Why You Should Use a Tiered Value Pricing Model

Pricing is the most important thing for you to get right in your business. Improper pricing ultimately leads to lack of profitability and overwork for both you and your team. There are many pricing models to choose from. The most common are:

• Hourly
• Fixed-fee
• Value

Of these three models, a tiered value pricing model will yield the best results for your firm.

Why you should use a tiered value pricing model

A tiered value pricing model accomplishes three things:

1. A predictable workflow. One of the pitfalls of “menu” or “fixed-fee” pricing is that you customize services for each client you serve. This not only results in confusion for your team, but it can also lead to you having as many “bosses” as you have clients. You started your firm to have freedom and flexibility…not to have multiple bosses dictating how you work.
2. A way to “steer” clients in the right direction. When structured properly, a tiered pricing model will influence your clients to choose the best option for their business. And it’s no coincidence that this option contains the most profitable offerings for your firm.
3. Financial security for you…and your team. When you create your tiered pricing model using the methodology we teach at Profit First Professionals, you ensure that your personal financial needs are met. However, it’s not all about you: This model also ensures you can properly compensate your team for their contributions.

How to create a tiered value pricing model

There are five steps to creating a tiered value pricing model:

1. Reverse engineer your firm’s income. We call this Income Targeting. Start by determining what you want to earn for the work you do in your firm. Then, use the Profit First model to reverse engineer the revenue you must generate to support your salary while maintaining business profitability.
2. Analyze your current pricing. Create a list of your current clients and how much they pay you annually. Use this list to determine the average annual value of the clients in your firm.
3. Analyze your workflow. List all of the services your firm provides. What services do you provide for each client? What services do you provide to the majority of your clients?
4. Build your tiers. This is how you create the company you want. Using your workflow analysis, create three packages of services for your prospective clients to choose from. The middle package will be ideal for around 90% of your clients…and again, this package will contain the most profitable services for your firm.
5. Price your packages. This is where the rubber meets the road. Use your Income Targeting and average annual value exercises to determine how many clients your firm needs to reach your revenue goals. Adjust this price until you reach a number of clients your firm can handle. This is the annual price of your middle service package. Your basic package will be priced at half of this amount, and your top package will be priced at 2.5 times the price of your middle package.

Next Steps

Using a tiered value pricing model is conceptually simple, but as with most things, the devil is in the details. A complete, 10-module course to help you create the perfect tiered value pricing model for your firm is included in Profit First Professionals membership. Non-members can purchase this course for $497.