A recent Peloton product launch reminded me about good-better-best pricing strategy, and why the strategy could be for your small business.
For those who do not know, Peloton makes exercise equipment. They became famous for their stationary bike, and the experience that goes along with using it. You see, the company also makes the media that people who exercise on their machines consume while working out.
The company has expanded its line to include a treadmill. In the latest announcement, the company further enlarged its product line.
Peloton tries good-better-best pricing
Earlier this month, Peloton introduced two products to the world. There’s the cheaper treadmill, called the Tread, which will be available starting early next year. They also debuted a more expensive bike, called the Bike+. It is now available in the US, Canada, the UK and Germany.
Consequently, the company is now calling their original Peloton Tread the Tread+. The original Peloton Bike is still called that, but is now selling for at a cheaper price. Here is the product lineup and its price points:
- The original Peloton Bike ($1,895)
- The new Peloton Bike+ ($2,495)
- The new Peloton Tread ($2,495)
- The renamed Peloton Tread+ ($4,295)
As you would expect, the Bike+ and the Tread+ offers additional features to justify their price. In effect, the company has effectively moved into somewhat good-better-best pricing model. This is sometimes called tiered pricing.
This got me thinking a bit more about this strategy, and how it can level up your business. Here are lessons entrepreneurs can learn from this pricing strategy.
Making your product more accessible
The good-better-best pricing strategy also allows you to make your product more accessible to your clients. Use the lowest-end of your pricing structure to bring in customers. Consider this as one pillar for your customer acquisition plan. Then, you can implement a customer ascension plan to cultivate those customers to become repeat customers who may buy more expensive products from your product line. Read this to learn why entrepreneurs must develop those two plans, as well as one more, to create a thriving business.
Increasing profit margins and prestige
Good-better-best pricing also allows you to increase profit margins at the higher-end your tiered pricing. Because you got the lower end covered by your “good” and “better” priced offerings, your “best” tier can be a higher-margin category for your business. Offering something premium, and making sure that experience lives up to its promise, uplifts the whole brand through the Halo Effect.
Appealing to various types of customers
There are always going to be different types of customers for your business. Even for the business that has a precise idea of what clients it wants, those clients will still have different sensitivities to pricing and added features. Offering more than one choice through good-better-best pricing, with different features to boot, lets these customers choose what works best for them.
Making consumer psychology work for you
The good-better-best pricing strategy also allows you to make consumer psychology work for you.
First, it can make your product line easier to understand. In other words, you can used tiered pricing to unbundle product features. In turn, that can make it simpler for potential customers to understand what exactly you offer and judge what features they need.
Second, a higher price can actually tempt customers into buying a product. Consider an experiment shared by MIT professor William Poundstone in his book Priceless: The Myth of Fair Value. Asked what beer among two they would prefer, people choose the more expensive option 80% of the time. Out of three, they will select the middle-priced option 85% of the time.
Thirdly, creating different tiers produces a mental shift. Rather than thinking about “buying” and “not buying” for too long, that decision is made quickly. The focus then turns into looking for the best value.