Once upon a time, there were three bears, who lived together in a house of their own, in the woods. One of them was a little, wee bear; one was a middle-sized bear and the other was a great, huge bear.
You’ve likely heard the story of Goldilocks, who entered the bears’ house and tried their porridge, sat in their chairs and slept in their beds. But she was hard to please: she didn’t settle until she found the porridge, chair and bed that were “just right.”
Today’s ecommerce subscribers aren’t so different. They shop around until they find a product that meets their exact needs. And every subscription merchant wants to convince consumers their offering is “just right.” The formula for that success often involves tailoring a product to a specific target market.
One of the best ways to tailor your ecommerce subscription offering is by implementing a tiered pricing strategy. Some of the most common ecommerce companies — including Ipsy, Netflix and Rent the Runway — use this pricing structure and have realized this customer-centric approach helps them win over and retain more customers. Here’s how.
Ecommerce sellers who use a tiered pricing strategy create different levels of subscription products to sell at different price points. The goal is to create distinct offerings that align with the needs of specific consumer segments. Customers can choose the option that’s the best fit and are free to switch to a different tier at any time.
Though the two terms are sometimes used interchangeably, tiered pricing strategies are different from tiered pricing models. Tiered pricing models dictate the price per unit of one product according to purchase volume. Tiered pricing strategies, on the other hand, apply to unique products, each of which meets the needs of a specific audience.
Say you sell something simple, like nails. You might use a tiered pricing model to incentivize buyers to purchase at volume. For the first 100 nails, a customer would pay 25 cents per nail. If they bought anywhere from 101 to 500 nails, they would pay only 20 cents each. After that, 501 to 1,000 nails would cost 15 cents each. And so on.
Our nail seller, if they wanted to offer a tiered pricing strategy, would instead focus on packages that address how consumers are using those nails. Their “birdhouse builder” package includes seven pieces of wood, 12 nails, a quart of paint and a paintbrush for $35. Their “doghouse builder” package has 34 pieces of wood, 100 screws, a nail gun, a gallon of paint and a paintbrush for $175.
The difference in tiers here isn’t about the volume of product sold. It’s about the customer profile — beginning builder vs. experienced DIYer.
To see how a tiered pricing strategy works, let’s look at Netflix. The company currently offers four pricing tiers. The lowest, “Basic with ads,” is approximately one-third of the price of the most expensive option (“Premium”). Each of these tiers was created to meet the needs of a specific type of customer:
No matter your feelings about Netflix’s pricing system, there’s no denying it effectively segments customers according to usage habits and provides an option that meets the needs of each group.
Tiered pricing strategies are excellent drivers of company growth, but they require more effort. Merchants who take the time to prepare unique tiers based on their audience are likely to see bigger profits. But, for small startups, the effort may take away from other vital operations.
Here are some notable benefits and drawbacks to using a tiered pricing strategy.
Matching consumers’ needs leads to higher conversion rates. We already discussed the value of offering a “just right” product. It’s easier to tailor your offerings to specific customer segments when you’re selling more than one product. Suddenly, your consumers aren’t “tea drinkers” — they’re “daily tea drinkers,” “weekend tea drinkers” and “tea connoisseurs.” And each one will love to see a product that reflects their tea needs.
You can reach a larger target audience. Even the best subscription product will only appeal to certain demographics, and the more tailored a product is, the smaller its customer base will tend to be in turn. You can make a less-tailored product to expand your reach, or you can use tiered pricing to add products tailored to different audiences. Choosing the latter approach allows you to maintain your “just right” status while reaching more customers.
It creates the potential for upsells. Customers who find your lower-tiered options valuable may be enticed to upgrade when they see additional perks they want, such as early access to discounts or double loyalty points. Benefits that didn’t seem exciting during signup can be big selling points once you build up customers’ loyalty to your brand.
Complexity can confuse customers. Adding choice always creates the possibility a customer will give up on their purchase out of indecisiveness or overwhelm. The more tiers you offer, the more information each potential customer will have to digest. You’ll also have to find a clear way to demonstrate the unique value of each tier, specifically the added value for your more expensive tiers.
You need a deep understanding of your customer segments. Each tier you create should speak to the needs of some customer segment, so you need to know your buyers. The best way to get the in-depth information you need is through consumer research or analyzing customer behavior. However, gathering a large enough data sample often requires expensive consumer research or many months of sales records. Small startups may find it hard to get the information they need to build tailored subscription offerings.
Small businesses can overcome these complications and become stronger for it. The question is often whether to tackle them now or wait until you’re more established.
Every consumer is at the center of their own story. The best brands find a way to become a part of a buyer’s narrative — and you can, too, with a tiered pricing strategy.
Imagine: A customer discovers your bath and body subscription and signs up. They opt for your middle tier. Each month they receive new body wash and lotion samples that add joy to their daily routine.
By the end of month four, you’ve earned their complete trust by selling quality products. They decide to upgrade to your top tier. Now, they get bath bombs and body scrubs, too. Each box they receive from you is a source of excitement and a nudge to pamper themself. You’ve become a brand they trust to take care of them.
But then inflation hits, and the customer needs to prioritize purchases that add value and save them money. They don’t want to cancel, and thankfully they can downgrade to your lowest tier. It’s not a “goodbye” to the body scrubs; it’s a “see you later.” Months later, they return once they can afford to splurge on the products that make them happy.
This story is about the magic of a tiered subscription pricing strategy. It’s not just about serving different customers in different segments. It’s about continuing to serve your subscribers as their needs change. The product that’s “just right” now may be too hot, too cold, too hard or too soft in six months. So, make sure you have another offering that will be “just right” for customers as their needs change.