Monday, November 19, 2012

Pricing tears

Most businesses that use pricing tiers miss the point, which makes me sad.  They end up using prices that are all roughly the same.  When you have similar prices, it actually makes the purchasing decision harder.  Prices are generally a symbol of value and as such, when you have different feature sets at nearly the same price, it says the extra features aren't worth much.

It takes nearly 4 times as much money to purchase twice as much enjoyment.  To test this, lets imagine I just gave you $5.  Think about all the things you can do with a free $5.  I think about food.  $5 will get me a cheap meal at a fast food restaurant.

If I were to double that and give you $10, the value of what you can get doesn't change much.  You can still really only afford a meal at a fast food restaurant, but maybe now can get a full sized meal with a drink and fries.

If I double the offer again to $20, you can afford a meal at a decent restaurant.  This change for me, the chance to eat at a decent restaurant vs a fast food restaurant, would likely double my enjoyment of the meal.

If your product tiers stand to double the experience, you should have 3-4 degrees of separation between the prices.  This serves to elevate the value of the options even more.  If you only raise the price a little, because the extra features don't really increase your costs, it serves not only to cheapen the higher option, but also the lower options.

The Ford Shelby Mustang GT500 is almost 3x the price of the basic Ford Mustang.  The basic Mustang is just a sports car, but the Shelby is a super car.  Having the option of a super car that looks just like the sports car makes both the sports car and the super car more desirable.

Pricing tiers aren't meant to allow more people into the market at exactly the price they desire, they are a tool to increase value and desirability of your offering.  If your goal is to let your customers choose the price, consider รก la carte.