Optimizing Business Revenues Through New Pricing Strategies
New pricing strategies like tiered pricing, membership models, bundling, and payment plans can boost a small business’s revenue, customer engagement, and overall profitability. These strategies provide flexibility and accessibility, enhance marketing, and can even improve a business’s valuation if considering a sale.
11/26/24
Small businesses can gain a lot from considering new ways to price their offerings. Pricing in itself can be its own marketing strategy, as the price of a good or service can heavily influence its perceived value. Flexible pricing also increases accessibility, potentially influencing a buyer to go with you over a competitor.
When looking for ways to optimize a small business, introducing new pricing strategies like tiered pricing, membership models, bundling, and payment plans can unlock new revenue streams, increase customer engagement and retention, and boost overall profitability. If you ever consider selling your business, the strategic use of pricing can add to the business’s overall valuation.
This article serves as an introduction to various pricing strategies a small business can consider when working to optimize business revenues. Consider the following strategies as part of your business optimization plan:
Tiered Pricing Models
Tiered pricing allows businesses to cater to different segments of their customer base by offering varied levels of service or product packages at different price points. Good examples are the typical basic/standard/premium pricing used by tech products, or membership tiers for airlines.
Tiered pricing unlocks flexibility and choice for consumers by creating new entry points to your offerings. Potential customers who look to competitors for cheaper prices could be won over by a lower-priced option – alternatively, more loyal customers may be open to a more premium option if it were available. This strategy also enriches your customer insights: collecting data on which customers choose which option can enhance lead conversion and customer retention strategies with this new data.
Be wary of common pitfalls when tiered pricing is applied inappropriately. Your business will need to be prepared to deliver on each offering tier respectively, which could introduce new complications to operations. You can also run the risk of having customers simply moving to a lower pricing option once it is available, decreasing overall revenues. And if an offering doesn’t lend itself well to tiered pricing and leads to your goods or services no longer matching customer needs appropriately, you can lose customers overall. Ensure that tiered pricing options enhance value for the customer and not the other way around.
Optimization Tip:
Look through your business’s offerings and determine whether they could be provided at varying levels. Analyze your customer data and identify trends that indicate a higher or lower pricing could increase revenues or increase lead conversion rates respectively. Take time to ensure that the tiers are backed up with data on your customers’ behaviors to ensure the new options improve revenues
Membership/subscription models
Membership or subscription models have become popular across a range of industries because they provide a steady, predictable revenue stream to a business by encouraging customers to pay a recurring fee in exchange for ongoing access to products, services, or exclusive content. One study found that 15% of ecommerce shoppers had signed up for subscriptions in which they regularly receive products, typically on a monthly basis.
Membership models can also be customized to fit your own industry and the nature of your offerings: membership models can provide service access at any time, provide goods delivered on a regular interval, or provide access to a higher tier of goods and services. Your own business model may not ultimately lend itself well to a subscription model, and that is fine – do the work beforehand so you can avoid applying a strategy that ultimately hurts your business.
Optimization Tip:
Consider offerings that you provide on a regular basis and create a plan to introduce a new subscription service that allows customers access by way of a monthly payment. Come up with a number of hypothetical plans and use current customer data to help you determine the amount and frequency of pricing,
Bundling Options
Product or service bundling is another excellent way to increase revenue while adding perceived value for your customers. Bundling involves packaging complementary products or services together at a slightly reduced price compared to purchasing each item separately. Customers are then spending more overall in a single transaction, increasing your overall average order value and total revenue, even if the profit margin is technically lower for each item.
Bundling is also a great way to introduce customers to lesser-known products or services, sell off inventory that has seen less movement or simply expand your revenue streams. For example, a fitness studio might bundle personal training sessions with group class memberships, increasing the total sale and offering added value to the customer.
Optimization Tip:
Look at your offerings and find ways that multiple items or services could be bundled together and create added value in the perspective of the customer. You may find that a group of customers already regularly order a set of items together, which could lend itself to bundling those items plus one more in a way with the total bundle price being 10% off what it would be if bought separately. You could also consider creating seasonal bundles with limited time offerings that correspond with holidays or events in your community.
Payment Plans
Payment plans add flexibility to a customer’s ability to purchase higher-ticket products or services. When payments can be spread over time, you reduce the barrier to entry for expensive offerings, which can lead to higher sales volumes. This approach is especially useful for businesses that sell big-ticket items or services that require significant upfront costs. Payment plans can also be offered at slightly higher overall cost by including markups as a tradeoff for not receiving the full payment upfront. It was found in one study of “buy now pay later” plans that businesses that presented a buy now, pay later option at checkout on their website saw 14% increased revenues and saw increased customer conversion rates.
There are tradeoffs that must be considered when implementing payment plans. While ultimately payment plans can boost sales and increase profitability, you will have to ensure that your cash flow is still healthy without the upfront payments. At the same time, with enough customers on payment plans, your cash flow becomes more predictable as you can extrapolate revenues in the weeks and months ahead. Depending on a business’s financial health and current cash flows, the inclusion of payment plans could be a huge benefit.
Optimization Tip:
Take a look at your lead conversion rate data and determine whether the up front cost of higher-ticket items are keeping some customers from committing to a sale. You can also survey your customers to see if payment plans would be a preferable option. Before you implement a plan, extrapolate cash flows to ensure you won’t run into any financial difficulties as a result of gradual payments.
Simple adjustments to pricing can make a difference
Small changes to pricing can make huge differences to the overall health, profitability, and value of your business, and this article barely scratches the surface of the many methods that can be used to optimize a small business’s pricing. If you are a small business owner that is looking to bring your business to the next level but aren’t sure where to start, we can help. Sign up for a free consultation with a Bridge advisor who can analyze your own pricing and a number of other operational aspects and provide you with a tailored optimization plan.
