The benefits of tiered pricing

The Bavarian apple tart at The Bake Works in Northfield, New Jersey.

Retailers are finding success in scaling back their tiered pricing strategies from three options to two, as bakeries figure out the best way to maximize profitability.

For example, Bavarian apple tarts at The Bake Works in Northfield, New Jersey, sell for either $18 for a 6-inch tart or $25 for 8-inch. At the Cake Boss Cafe in New York City, customers can choose from small or large cannoli, in both traditional and chocolate. A small chocolate cannoli sells for $2.75 apiece, a large $4.

The Sweet Tooth Fairy Gourmet Bake Shop, with 10 locations in Utah, offers several pricing options for its signature Cakebites and other menu items. A half dozen Cakebites sell for $5, while a dozen sells for $10. Cakes are available in four sizes, ranging from $35 for 6-inch round to $96 for a 12-inch round.

“At The Sweet Tooth Fairy, we incorporate the magic and nostalgia of baking into delicacies that resonate with many tastes,” says Megan Faulkner Brown, CEO and founder of The Sweet Tooth Fairy.

Tiered pricing is a mechanism that allows a retail bakery to set levels of prices based on different categories — or lifestyles — of shoppers. It is becoming more common to see bakeries take advantage of tiered pricing. You can start by setting one price for the top end of a bakery category, a slightly lower price for the middle, and the lowest price for the bargain hunters. Or make it simpler for the consumer by offering two tiers of prices.

Bakery owners agree that given the choice, the majority of shoppers will migrate to the middle. But by having a top tier, you can capture dollars that you ordinarily miss. And having a bottom level ensures your bakery will reach those looking exclusively for the best deal and build more customer traffic.

Another point worth noting is to never underestimate the importance of add-ons. People love to make their own choice, and add-ons like premium nut toppings or flavor shots for beverages can be priced separately. This strategy gives you the ability to charge more for the extras enhancing your bakery’s profitability.

Tiered pricing applies to other aspects of your business beyond retail. Weddings and catering are two great examples. Catering experts recommend that you present customers with multiple options on catering menus to entice people to trade up. Be as specific as possible with your catering menus — quantities, sizes, flavor options and prices. Customers don’t like surprises.

Sound advice

Having the lowest price is not a strong position for small business. Larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low price strategy starts with looking at the demand in the market, according to About Money, by examining three factors:

  • Competitive Analysis: Don't just look at your competitor's pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the value-added services if any?

  • Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine their pricing limits. The highest price in the market may not be the ceiling price.

  • Price Elasticity: If the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, buyer's perception of quality, and consumers not habituated to looking for the lowest price in your industry.

Once you understand the demand structure in your industry, review your costs and profit goals as set in your business plan or financials. The low price strategy is best avoided by small business, but there are conditions such as a price war that can drag a company into the lowest price battle.

Follow these tips to avoid a costly price war:

  • Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices.

  • Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don't want.

  • Value-added: Find value your business can add to stand out in the marketplace. Be the most unique business in the category.

  • Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war. Leave the price-cutting and price wars to big business. Small businesses with solid pricing strategies can escape a price war and low price position. Carefully, consider your price decisions. Your business depends on it.