Tiered membership is one of the many types of membership business models. It offers memberships at different price points and levels, which come with additional value and benefits. Setting up a tiered membership structure is not as difficult as you may think, but there are some strategies and tactics you should know to maximize the revenue potential of your business.
In this guide, we will help you create tiered membership levels tailored to your business, whether it’s a SaaS platform, a content creation venture, or online courses.
Understanding the Psychology Behind Tiered Pricing
Price Anchoring
When people make purchases, they will unconsciously use a psychological principle called “price anchoring” to evaluate different offers, which we mentioned in other posts. Essentially, when people see multiple price points side by side, they tend to use the highest price as an anchor against which they evaluate all other options.
You may have noticed that most of the time when you walk into a store, the staff will recommend the more expensive items first before showing you the more affordable options. Once you have been shown the expensive options, the cheaper ones will seem more attractive.
Setting up your tiered membership levels is the same; that’s why every membership or subscription business offers a premium tier that is significantly higher priced than the middle option, so make it seem like a bargain.
However, you shouldn’t just create a premium tier plan for the sake of making your middle or cheaper plans look more attractive. The premium plan should still provide significantly more value than other plans, as some will be genuinely interested in them.
Goldilocks Effect
Another psychological factor at play is the “Goldilocks effect.” People naturally gravitate toward middle options when presented with three choices. Too cheap feels risky (what’s the catch?), too expensive feels extravagant, and many will not be able to afford it, but that middle option will feel just right. That’s why many businesses offer three tier levels, which is recommended. However, you can have two tier levels for simplicity or more depending on your business and your target audience.
Fear of Missing Out (FOMO)
Higher-tiered plans often offer exclusive benefits, early access, or limited opportunities. If you are offering more premium memberships, you may also include a limited number of availabilities. These benefits will create FOMO and urge people to upgrade their membership levels. If you wish to use FOMO as one of the marketing tactics, make sure to clearly outline what benefits your premium plan provides.
Designing Your Membership Tiers
As we have mentioned, three tier levels are often the sweet spot for businesses. However, it can and should vary depending on your business, membership business model, and your ideal customers. Avoid creating too many options, as it will lead to choice paralysis and make it difficult for your ideal customer to make a decision (there is a chance that they will give up on deciding and go to your competitors).
Although three tiers are the most common, many businesses have succeeded with just two-tier plans. Some examples are most commonly seen in businesses using the freemium membership business model, such as YouTube, Spotify, CapCut, and Patreon.
Start with your ideal customer profile in mind. What can you identify in three distinct segments? For example, if you are teaching people how to crochet, you can have beginners who just started, intermediates who have mastered the basics and want more challenging projects, and advanced crocheters.
Your entry-level tier should be accessible but valuable enough to demonstrate your expertise. This tier often serves as your customer acquisition tool—it’s your foot in the door!
E.g., Simple tutorials, a welcoming community, and answers to basic questions.
For the middle tier, focus on delivering exceptional value at a price point that represents a reasonable upgrade from your basic tier.
E.g., Detailed tutorials for a wider range of projects, opportunities for feedback, and the ability to get their questions answered by experts (your instructors)
For the premium tier, don’t just include additional minor perks but include truly premium offerings—like direct access to you, faster response times, and exclusive resources. Even if fewer people choose this option, its price should be justified by the value.
E.g., In-depth instruction on advanced techniques, personalized feedback on their challenging projects, direct access for tailored advice, and being part of an elite group personally hosted by you.
One good strategy to use is the “good-better-best” framework. The “good” tier solves the core problem, the “better” tier enhances the solution with additional features, and the “best” tier transforms the experience completely. Some businesses use the “decoy effect” to make the higher-tier plans look more attractive. However, be careful when you use this tactic; don’t manipulate your customers by purposely making the lower-tier membership bad, as it may lead to a bad reputation and loss of sales.
Pricing Strategies for Tiered Memberships
Cost-plus and value-based pricing
Memberships are a type of digital product, and we have discussed how to price your digital product. You should use value-based pricing, which focuses on how much value your membership can provide for your customer, in combination with cost-plus pricing, which is your time, costs for creating your digital products or services, and other costs like web hosting, platforms, etc.
Strategic Price Gap
From what I understand, the price gap between tiers matters tremendously. I’ve found that jumps that are too small (like $27 to $37) don’t create enough perceived value difference, while jumps that are too large (like $97 to $497) create too much resistance to upgrading. However, if you wish to create a decoy effect on pricing to convince your potential customers to purchase the middle plan, it can be effective.
For example, at $37, a mere $10 upgrade from the $27 basic plan unlocks significantly more offerings, making it a no-brainer option.
Annual Payment
Annual payment options with discounts can dramatically improve your cash flow. By reducing your profit margin by providing a discount (e.g., 15%-20%), you secure a year-long commitment from your members. It creates a consistent and likely more substantial revenue over time.
Keep Testing
Remember that your pricing strategy isn’t set in stone. As your costs change, your expertise grows, or market conditions shift, you should revisit your pricing structure. Don’t be afraid to increase the price when necessary, you may be surprised by how little change it may have.
Communicating Value to Different Customer Segments
Learning to articulate the value of each membership tier can be difficult. Different customer segments respond to different value propositions, as they are at different stages and have different needs. You should identify what they are looking for and list the benefits, which is why understanding your ideal customers is important.
Furthermore, using comparison tables on your pricing page is essential. It’s the simplest and clearest way you can show them visually what benefits each tier plan has.
Example: Shopify clearly states who each plan is for and lists all the features, including standout features, so their potential customers can easily identify and evaluate the benefits of each plan.
Conclusion
A common misconception is that you set your membership tiers once, and you’re done. In reality, your tier structure should evolve as your business grows and you gather more data about customer behavior. Your initial tier structure doesn’t need to be perfect. Start with a clear differentiation between tier levels, compelling value at each price point, and systems to manage the operational aspects. Then commit to regularly reviewing and optimizing based on actual member behavior and feedback.
Choose your membership platform carefully. Different membership site platforms have different strengths and weaknesses, so you want to pick the one that suits your membership business the most. Check out the 6 best membership site platforms and find the perfect one for your business!
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