As a new small business owner, pricing your products or services properly can get a little tricky. How do you determine how much to charge? How do you put an appropriate number on the value that you are offering?
When you are just starting out, you may want to consider a three-pronged pricing structure. This pricing model is pretty popular among small businesses, especially those that operate online, and the beauty of it is that it allows you to gather important customer purchasing data. This data in turn can help you tweak and refine your pricing so you can both maximize your profits and customer satisfaction.
Hit or Miss Pricing
The truth is that the majority of entrepreneurs and business owners kind of make things up as they go along when it comes to their pricing strategy. The process often looks something like this:
- The business owner does some cursory research and then just slaps a price tag on the product or service
- After a while, the owner has second thoughts about the pricing- especially if the business is in an extremely competitive market.
- Finally, the owner starts offering discounts or reducing the price outright. Typically, the result of these reductions is that the business’ offerings are now under-priced, cutting into profit margins, and putting the business in a precarious financial situation.
The problem with this strategy is that it can often do irreparable damage to the business and its reputation. When people are struggling to earn enough money to keep their heads above water, then it’s more likely that they will make bad, short-sighted business decisions. Business owners who under-charge are also more likely to burn out and feel anxious, and they will eventually feel resentment towards their low-paying customers.
Of course, none of these things are conducive to healthy business operations and growth, and it’s a compelling reason to get the pricing strategy right from the very beginning.
What is Three-Pronged Pricing and Why it Works
Even if you have a very defined target market, chances are this market will consist of many different people or businesses with varying levels of income. If you are truly offering a valuable product or service and you are clearly communicating that value to your potential and current customers, then you will often have three different groups of customers. Some of your customers may be willing to pay as much as you ask and want to get the most value out of their purchase. Others are looking for a standard offering. They have some money and are willing to spend it, but they aren’t so interested in too many “extras.” Finally, there are those who want what you’re selling but will only pay for the bare minimum.
In order to cater to all three types of customers, you need to come up with three different “packages” or levels for your offering:
- The Basic Package– offers a bare minimum of features and comes at a lower-than-normal price.
- The Advanced Package- offers a full version of your product or service
- The Superior Package– the most expensive offering with all the bells and whistles in addition to the basic features.
Instead of establishing one standard price, this approach allows you to target your products or services to different groups. For this reason, you will likely generate more sales and ultimately more revenue. Moreover, your customers’ purchasing behavior will give you valuable feedback on your overall pricing scheme. If, for example, a disproportionate amount of customers purchase the most expensive offering, then it could be that you are under-charging. On the other hand, too many purchases of the most basic package could be an indication that you are over-charging.
In short, the three-pronged pricing model is a good strategy to follow especially when you haven’t been in business so it. It’s a good place to start because it works and it forces you to truly understand the value that you are offering- at every level.