Adam Coffey, founding partner of The Chairman Group. Best-selling author of The Private Equity Playbook.
Over the past four years, I’ve been fortunate enough to work with a wide variety of entrepreneurs and founders to grow and scale their businesses. And I’ll tell you: While my clients encompass a myriad of industries, company sizes and product/service focuses, I’ve found there are certain universal levers all of them can pull to boost their profits and grow their businesses.
One of the most important of these levers—particularly if you’re already managing price—is tiering. Unfortunately, it’s also one of the levers that both product and service companies frequently overlook.
Avoid lost opportunities.
If you fail to tier, you could lose out on opportunities. Let’s say, for example, that your company puts out bids to win work. If you only include one option in your bids, you’re missing out on customers who aren’t willing to pay what you’re asking. You’re also missing out on customers who might be willing to pay more.
Mercedes-Benz is a great example of how effective tiering can be. When it comes to sedans, they offer the S-Class model at the highest price point. They also offer the E-Class at a lower price point, which broadens their appeal to a wider category of customers—precisely the point of tiering—but it still leaves a significant number of potential customers out in the cold. So, they have the C-Class at the lowest price point; this model appeals to people who want to drive a Mercedes but don’t have as much money to spend on a car.
The point? Because they offer multiple tiers of sedans at multiple price points, they widen the appeal of their product so they can capture more wallet share.
I think it’s important to say here that I don’t have any investments in any of the companies I discuss in this article, nor am I receiving any compensation for mentioning any of them. I’m simply telling you about them as examples of how different companies in very different industries have pulled the tiering lever to grow their revenue.
Every company can tier.
Another great example of tiering is DoorDash. In certain locations, when you place your order, they offer an option to pay an express fee. If you’re price-conscious, you might be okay with waiting longer to get your order. If you’re willing to pay a couple extra bucks, though, they’ll prioritize your delivery. It’s a great way to appeal to a broader set of customers and make extra money in the process.
They don’t stop there, though. They’ll also ask you if you want a “DoubleDash.” You get to decide if you want to tack on an extra pickup to your order. Have a fussy kid who doesn’t want to eat what the rest of the family is ordering? You can add on something that will satisfy them for a relatively nominal fee. It’s another good example of how tiering broadens the appeal of the service and drives more customers—and more revenue—to them.
To really drive the point home, I want to share what one more company is doing. There’s a Canadian company called NewAge that manufactures cabinets and other organizational systems for garages. They offer the “Bold” 14-piece cabinet and the “Pro” 14-piece cabinet, which looks very similar to the Bold cabinet but is about twice the price at the time I’m writing this. The Pro cabinet has more advanced features. By offering both the Bold and the Pro options, NewAge can capture do-it-yourself customers who want to upgrade their garages into man caves, whether they have a lot of money to spend or just a little.
Pull the tiering lever.
While I don’t have a particular study to support this, in my experience, when you give people three choices, about 60% of them will pick the middle option. Some subset of people who wouldn’t otherwise have bought anything from you will purchase the most economical version, and some subset will buy the most expensive option. (Interestingly, if you give people four options, analysis paralysis tends to set in, and they might not buy anything.)
Given all that, I want to invite you to take a good look at your company’s offerings. Do you tier them, or do you only offer one option of any given product or service? If you do tier, are you doing it in sets of three? And finally, are you continually managing price for all the tiered products and services you offer?
Bottom line: If the answer to any of these questions is no, you could have room to boost your organic growth by pulling the tiering lever.
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