The Simple Pricing Strategy That Will Boost Your Profitability
Good better best pricing
I was purchasing paint rollers and in scanning the shelf I noticed that one brand offered three different types of rollers labeled GOOD, BETTER, and BEST.
Interesting, I thought.
I thought to myself, well if the Good option is the lowest available offering, it might not be good enough for me. I don’t want glumps of paint or fibers on my wall. The Best option was really expensive and that didn’t seem worth it to me for a stinkin’ paint roller… It’s a wall…I’m not painting a work of art. The Better option seemed like the best value. It seemed like the right option for me.
I see this kind of pricing all the time, especially with online software pricing. You probably know what I’m talking about. Nearly all online software products offer three paid pricing options, increasing in terms of price and benefits.
Three-tier pricing Examples
Hubspot pricing: three paid tiers of pricing.
Mailchimp pricing: three paid tiers of pricing in addition to a free plan.
Acuity Scheduling pricing: three paid tiers of pricing in addition to a free plan.
The magic of three
There must be some logic to this pricing if so many companies are using it. And there is. When it comes to selling, the magic number is three. Our brain does really well considering three options. More than that and we have analysis paralysis. Less than that and we feel like we’re missing out on a potentially better option elsewhere. But there’s more to it than just having the right number of options.
These three options should range in pricing (low - medium - high) and have corresponding scope increase (small - medium - large). By doing this, the vast majority of your sales will be for the medium-priced, medium-scale product.
This is because when comparing the three, the cheapest option will feel like there just isn’t enough offered. The most expensive option will seem expensive, but that’s the point. It’ll make the middle option feel more affordable than if there wasn’t a higher priced option to compare it to (also known as price anchoring). So, what do you get when you bookend the offering you most want people to buy with something more expensive with all the bells and whistles and something least expensive with the least amount of benefit?
The middle option will seem juuuust right.
Remember Goldilocks and the three bears? This porridge is too hot; this porridge is too cold; this porridge is juuuust right! This is why some refer to the three-tiered pricing model as the Goldilocks Pricing Model.
What if you charge hourly?
While it is totally fine to use hourly pricing to experiment with what work your business should focus on and to figure out how much time, effort, and resources go into solving your client’s problems, it is NOT a forever pricing strategy.
Your goal should be to move away from hourly pricing (and custom proposals) as soon as you’ve learned enough to develop standard packages for your offerings (read How to Transition from Experimentation to Expert as an Entrepreneur).
In my experience, most consultants and creatives continue pricing hourly far longer than they need to. Most just need to take the time to evaluate, organize, and make sense of everything you’ve learned from working with clients. All the information you need is likely already in your head, you’re just to close to see the patterns or aren’t carving out the time needed to figure it out. It often helps to find a strategic thought-partner to help you think through this kind of stuff if you’re getting stuck.
Your clients don’t know what it takes to solve their problem (that’s why they’re hiring you), so don’t make them guess how much time you need to do it. By packaging your offerings, you’re communicating that you’re an expert and you know exactly what needs to be done and what the value of that solution is.
Still not convinced? Read The Secret to Pricing Like an Expert for a more in-depth explanation of why hourly pricing actually works against you and your business.
How packaging your services increases profitability
Not only does packaging your services make them more appealing (leading to more sales and higher revenue), it also makes them more profitable. Let me explain.
Can you do something new as fast as you can do something you’ve done lots of times before? No. That’s because you learn and get better and better at it the more you do it. You figure out how to improve and streamline your process to get better, faster results.
So, the benefit of charging the same amount for something that can be done faster and faster over time is…you guessed, increased profitability!
You also get more time back (and increase profitability) by eliminating the need for custom proposals, which are always a time suck. Proposals usually require several conversations with your potential clients about scope before you even get paid or know you’re going to get hired. Then you actually need to write the damn thing (which is rarely quick and usually something that entrepreneurs despise doing).
Time isn’t the only factor. You may need to invest in materials, tech, software, etc. to do what you do. If you are always offering different services that require different materials and resources, then (SHOCKER!) you are going to have to keep buying and investing in more materials and resources. Conversely, if you focus on growing your clientele for the SAME service, you can either reuse the same resources or get better economies of scale and voila! Even better profitability.
Packaging your services to offer a standard set of valuable benefits to your ideal clientele sets you up to become a super profitable expert at delivering on the promises of those packages and gets you out of the rat-race of always-changing proposal work.
This way, you can also charge for the value of the work you’re doing, not the time it takes.
So, if I’ve convinced you, let’s dive into how to figure out your productized service offerings (packaging your services as if they were a product with a set price).
Start with your niche
In order to create your own three-tier packaged offerings, you’ll have to know your niche. This is because the offerings need to be three alternatives that a customer chooses between rather than being totally unrelated offerings that someone could conceivably purchase all of.
Not sure what your business should focus on or not convinced that niching down is a smart strategy? Read Find Your Sweet Spot to be a Successful Entrepreneur, 3 Benefits to Being a Specialist Instead of a Generalist, and What a Niche Looks Like for Service Businesses.
Know your ideal client
The other thing you’ll need to create compelling packages is a solid understanding of the needs of your ideal client.
Your packages should solve for their biggest pain points, so if you don’t know what their pain points are, crafting your packages is going to be difficult.
If you’re not sure who your ideal client is, download this free step-by-step guide to figure yours out.
Creating your own bronze - silver - gold pricing strategy
Once you know your niche and your ideal client, there are a couple of ways to figure out how to package your offerings.
One way to figure out what your offerings should be is to think about three different levels of needs your ideal client might have. Each package should solve those varying levels of needs.
The other way is to start with your middle package - the one that will be purchased most often. Pia Silva, author of Badass Your Brand, calls this your Bullseye Product (yes, she is talking about a service offering).
She suggests you craft your middle package first based on the scope of project you want to do most often, which should hopefully line up with what will be most appealing to the majority of your ideal clients.
Once you’ve formed your bullseye product, you can remove some of the less necessary items to develop a lower-priced budget option. Conversely, you can add in all the bells-and-whistles to create a more expensive VIP option. This is illustrated below:
What if you don’t have typical projects?
I’ve heard all the excuses for why people want to continue billing hourly, but the most common one is that they think the scope of projects is so vastly different from case to case that they can’t offer just a few packages.
If you’re just getting started, this could mean that you’re still in the experimentation phase and you don’t yet know enough to create standard packages.
However, if you have a decent amount of experience, you should still be able to package your services. Here are a few ideas for how to package your services if you feel each project is so different it feels impossible:
Pick the most likely scenarios and make those into packaged offerings. This at least gives your potential clients an idea of what value is possible at what price and get a better feel for what they might need. You can make a footnote to be contacted for package customization, but I will challenge you here to first consider option two below.
If you really get super clear on who you want to be working with and on what kind of projects, I bet you can narrow it down to three types of project scopes. This doesn’t mean that other scenarios don’t exist, it just means that those are the types of projects you really want to take on as an expert. Don’t worry, you can adjust these over time, but it’s good to pick a place to start and try it out.
Include a specific scope for a specific offering and let people know that this package can be purchased multiple times to get additional scope. For example, if you do website SEO audits, your package could include an audit of 5 website pages for $100. If they have 10 website pages they can purchase two of these for $200. This option is really only needed if your time spent changes drastically based on the scope you’ve set AND so does the value they get. If either one of these isn’t drastically different, instead approach it like option four below.
Charge a price that you’d be happy to do the work for no matter the scope, yet provides enough value for the price no matter what situation your potential clients are in. Let’s revisit the website SEO example. Your potential client is paying for value and the value they’ll get is a website that is better for SEO. All they care about is this benefit, not how many web pages they have or how long it takes you, so unless you tell them they should pay more or less depending on their website setup, they probably won’t even think about it, so charge a flat rate that makes sense for the majority of your ideal clients.
So stop with the proposals and tracking of billable hours. There is so much upfront work and conversation that goes into getting hired this way that a lot of times, frankly, just doesn’t pay off. Instead, think about who your ideal client is and what their needs are and figure out how this overlaps with the aspects of your work you enjoy doing the most.
IN A NUTSHELL: Pricing strategy for increased profitability
Develop a low, medium, and high-priced offering with increasing scope to match the increasing price to solve your ideal client’s most common needs (like the graphic below illustrates).
Watch as your revenues increase from offering a more compelling solution.
Revel in increased profitability over time as you get more and more efficient with your process and can reuse things you need to invest in to do your work (or get economies of scale from purchasing higher volume).
Don’t know your ideal client?
As I mentioned earlier, knowing your ideal client and understanding their needs is paramount to creating profitable and compelling packages for your services. If you’re not sure who your ideal client is, download this free step-by-step guide to figure yours out.
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I’m Stacy, an entrepreneur, strategist, and adventurer dedicated to helping you build a kick-ass business out of your skills & passions. Why? Because I think you should love your life and that’s kind of hard to do if you don’t love your work.
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