided into three categories:
Price Buyers - Core Offering
The most basic or stripped down option. Your margin may not be that great, but this offering enables you to service price sensitive customers.
Value Buyers - Core Offering & Extras
Your middle option that you expect most customers to select. It should provide the standard options in your market at a price most customers are prepared to pay.
Premium Buyers - Core Offering & Premium Extras
Your most expensive offering with the highest margin that only premium customers are willing to pay for, just so they can have the best.
You can have more than 3 levels, but the greater the number, the more likely the customer will suffer choice paralysis. As such we recommend 3, and no more than 5. Please see the screen shot below for an example.
Show the premium price first
It is human nature to compare. By using multi-level pricing, customers compare prices between your options, rather than comparing with your competitors. In order to maximise the advantage of this comparison, show your highest prices first. This anchors customer expectation with the highest price, so your other options seem relatively much cheaper. To maximise this effect, set your premium price much higher than your other prices (a multiple of 2 or 3 is not uncommon).
The danger with this approach is that customers may go into pricing shock, so it is best to follow up fairly quickly with your other options, so customers can self-select the value they are prepared to pay for.
Obvious differences between levels
In creating your options, it is very important to provide strong differentiation between each, so it is very clear why some prices are higher. An example is given below for web hosting:
Web Hosting & Free Setup
Web Hosting & Free Setup & 24x7 Phone Support
Clear differences stop price negotiators from pressuring you to lower prices or discount higher priced offerings. Rather than discounting an option, you can simply suggest they take the lower priced option that fits their budget. This approach makes it easy for your sales-people to justify prices, and explain why one customer paid less than another.
Cross-sell after option selection
After a customer selects an offering, then offer additional high margin products or services that clients may also need. You may have customers that don't fit neatly into your generic multi-level option, so these extras or complementary services may help you customise your product or service meet a specific industry or customer segment.
Also, by combining multi-level pricing with optional extras, your sales people now have great flexibility in matching the value a client is prepared to pay for.
Now that you have built-in flexibility in your pricing so you can match any customer budget, make an agreement to no longer discount. A reduction in price should always result in a reduction in value provided. A logical and consistent approach to pricing will sky-rocket customer understanding of the value you provide.