1) Let’s say we have a Good Package (P1) and a Better Package (P2). P2 includes P1 plus feature A, B, and C.
2) Should we allow feature A, B, and C to be purchased a la carte on top of P1? Or should we insist the customer purchases either P1 or P2? I can argue for both cases. Could you share some principles and guidelines on how to think about it?
Answer:
I haven’t seen any research on this, but I have seen companies offer features that are included in premium packages as options in the less expensive packages. Here are some pros, cons and summarizing thoughts:
Offering Features as Options
The main reason to offer them as options is incremental revenue. The idea is that some people would want one or more of these features, but not the entire P2 package. The fact that you can sell it means you’re making money you may not have made otherwise. A definite plus. However, I recommend you estimate how much more revenue you think you will make and weigh that against the disadvantages.
Two Big Disadvantages
There are two big disadvantages. The first is that it takes away the incentive to upgrade to P2. Presumably, the buyer can buy P1 plus feature A at a price lower than the P2 price. When you’re estimating the incremental revenue, also ask yourself how many of those do you think would have upgraded? That’s lost incremental revenue.
The other disadvantage is the more products and offers you have, the more confusing your price list becomes. This is true both internally and externally, but I worry more about your buyers. Confused buyers don’t buy. Try to keep the pricing your buyers see simple.
Given these advantages and disadvantages, here are the circumstances under which it seems to make sense to offer a feature in a higher level package as an option. The feature needs to be expensive to make it worth your while. That means, there needs to be a large price disparity between P1 and P2 so that the price of P1 plus A is reasonably more expensive than P1 alone yet reasonably less expensive than P2. Also, do not offer a ton of features as options. Only do this for one or two features to keep it simple.
How to Choose The Features
It is hard work to choose which features go in P1, P2, and P3, but when it’s done well, the breakpoints are pretty obvious and the people who are willing to pay more also are the ones who want the features in the higher packages. Sometimes though it doesn’t work out that way. Sometimes, you have a feature that some people want and other people don’t, but these people aren’t correlated with who would pay more. That’s when you start to consider offering it a la carte. An example of this might be LinkedIn inmails. Some people who might only want the free package or their good product still want to reach out to a lot of people not in their network. LinkedIn charges a pretty penny, but they make it possible.
One more crucial suggestion: Make sure you have created your good, better, best packages within a market segment. If you try to do good, better, best across market segments you will find lots of features where their relative value just doesn’t seem correlated with willingness to pay. Having a lot of features that you want to offer as options for the good and or better packages is a strong indicator that you haven’t segmented well. Good, better, best packaging is significantly more effective within a market segment.
Hope that helps.
**NOTE: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.
