Question: Do you recommend multiple sales tiers? If so, how should I price them?
Drew Cameron; President, HVAC Sellutions & Energy Design Systems, Inc:
Yes, we do recommend having multiple tiers and lots of people wonder how many you should have. We typically like to see somewhere between five to seven. If there are fewer than that, it doesn’t give customers enough choice. Most manufacturers have seven levels of equipment available to you as a contractor, so you should make all of those options available to your customers.
Some people might say five to seven sales tiers presents too many options, but that’s not necessarily the case. There was a study done in the 1970’s on 35mm cameras. When people were offered one option, the majority of them didn’t purchase a camera. When they were offered two options, about half bought. When they were offered three pricing options, nearly everyone bought a camera and the majority bought the middle-tier option.
In 1994, Notre Dame did a study to find out how many pricing options would be too many for consumers and found that six or seven is the ceiling. So, our price book has five to seven options based on the contractor that we work with. The nice thing about having an odd number is that there’s an actual middle to the offerings they have when they lay them out on a page. Tiering that from top-of-the-line down to entry level is very important.
Having that high priced, max benefit package at the left of the page and the lowest priced, entry level package off to the right shows them that you can accommodate their price point. You want to show the customer that they could invest $20,000 to heat and cool your home, but you could also invest just $6,000. More importantly, you could invest as much as $220 per month, or as little as $80 per month.
I would position the monthly payment with some of the financing we offer through EGIA. I would position the monthly payment as the main number you offer, with the total investment under it in a smaller font. I would use some of the financing that takes you out to 10 or 12 years at a low interest rate to really promote affordable monthly payments. Most people in the market today are payment customers. So that’s how you should position these things from top-of-the-line to entry level.
Also, vary the benefits that come with those packages, such as benefits, warrantees, and guarantees. I don’t like to include all of those ancillary accessories like UV lights, humidifiers, and air cleaners with the equipment. I want the equipment package tiers to be sold by themselves. Anything else you should add on after that. So, you want there to be multiple tiers and you want to use monthly payments to show that they’re affordable.
Now, how should you price them? I would reduce the amount of net profit I want to make at the entry level package. Let’s say 10-12% on the entry level solution and 15-20% net profit on everything else. I also might lower the commission I pay a salesperson on the lower level solution. That’s going to make that lower level option very competitive when compared to any other company who’s offering that lower level equipment.
Then you can have a gradual step up in price as you increase the efficiency of equipment. When you get into the higher tiers, the equipment is going to be more expensive and technologically advanced. As you step up in technology, you step up in price as well. So, on your page – from left to right – you’re actually stepping down. Your customers have to give up benefits to get a lower price. You’re going to have a jump of $1,500-$2,000 when you go from standard technology to variable-speed and variable-staged equipment.
If you price these things properly and get the monthly payments right, you’re going to be where your monthly payment is about $1-$3 per day as you step down. This means your customer’s payment will drop $30-$90 per month. That makes sense to people. When you start jumping thousands of dollars from one price point to the next, customers can get intimidated. Representing the price in terms of monthly payments allows you to represent the price difference in a way that customers understand and makes it easier to sell the next highest package.