TL;DR
- You can significantly enhance your SaaS growth by shifting from a one-size-fits-all to a three-tier pricing strategy, which broadens your appeal across different customer budgets and needs.
- The strategy's essence lies in its ability to offer choices—Basic, Standard, and Premium tiers—each designed to meet specific customer requirements and encourage upgrades.
- Effective implementation requires pinpointing your target market, matching your offerings to their expectations, and strategically using price anchoring to make the middle tier the most appealing.
- There is a psychological aspect of customer decision-making that encourages customers towards higher-priced packages.
- Differentiating your tiers by continuously gathering customer insights and staying ahead of market trends ensures your pricing remains competitive and attractive.
- Partnering with Togai can streamline the adoption of a three-tier pricing model, enabling faster deployment and optimization of your pricing strategy to capture a larger market share.
When it comes to SaaS, or software as a service, choosing the right pricing strategy is often the difference between sustained growth and stagnation. While the adage "keep it simple" is common advice, it may not always be the best course of action. In fact, overly simplified pricing models, such as a single price offering, can create more hurdles than they clear.
Imagine this scenario: a prospect views your single pricing strategy and must decide whether to accept your price and associated features or seek alternatives. You inadvertently corner potential customers into a 'take it or leave it' situation. Consider two extremes: a large enterprise with a generous budget that can comfortably pay more for all your features and a bootstrapped startup whose tight budget only stretches to afford your core offerings.
By sticking to a one-size-fits-all pricing strategy, you might isolate approximately 66% of your potential customer base. By contrast, a three-tier pricing strategy provides flexibility and choice, significantly boosting your chances of winning the bigger sale.
So, what is a three-tier pricing strategy? It's a subscription billing model offering several plans at fixed monthly prices. The three tiers are typically differentiated by the range of features, the number of users, or product usage levels—each catering to a distinct segment of your customer base.
But why should you consider three-tier pricing? The answer is simple and backed by data. Studies indicate that three is not just the most common number of tiers for SaaS companies but might also be the most effective. Let's delve deeper into the "why" behind this three-tier pricing strategy and understand how you can leverage it for your business.
Three-Tier Pricing: What Does it Mean?
A three-tier pricing strategy is a powerful approach that offers three distinct pricing choices for fundamentally the same product or service but with varying levels of value and options. This strategy, known by different names like 'choices pricing,' 'good-better-best pricing strategy', 'gold-silver-bronze pricing method,' and 'Goldilocks pricing,' brings clarity to customers, making their decision-making process easier.
The three-tier pricing model is divided into three categories: Basic, Standard, and Premium. Here's a brief overview of each tier:
Successful businesses, not limited to the SaaS industry, have utilized the three-tier pricing strategy effectively. However, not all companies' tiered pricing models are as straightforward as they might seem at first glance.
Take Canva, for example. While it offers three pricing tiers, it adjusts the prices based on the number of users. Another instance is Airbase. Although it promotes three primary tiers, they also provide a standalone bill payments option that leads to a different set of plans.
The ultimate goal of implementing a three-tier pricing strategy is to cater to the various needs and budgets of your customers. This approach, when implemented correctly, can add significant value to your business and boost your revenue.
Why Opt for a Three-Tier Pricing Strategy?
So why should you adopt a three-tier pricing strategy? Here's why:
1. Transcend the "take it or leave it" stance
One major advantage of three-tiered pricing is that it transforms the client's decision-making process. Traditionally, with a single option, a customer is left with a 'take it or leave it' choice. However, presenting multiple pricing options shifts their thought process from deciding whether or not to take your offer to choosing which option suits them best. This subtle shift makes your sales approach more appealing and customer-friendly, as it demonstrates your willingness to find a plan that best fits their needs.
2. Bulls-eye precision? Not always possible
Determining the exact price a potential customer is willing to pay can be likened to hitting a bull's eye - virtually impossible. This is where a three-tier pricing strategy shines. It provides a range of pricing options, increasing the likelihood of meeting your customer's value expectations. With a wider price range, you'll be better equipped to strike a balance between delivering value and making a satisfactory deal - an essential advantage of three-tier pricing.
3. Aim higher with the power of three
One of the intriguing aspects of the three-tier pricing strategy is its ability to nudge customers towards higher-priced packages. An interesting fact about our decision-making psychology is our inclination towards options in three than four or two. When presented with three options, studies depict that 66% will choose the middle one, 23% will opt for the low-priced one, and 11% will gravitate towards the high-priced package. This indicates that 77% of your clientele will likely choose options above your basic service level, thereby boosting your revenue.
Also Read: Tiered Pricing Structures: 5 Ways to Create the Best Structures
How to Implement a Three-Tiered Pricing Strategy
Implementing a three-tiered pricing strategy effectively can make a significant difference in your SaaS business's growth. Here's a step-by-step guide to ease your journey.
Identifying the target market
Knowing your audience is paramount in any business strategy. In a three-tiered pricing model, it's essential to identify your target market to understand their needs and preferences. This understanding will allow you to align your pricing options with individual customer requirements.
For instance, if your software serves a global audience, you may find customers who frequently travel overseas, preferring to purchase higher-tier services to maximize their utility. Identifying such trends and consumer behaviors is key to designing effective tiered pricing.
Matching services to product levels
Once you've pinpointed your target market, it's time to match your services to product offerings. This data will enable you to create service or product tiers catering to varying customer needs.
For instance, if you discover that customers who are willing to invest more in an international vacation are also open to purchasing supplementary products and services, it can be advantageous to design a tiered service structure that provides additional offerings at various price points to cater to their preferences and budgets.
Utilizing price anchoring
One standout benefit of a three-tier pricing strategy is the ability to guide a customer's choice. Many SaaS platforms highlight a 'best value' or ‘recommended' option, making it the most appealing of the three. Some refer to this middle tier as the 'pillar price' or 'anchor price,’ and it forms the basis of your pricing strategy.
The concept of price anchoring relies on the initial impact of a higher price, which can create a sense of surprise. However, as the potential customer becomes accustomed to this higher price, they become desensitized to the prices of the other two options. This desensitization can significantly increase the likelihood of closing the deal.
To illustrate this, let's consider an example. Imagine you're looking to purchase a software subscription. The company offers three tiers of service: Basic, Pro, and Premium. The Basic option is reasonably priced but has limited features. The Premium option is quite expensive but comes with exclusive features and added benefits. Now, the company strategically positions the Pro option as the "recommended" choice, offering a balanced combination of features and price.
As a potential customer, when you see the Pro option highlighted as the "Best Value," your attention is naturally drawn to it. The higher-priced Premium option may initially give you a slight shock, but it serves as a reference point for the value offered by the Pro option. Consequently, you're more likely to view the Basic option as lacking in features and the Premium option as overly expensive. This makes it easier for the company to convince you to choose the Pro option, ultimately closing the deal in their favor.
Offering Differentiation
Differentiation plays a crucial role in options pricing. The objective is to establish clear and unique value propositions for each tier, enticing customers to consider upgrading to higher-priced options. It is essential to consistently analyze customer feedback, stay updated on industry trends, and conduct market research. These efforts will help you identify opportunities for further differentiation and refinement of your pricing tiers.
For example, let's consider a software company that offers three pricing tiers: Basic, Standard, and Premium. Through customer feedback and market research, they identify that customers value additional features and personalized support. In response, they differentiate the pricing tiers accordingly. The Basic tier provides essential functionalities at an affordable price point. The Standard tier includes advanced features and access to a dedicated support team. The Premium tier offers all the features, along with priority support, advanced analytics, and integration options with other software tools.
By continuously analyzing feedback, monitoring market trends, and staying attuned to customer needs, the software company can identify opportunities to refine and differentiate its pricing tiers further. The goal is to continuously evolve and improve each tier's value proposition, making it compelling for customers to upgrade to higher tiers.
Displaying options horizontally
When presenting tiered pricing to customers, it is generally recommended to display the options horizontally. While vertical presentation is a possibility, it tends to make comparing the different tiers more challenging. By opting for a horizontal format, you streamline the process and minimize friction, increasing the likelihood of closing the deal.
A horizontal presentation allows customers to easily compare the features and benefits of each tier side by side. This clear and straightforward layout enables them to assess the value proposition of each option more efficiently. It eliminates the need for excessive scrolling or searching for information, providing a seamless experience that simplifies the decision-making process.
Creating targeted marketing plans for each tier
By conducting thorough market research, you can develop targeted marketing plans for each tier of your product or service offerings. Let's take the example of a travel company to illustrate this concept. Through market research, the company discovers that its customers are willing to invest more in international vacations. To capitalize on this insight, the company designs a premium tier with additional perks and tailors its marketing efforts accordingly. Simultaneously, the company promotes its basic package to a broader audience.
Maximize Revenue Potential: Implement Your Pricing Strategy with Togai
In conclusion, the three-tier pricing model has proven to be a powerful strategy for businesses seeking to optimize their pricing and attract a wider range of customers. Whether you're launching a new SaaS product and want to test your MVP pricing or are looking to revamp your existing pricing model to drive more revenue, implementing the three-tier approach can yield significant benefits. With Togai, the leading pricing implementation platform, you can easily adopt this strategy and take full control of your sales. Don't miss out on the opportunity to unlock new customer segments and maximize your revenue potential. Schedule a free demo today and discover how Togai can help implement any pricing strategy 10x faster in less than a day.
