A student recently asked, “when does it make sense to use two-part pricing?”
First, let’s define two-part pricing. It is when you charge one fee up front, and then another fee as the product is used.
For example, popular bars have a cover charge and then charge for drinks as the night goes on. Health clubs have initiation fees then charge monthly rates. Country clubs have large initiation fees with monthly or annual dues.
In each of these examples, a customer cannot access the facility or the product without paying the up front fee. This works because customers get two different pieces of value, both of which they are paying for. For example, they get value from going to the bar and they get value from the drinks. They get value from having access to a workout facility and they get value from working out. They get value from saying they are a member of a country club and they get value from using it.
Of course this only works when you can control access to your facility or product. People who have not paid the upfront fee cannot purchase the other products.
Two part pricing can also be used as a technique for price segmentation while building loyalty and increased demand. Amazon Prime is an upfront fee that gives you free shipping as you buy goods from them. But you don’t have to use Prime to buy from Amazon. Amazon gives you a choice.
Infrequent buyers or people who are not price sensitive probably will not purchase Prime. However, heavy users who are price sensitive will pay the fee to join Prime. Once these people have joined Prime, they are more likely to shop from Amazon than elsewhere.
So should you try two-part pricing? Sure, if your market conditions allow you to meet one of these two scenarios. Do you have a popular product that provides a lot more value to your customers than just the use they get? If so, you may try charging an up front fee, just like a country club.
Do you have a product that is frequently purchased and you have some users who are heavy users and price sensitive? Then try imitating Amazon Prime. You don’t have to force everyone to go this way. Let the targeted segment reveal themselves.
Photo: “Cycle Class at a Gym” by www.localfitness.com.au