How to Create a Value Ladder to Maintain Clients
⏱ Reading Time: 9 minutes
As a business owner, you’ll want to maximize the spend of every single customer who purchases goods or services. Implementing a value ladder as part of your operations could help to turn that goal into a reality.
A key driving force behind the importance of the value ladder lies in being able to predict and optimize customer spending. Without asking them directly, there’s no way of knowing precisely how much money a customer has to spend. Even if you operate in an industry that allows you to ask such questions, many customers underestimate their spending power. Or, they’ll provide inaccurate information.
A large percentage of prospects will never convert into real customers, even when confronted with your entry price levels.
Picture 1. What’s a value ladder?
Why Businesses Without Ladders Suffer
Before we delve deeper into the importance of value ladders, let’s assess an example of a business that’s chosen not to implement one. In the example, a business faces three prospective customers who all wish to buy its solution.
Customer A has $50 to spend. Customer B has $100 to spend, and Customer C can spend up to $250 with the business. The company in question offers products that range in price from $60 to $100. Statistically, if all three customers purchased the solution, they’d walk out having spent a maximum combined total of $160.
The thinking behind this goes as follows. Customer A cannot afford to buy the solution and therefore does not spend any money. Customer B can afford the solution, and may choose to opt for a higher package and spend the full $100. However, chances are he would simply choose a more affordable package if it adequately meets his needs, spending just $60.
Customer C will quickly see that the highest priced product is priced below his spending potential. He’ll probably choose the higher package and spend $100.
Ultimately, when faced with three prospects, this company could likely earn a maximum of $160 out of a potential $400. That’s a significant amount of money left on the table in this scenario! Regardless of whether you operate in a B2B or B2C industry, there are few businesses that wouldn’t benefit from having a value ladder. The implementation of a value ladder increases sales potential and income, and avoids a situation like the one above.
Understanding the Value Ladder
Now you know what happens to businesses without value ladders. It’s time to gain a better understanding of exactly what a value ladder is.
Simply put, a value ladder consists of a range of products. These products increase in price from your lowest-value product to your highest priced premium solution. The lowest offer can increase the size of your product list. Plus, it can prove your customer value to potential spenders, and raise awareness about your brand.
Your goal will be to direct customers to ascend every stage of your value ladder to maximize their spending potential. We will use the same example used above to demonstrate the power of the ladder for your business.
How a Value Ladder Affects Your Business
The company faces the same three customers, but this time it operates its sales system very differently. The only offer available to new prospects is completely free, or very low cost, depending on the industry in question. Following this, the business would only make an offer to the next rung of the value ladder. This system would continue indefinitely, as the best value ladders don’t have endpoints. Rather, they conclude with high value repeat spending options like recurring subscriptions.
In this example, the business sells its service for $0,. They then add on extra-value products that cost $10, $20, $50, $70, $100, $250, $500 and so on. Customer A would take the $0 option, and upon receiving great value, would choose to purchase the next three tiers. He spends his full $50 budget.
Customer B takes the free offer, and upgrades to the $100 package, also spending his full budget. Customer C is impressed by the free offer, and immediately buys the next 4 value tiers, spending $150. He appreciates the low cost of the solution that he then chooses the $100 tier, spending his full budget of $250.
In this situation, the business has successfully maximized its customer lifetime spending power. Additionally, it’s earned the full potential $400 that customers had available to spend.
Creating Your Value Ladder
You are now aware of just how crucial a value ladder is when creating customer value, promoting retention, and boosting expenditure. The structure and staging of your ladder are vital to its success. Yet, it may take a fair amount of trial and error to find the right solution for your company.
Before you design your value ladder, you must understand that the first free (or low cost) offer is not a sales meeting, or a consultation. This can immediately put prospective customers off and offers them no real value.
Your initial $0 offer must be irresistible, and should be something buyers would normally need to pay to access. When you implement this, every prospect who accepts the offer will immediately view your brand as offering incredible value. This builds trust and makes them more likely to buy the next paid tiers of your value ladder.
Offering a Free Service
The free or low-cost offer serves as bait to attract customers. It boosts the number of prospects that enter the ladder and raises awareness around your brand. Additionally, it builds a customer list that you can market your products to in the future.
The next offer on the ladder should cover the costs of your free offering and itself. Thus, if the free offer costs your business $2, and the first offer costs $6, the sales price should stand at $8. Always remember to add in your marketing costs when determining prices.
At this point, you would still break even in financial terms. However, you’ve already provided two great products that a customer won’t find elsewhere, which puts you in a favorable position. The next offers on the value ladder will bring in profit for your business in steadily increasing margins. You can determine what these margins are upfront using a markup calculator. This ensures you have a clear overview of income versus expenditure.
Just remember that after trying the free option, many prospects will purchase 3 or 4 tiers of your ladder in a single step. This will increase your margins favorably. However, should this happen, you need to ensure that customers don’t skip any of the steps on your ladder. A value ladder can only maximize customer value if they buy in ascending steps.
Picture 3. Benefits of a freemium model
5 Steps for Designing an Effective Value Ladder
1. Know Your Market
You need to understand your competition, and their strategies, and tactics to compete with them. Once you understand their approaches, gain information on how best to connect with your customers. Learn about their income, leisure, and spending habits, interests, goals, challenges, and locations.
2. Establish a Core Offering
Your core offering is the main product or service you’ll be selling. To identify this, must define your target customers properly and develop an offering that speaks directly to their needs. Ensure that your solution offers excellent value, and addresses specific needs or issues.
3. Create a Tripwire
Your tripwire (or value proposition) is a small and irresistible offer that will hook customers. Many companies choose to splinter their core offerings and offer part of them as a tripwire to create interest in the main product.
4. Create a Lead Magnet
Now that you have a core offer and value proposition in place, you can reel prospects in with your lead magnet. This is a completely free offer used as bait to get customers to experience your value ladder.
The goal here is to give away something to your audience in exchange for their email address. You can then use this information later on to contact them with value-added offers. Some great examples include free reports, eBooks, free consultations, infographics, or anything else that suits your sector.
5. Incorporate a Profit Maximizer
Your goal should be to focus on both the back and front ends of your business. A profit maximizer can help you boost customers’ lifetime values.
This concept is usually designed as a small and exclusive group workshop, a personalized offer, or a bundled package of your core offerings. It should be personal and tempting enough for your premium customers to pay top dollar for it. Ultimately, a profit maximizer gives you the chance to sell products to your core customers again and again. All the while creating loyal followers that will give you great reviews and refer your business to others.
The Bottom Line
A carefully designed and properly structured value ladder can transform your business and significantly boost your profit margins.
The free or affordable value proposition at the bottom of your ladder will lead more prospects into your sales process. Plus, it will expand your list, and foster awareness around your brand, and your products. Then, the incremental structure of your ladder will maximize the value of every one of your customers. All while giving them more spending options at the same time.
Developing a value proposition that attracts new customers and liquidates your expenses and marketing expenditure on the second and third rungs of your ladder is key to success. If you can do this, and create a back-end maximizing your most valuable clients’ spending potential, your value ladder could take your business to a whole new level!
Nina Sharpe is a content champion for various outlets, covering range of business topics from finance for startups to small business accounting tips.
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