Building Real Customer Choice By Ditching Tiered Pricing
When I made the decision to partner with HubSpot in 2012 and learn how to do inbound marketing I went in with my eyes wide open. I made a conscious decision to absorb everything I could get my hands on. I was attempting to master my new craft as quickly as possible. I read up on what the experts had to say, from our peers' books, blogs, and whitepapers, to their websites. I evaluated what I perceived to be the very best agencies in the industry, knowing they knew more than I did and whatever they were doing must work.
In retrospect, I don't think that was a bad strategy. The approach has helped Revenue River Marketing grow into an inbound marketing agency I'm really proud of. On the other hand, I'm not sure everything we saw, liked, tweaked, and implemented was necessarily the best direction for us take.
As a marketing agency that has truly built ourselves from the ground up we've learned a lot of lessons the hard way. The list of mistakes I've made is longer than my pride wants to let me admit. As I reflect back on our last three years I think about all of the ideas that crashed and burned. I'm reminded of one of the most costly ideas I ever got from our community. Tiered pricing.
Whoever told us Tiered Pricing was a good idea, was wrong
The advice I got from a collection of resources was pretty consistent
I noticed that nearly everyone was doing the same thing:
- Agencies were packaging their inbound marketing services into retainers
- They were publishing the pricing for their packages on their website
- They were all offering some combination of inbound services scaled over three levels
- They all sought a one-year commitment
You can call it what you want, and many did. Everyone had their own take on how to wrap it up with a bow, but it was all the same.
Fast, Faster and Fastest was the most common representation on agency pricing pages
For $4,000 per month you would get 4 blog articles, 2 promotional email sends, daily social media posting and monitoring, search engine optimization, web services, an eBook or whitepaper every quarter, etc. Some offered more for less or little sprinkles of something extra like press releases, infographics, or video services. But wait, if you want to reach your goals you might want to go faster. For $7,000 you could get 8 articles instead of 4, and so forth. Wanna get crazy with this inbound marketing thing? Not a problem, just stroke your check for $10,000 and we'll blow the doors off this bitch! Triple everything, we'll make you famous in just a couple months.
The prevailing strategy seemed to be something like this:
- Packaging your services allows you to generate recurring campaign commitments
- Combining multiple services into one lump sum helps you get away from the traditional agency model of the billable hour
- Never turn your services into a Chinese menu, clients will pick your retainer apart over time
- During the sales cycle, you should work hard on identifying prospects' goals, plans, and challenges so you build demand to fill the gap
- The larger the gap the greater opportunity you'd have to upsell them into an option to move faster, 'in order to hit your goals'
- If you landed on the bottom you could always move them to the middle or top by providing ROI and proof of concept
We implemented our tiers and sold a load of small retainers with nearly identical scopes
- Nearly every opportunity we encountered wanted to start small and see if we could prove it
- As campaigns progressed we struggled to upsell into higher tiers because their needs didn't simply revolve around 'same shit, only faster'
- We weren't able to handle critical campaign elements like sales materials, integrations or lead scoring without quoting by the project
- We bled ourselves out providing all kinds of free services to maintain 'happy' clients with hopes they'd appreciate our efforts and expand us later
I know at least half of you can relate to my struggles. I know the other half are calling me an idiot right now. I realize these struggles didn't completely revolve around the fact that we listed tiered pricing on our website, but I'm positive it set the wrong expectations. I'm sure the agencies I looked up to didn't make as big of a mess of things as I did, but I also notice many of them don't have tiered pricing on their website anymore either.
The problem with tiered pricing is it puts your agency and your offering into a very small box
- How do you deal with additional needs as they come along?
- What do you do when clients have capable internal resources that can handle certain components?
- How do you scale up only some of the elements from fast to faster and determine the correct pricing?
- How do you present yourself as an agile and scalable resource but only have three options?
Another major problem was the tiered pricing system didn't fit with what I understand about the sales cycle
The unfortunate thing is, I knew that. I had a background in sales and had represented companies before that had similar models. I knew the difficulty this structure caused in the sales cycle because I'd experienced them before. Honestly, I think I got a little starstruck. I saw these fantastic agencies that were clearly successful running this system. I just had to be like them, I just had to jump in line. After I recognized the error of my ways I felt like a lemming jumping off a cliff because the hairy ass in front of me was doing it too.
Every prospect is attempting to get more for less, they think that's their job. On the flip side, sales people should feel empowered to upsell whenever they have the opportunity. With tiered pricing that's published for all to see you don't have a lot of flexibility in building custom options. You also have a hard time selling a small scope of work for $4,500 when it's listed at $4,000. Your upsell options are strictly centered around your tiers, presenting the challenge of convincing prospects that faster will be better without any real proof.
Most prospects are also fighting an internal challenge of convincing leadership that this 'new age concept' of inbound marketing is a legitimate solution to their problems. They have a limited understanding of the elements, how they work together, and what it takes to be successful. We're all challenged to educate them enough to get the sale while competing against each other and the urgency to move quickly that the prospect often initiates. Everything sets up for a proof of concept campaign and no one wants to be locked in for a year with the exact same activities. So how do we turn the tables and set us and our new clients up for success instead of burn out?
To address our shortcomings, we overhauled our entire service model and sales process this year
Our new model came from a combination of agile methodologies and value-based pricing concepts
The foundation of our new system is still the desire to divorce the billable hour, something I learned from reading The Marketing Agency Blueprint. To divorce the hour as well as tiered pricing options I got some fantastic insight from my brothers at Kula Partners. From their experiences adopting the agile methodology I decided the story point concept would help us properly quantify the value and effort involved with each service. I pulled together our marketing team and we jumped on the whiteboard, pulling together every aspect of every service element and creating the hybrid pricing system we're now using.
- We defined the differences between onboarding points, recurring campaign points, and the necessary points to complete one-time projects
- We built everything into our diagnostic and planning presentations to illustrate how our process would lead to long-term success
- We developed an entirely different proposal format incorporating a marketing plan, campaign timeline, and story points
The early results have been encouraging, I believe this will help our agency break through to the next level
- We're getting unbelievably positive feedback from prospects, they love the sense of control and flexibility they have in building their own campaign
- Our close rate has gone up
- Onboarding fees have gone up and the timeframe has stretched from 30-45 days
- Billing for our recurring scope of work has gone up
- Our marketing team is setting strategy that builds demand for additional services and project work, and our clients are paying us for the work
I believe the results can be attributed to our ability to address 3 big issues that fast, faster or fastest just couldn't solve
- Expectations and processes are clearly outlined with answers to the most common objections built directly into the proposal
- The scope of work is more flexible - We work with clients through the sales cycle to identify the appropriate campaign elements to focus on at each phase of our relationship
- The path for expansion is set - Whatever starting package we come up with includes an appendix of additional services with point values ready to implement as the campaign matures
It's early, but I'm excited at what we've learned and what we've built to counteract the issues we created as we developed our pricing. It's also a complete work in progress, we continue to improve the materials and pitch as we receive feedback and uncover additional opportunity. I'm less confident that what we have is the answer as I am that tiered pricing was definitely not the answer. The problems it created made us too rigid, too predictable, and too cheap. We sold what we could on the front side and went from the frying pan to the fire by gifting services to clients over and over again.
I've learned a lot of lessons building a business and this one's no different. You do your best to identify problems, come up with ideas, implement, and test them. You learn what works, what doesn't work, and adjust. Then rinse and repeat until you get it 'right'. With pricing, it sets the stage for your sales process and delivery process so the issues are magnified beyond most anything else we encounter. I'm grateful for all the resources and insights I had access to in overhauling our go to market strategy.
If you're struggling to develop or reinvent your pricing system you're not alone. I know there are a bunch of you out there because I have a lot of great inbound marketing agency friends that are struggling to put the puzzle together too. Some of us have shared our struggles at Inbound, Partner Day, LinkedIn Groups, and over beers. I wish I could take credit for figuring everything out on my own but as you know I'm not that smart. I've learned a lot by talking things out, learning what others are doing, and putting my own spin on the compilation of ideas discussed. I know it's helped our agency a lot, if you think you could use some help I encourage you to reach out. I'd love to help if I can.