Set fractal price tiers and read price off the close rate

1. Customers are fractal

The view here ranks this as one of the most important ideas for lifetime value. Start from the 80/20 rule and square it, then square it again:

Customers	Share of total revenue
The top 20 percent: one person in five	80 percent
The top 20 percent of that group: the top 4 percent	64 percent
The top 20 percent of that group again: the top 0.8 percent, roughly 1 percent	51 percent

The condition. The pattern holds if and only if people have a way to pay more. Some of you might look at your own business and say it does not work like this for you; the answer is that you have not given customers any way of paying more. The comparison is income tax, where those who earn more pay more: on this reading, perfectly efficient apart from the loopholes, with the shares above holding even so. That is a reading only; tax rules are not covered on this page.

Look at the customers you have. Among them there might be some who came back and bought more times, stayed longer, paid more, or some mix of those, and so are worth more than the rest. Even if everyone nominally pays one price, lay the monthly fee on its side and check how long some of them have stayed on it: the same spread will probably show up. That is truer the longer you have been in business. Three months in, the pattern has not had time to appear, but it will probably drift toward these shares over time.

Make it deliberate. Rather than let the spread arrive by accident, you can design the business so it happens deliberately, and this ought to shape what you sell and how you price it.

2. The layers

Think of the business as layers, one through five, with a warning first: not every business needs five layers. The point is that a business can work toward a shape like this gradually, because as you go you can see the extra revenue and profit it opens up.

The layers follow a table of profit contribution, thought to come from a large commerce platform, held up here as a very efficient way of making money: it sells several levels of subscription and, because it processes payments, it is also paid a share of what runs through it, so a customer processing $100 million earns it more than one processing $10. Reading down that table:

• The base. 80 percent of its customers often make it no money, or cost it a little.
• Layer two is already the top 20 percent. The price at a layer, as a multiple of the base, is typically 5 to 10 times. If you want to stay conservative, take whatever your base is and set each level at at least 5 times.
• The 4 percent. How does a layer holding only 4 percent of customers pay? The answer: multiply it by 100 and it comes to 400 percent of what the base brings in.
• Above that sit the top 1 percent and, thinner still, the top 0.2 percent.

This is how money is made in business. Most owners do not grasp it, and so they earn nothing, or less than they ought to.

3. Set each tier's price from the share that will buy it

Where owners go wrong. Someone sells a first offer at $100 a month and plans an upsell at $300. Why? If 20 percent of people are willing to pay 5 to 10 times as much, the upsell should sit at $500 to $1,000 a month. Owners get pricing wrong, and service delivery with it, since they have not done their gross-margin sums either, and they misjudge take rates. They expect 66 percent of customers to take the upsell when it will be 20, maybe, and then they fail to price it for the 20 percent who will. So the new tier has to be worth having: if a fifth of customers take an upsell at twice the price, who cares?

The rule of thumb, boiled down. This is the part to keep if you keep nothing else. Every upsell will be taken by about 20 percent of people, so it needs at least 5 times the price of the level below, at every level: a $100 offer is followed by at least $500, and a $500 offer by at least $2,500. Why it matters: if 20 percent buy at five times the price, revenue doubles, and so every layer or tier doubles the business's revenue. The rule carries conditions: whenever you add an upsell, 20 percent will take it at 5 times the price if you do the job well, meaning a clear explanation and a tier customers truly want, and if things go the way they should.

Beside the other pages.

• A higher tier reached through a margin goal, and what share must take it, is option C on SOP 226 — Set a gross margin goal and close the gap three ways, section 8; its section 9 has a gym moving its customers up to a pricier tier with a trial.
• The fivefold back-end offer bought by 20 percent, with a worked case, is on SOP 152 — Sell a second product at ten to nineteen people, section 3. SOP 203 — Fix over-expansion, pay, underpricing and a single product, section 5, gives the same fivefold rule with a flag on how its doubling adds up over two upsells.
• An anchor shown before the main offer sits at 5 to 10 times it: SOP 68 — Run the anchor upsell, section 4.
• What goes into a higher tier, feature by feature, is on SOP 72 — Generate tiers and downsells from the quality vectors, sections 4 and 6. That page gives no figure for the gap between tiers; this section gives one.

4. Build layers over years, or skip some

Skipping is allowed. Asked whether you can skip layers, the answer is a clear yes. The five layers describe an ideal way of making money, but for most businesses building out every layer and every tier will take many years.

Where the high-ticket edge comes from. In general, high-priced offers tend to earn their owners more than cheap ones, because they jump straight to the tiers that already earn more, with less operational drag. Looking after 20 customers is easier than looking after 2,000, even at equal revenue.

It takes time. Having all these layers typically takes time. The three big, old and very successful businesses used as models here are one in software, one in physical products and one in services, all massive and all old. By rough guesses, not sure ones, the physical-products one is 50 or 60 years old, the software one probably at least 20, and the services one about 50 years old. Businesses like these show the pattern done right and taken to the extreme, and it is held to work all the way up. The point is not that you must do this tomorrow; at least, if you can, know how your current level relates to the next one.

Warnings.

• Do not add every layer at once; it takes years.
• Price the new tier so that it makes a real difference and fits the new ideal customer, or avatar, it is meant for.
• New layers, and the customers in them, bring significant operational drag; it will likely cost you effort and resources. So make it worth it: a tier that grows the business by 20 percent while doubling the work means twice the work for a fifth more, which is, with some doubt, kind of a poor trade. If you add an upsell to lift lifetime value, set its price high enough to count.

5. Hearing yes less often, and making more

Put plainly: offer $10,000 and $2,000 side by side and more people drift to the cheaper, because hearing yes pleases people more than earning more does. You have to be at ease with being told yes less often while you make more money. The same pull toward yes, on a sales team with a cheaper offer in reserve, is section 5 of SOP 228 — Weigh a downsell against raising the core price; section 4 of SOP 82 — Set price from the pricing rules and the three models makes the point about owners who cut price to collect yeses.

6. Read your price off your close rate

This is thought to be among the more tactical tools here, and reportedly it has worked really well. It is framed for businesses whose salespeople sell face to face or by phone, above all done-for-you services, home and health services included.

What the close rate is. It runs from offer to close: of the people you make the offer to, how many say yes. It is not the share of your leads that close.

The bands.

Close rate, offer to close	The reading of your price
80 percent or more	Probably underpriced by 3 to 4 times. Multiply the price by 3 and try that next time; a rule of thumb here: consider tripling to quadrupling it
60 to 80 percent	Probably underpriced by 2 to 3 times
50 to 60 percent	Probably underpriced by roughly 1.5 to 2 times
40 to 50 percent	Underpriced by roughly 1.25 times, a 25 percent increase, to 1.5 times
30 to 40 percent	Probably priced about right; hold it there
Below 30 percent	Probably best to work on selling better before touching the price, lifting the close rate toward the higher bands; the preference here is not to lower the price

SOP 245 — Check sales is the constraint and fix the worst part first reads a close rate a little above its benchmark for one-on-one selling as a sign you might want a higher price, where the band here says hold; the two are set side by side in its section 4.

Nothing else changes. It is for the same product, the exact same thing. Better offers are welcome too, and the advice is to do both; but this guide is purely about price, with the offer left as it is. The same product at a higher price makes you more money. When you do triple the price, expect to make more money.

Churn and capacity. Asked whether tripling or quadrupling a done-for-you price affects churn, the answer is that it does: none of these things happen in isolation. But many done-for-you services are single jobs rather than ongoing work; home services are the case in mind. In done-for-you work, the business is often supply-constrained, with no room for more customers. If you can't take on more customers and you close 80 percent or more, raise your prices. How price moves churn is on SOP 138 — Keep value above price to hold customers.

A commodity product. Take HVAC: where you sell the same commoditized unit as everyone else, the service side is probably the larger opportunity. You can probably still raise the price; you might not get an increase this size, but you still get a very large one.

Inbound or outbound. Whether 80 percent means something different for inbound and outbound leads is not established on this page.

7. Why the higher price holds, and trying it

Customers compare less than you think. This is a really important point. You know your field too well: what competitors charge, what the market rates are. Customers are not out there comparing HVAC work or dental care all day. There are brief moments of window shopping, but often prices are unclear, not always on the website, and not tailored to the person, and all of that makes comparing harder.

Try it. The rule of thumb again: a close rate of 80 percent means you are underpriced. Some of you will call that impossible; the reply is to try it, and the best part is that you can change it. Owners have argued for an hour against a 20 percent raise; the advice is to try it: if it fails, roll it back; if it works, they have doubled their profit.

Running it as a test. Setting the new price, working out at what conversion rate it would only break even, tracking it, and testing again until conversion rate times lifetime gross profit drops are on SOP 128 — Test price with a step size and a cadence, sections 2 and 4; how often to test is its section 6. For the shorter pricing rules, SOP 82 section 3 says that closing more than half your sales consistently leaves room to raise, and in the section after it a price is doubled while the close rate falls from 50 to 30 percent and more money comes in.

SOP 128, section 5, covers another starting point: an offer started at a low price to prove people want it, then lifted 20 percent after each 10 sales or so until sales fall off sharply. The bands in section 6 read a price you are already selling at against its close rate.

8. What this page does not decide for you

• What the 100 is. The 4 percent example multiplies by 100 without saying what the 100 stands for. Not established on this page.
• What the multiples count from. The 5 to 10 times is given as a multiple of the base; the worked prices set each tier at five times the one below it. This page does not settle which reading is right.
• What else to expect after tripling, besides more money. Not established on this page.
• Inbound against outbound leads. Not established on this page.

9. The checklist

Step	What to do
1	Look across your customers for the ones who bought more, stayed longer or paid more; the longer you have been in business, the more the spread shows
2	Give customers a way to pay more; without one, in the view here, the pattern does not hold
3	Price each new tier at at least 5 times the level below, expecting about 20 percent to take it if you do the job well: explain it clearly, and customers truly want it
4	Check each tier is worth the operational drag it brings; add layers over years, not at once; skipping layers is allowed
5	Work out your close rate from offer to close
6	Find your band; 80 percent or more probably means a price 3 to 4 times too low, so try 3 times the price next time, on the same product
7	Below 30 percent, work on selling better first; the preference here is not to cut the price
8	Try the new price; if it fails, roll it back; run it as a test on SOP 128

10. What this page does not cover

Adding a zero to your core offer, and a capped top tier, are SOP 231 — Build the next sale into the offer and anchor high, sections 7 to 10; setting out to be the most expensive provider in your area is SOP 233 — Become the most expensive and stop selling a commodity. Deciding the features inside each tier belongs to SOP 72, and whether to sell a cheaper offer beside the main one is weighed on SOP 228.