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With the creation of the internet, entrepreneurs have gotten much more creative in the ways that they package, price, and distribute their products. Before, businesses often had to provide a physical product, distribute it through a partner or retailer, and sell for a fixed price. Now, there are tons of business models, and even more ways to package, price, and distribute your product. Our russian nesting doll framework walks through how to tier your product to get your potential customers addicted before they even adopt your solution.
The key words we want you to remember throughout this framework are these: Addiction before Adoption. If you can package and price your product following this framework, you’ll be able to encourage potential customers to try your product, get addicted to it, and ultimately be unable to live without it. By the time they’re addicted, you’ll be charging for your product, and on the way to a sustainable business model.
There are tons of advantages to using this framework to build up your customer base. A few of them include:
Who doesn’t love a free trial of a product? You’ve seen this method used time and time again: free trials, money-back guarantees, and in-store samples are all free methods of incenting your customers to buy products. Many people are hesitant about purchasing a product without trying it, or at least seeing positive reviews of the product. To encourage people to try your product, offer some sort of free version.
This method is particularly easy for software products. Microsoft Office, Hulu, Spotify, and many other products all offer free versions to try for a certain time period before the customers decide if he/she likes it or not.
If you have a physical product, think about cosmetic counters in large retailers. You can sample lotions, perfumes, lipsticks and more before purchasing them. Clothing retailers often have changing rooms or easy return policies to test out the product. Hardware stores usually have sample computer, television or gaming systems set up so that you can experience the product first. Even grocery stores offer food and drink samples to promote products.
Service-based companies have also found ways to promote their products using free trials. Free options to try your product are the first step in getting potential customers addicted to your product. If you can get them using your product consistently, they’re much more likely to purchase an upgraded version (that they have to pay for)!
Our next Russian Nesting Doll is the freemium model, where you offer a limited version of your product for free. Yes, this is different from the free trial! Often, free trials offer versions of paid products to try for a restricted time period. The freemium model, on the other hand, offers basic features for free, forever, and offers premium upgrades. However, these free features are often the bare bones of the product. The ‘freemium’ model is designed to push potential customers to the next step of addiction; once they love the basic product, they’ll be certain to want more! For more on how the freemium model works, check out our lesson on Customer Acquisition and Retention Cost (CARC).
The key here is to not just offer a free version of your product without any thought of sustainability in mind. Those premium features should cost money, and that will be the foundation of your business model.
Your next step is considering Original Equipment Manufacturer (OEM) solutions. An OEM is a company that makes the individual parts that go into a product before it is sold. For example, a manufacturing company makes a hard drive, which is then assembled into a computer, sold, and marketed by a computer company.
Partnerships and deals with OEMs will allow you to stand on the shoulders of giants, so to speak. By this, we mean that you become a type of OEM - find a way to integrate your product into larger products. For example, YouTube automatically comes installed on every iPhone -- in this case, YouTube is the OEM, distributing through another product, the iPhone. This isn’t just the case with software, however! You can also push for your physical products to be placed with other products for more awareness, like adding car parts to one of the major manufacturers like Ford.
Often, you’ll be able to place a version of your product inside of other products that has fewer features, or is lower-fidelity. This may not be the case as often with physical products, but get creative! How can you encourage people to purchase a more robust version of your product? Introducing them to the product, and starting to get them addicted, is half the battle.
One important note here: don’t give away your CORE Value! While you can outsource parts of your product to OEMs, you never want to give away the center of your product. This CORE Value is the foundation on which your entire business rests, so be sure to guard that closely! Consider your barriers to entry and be sure to protect your CORE Value.
The fourth stage in our Russian Nesting Doll framework is reaching that premium product: the moment when a customer decides that the trial was great, the freemium product was in need of more features, and they’ve personally worked with the product, and now it’s time to buy for an entire group. Not only are they likely going to purchase those premium features for themselves, but chances are, they’ll be an advocate in their workplace for your business.
The personal solutions that are enabled by OEM solutions in the third step of this framework allow you to leverage those individual customers into larger, group customers at companies. Typically these purchases are more expensive based on the size of the group, so that you can accommodate smaller workgroups (five to ten people) and larger workgroups (up to 50 people).
This scaling works both for your packaging tiers and your pricing tiers. As the number of people with access to the product increases, so do your prices. Additionally, this allows you to add more features to the higher tiers of your product, encouraging even smaller companies to go for the pricier tiers.
For example, we can look at HubSpot, a marketing automation platform. Their tiers have ‘starting at’ prices, and show you the base features attached to each tier. They further customize their payment scheme by asking how many contacts you’ll have in your database, and adjust pricing from there. This hyper-tiered pricing allows them to customize prices to each individual customer, leaving the customer with a sense of flexibility. It also allows them to adjust their pricing as the customer engages with the company for continual upsell.
Finally, we reach the fifth and outer nesting doll: the corporate and enterprise stage. This is often the highest price tier for companies that use the steps of free trials, freemium, and premium features for their products.
Corporate or Enterprise solutions are the most expensive because they usually include all features available, as well as attentive customer service, and large user groups. Additionally, selling enterprise-tier products requires more from your sales team! Don’t forget about your own expenses when navigating a tiered pricing system.
People will often expect, when they buy more units of a product, for there to be a discount on the overall price. You’re going to face this question at some point: what discount will you give me? Think about this question in advance, and design your product tiers to accommodate it. Enterprise purchases often cost less in proportion to a workgroup purchase, and come with more features, to allay the worry about discounts at this level.
This enterprise level is truly when you have full adoption of your product. And, it all starts with the first level: getting those customers addicted! Addiction before adoption is a great method to extend your sales cycles and continually upsell your product.
Your product or service can often utilize some or all of these steps in our Russian Doll framework to land customers and upsell. Extending your customer lifecycle is a great way to introduce sustainability to your business model. It will help you navigate your questions about pricing, packaging and distribution, as well as scaling your product and your business. With those thoughts in mind, you can instill confidence in your stakeholders as you align your product and business with your vision and mission statements.
Have questions? Not sure how this framework can apply to your product? Head over to our forums and see what other entrepreneurs think!