Fee Menus that Work: Essential Insights to Boost Revenue and Reach
Pricing Pointers, Issue #9 🍎
Let users choose the fee they want to pay
User fees are a mixed blessing. They increase and diversify your organization’s funding. But they also decrease the number and income-diversity of the users you serve.
There is a way to collect more fee revenue that won't drive away budget-conscious users. Give every user the option to pay a higher or lower fee.
A tiered fee menu is a tool for accomplishing this objective. A tiered fee menu is a list of options at different fee levels (tiers) all users can select from.
The fee menu tells users what they can do to pay a lower fee and what they’ll get in return if they choose to pay more. Users then select the option that best fits their needs and budget.
The secret to serving more users without sacrificing fee revenue
If you want to increase both the reach of your programming and the fee revenue you collect, do these two things. First, give users a lower-fee option. Second, give users the opportunity to pay more for a better program experience.
If you follow these guidelines, you'll increase your fee revenue in two ways. First, you'll collect some fee revenue from users who select the low-fee option. You'll collect nothing at all from them if a higher fee drives them away from your program.
Second, you'll collect extra fee revenue from users who are willing to spend more. Some users will do that if spending more will give them a better program experience. Use any surplus revenues you collect from these users to cover the costs of serving other users.
Use 2-3 fee tiers
The different tiers in a fee menu play different roles
The lowest tier is to give budget-conscious users a more affordable alternative.
The highest tier is to give users who want a better program experience the opportunity to spend more. You can use extra revenue from your highest tier to keep costs low for the other users you serve. That will lead to greater inclusion in your recreational programming.
Two tiers are a good start, but three tiers are ideal. Why?
First, another tier can generate more fee revenue to cover the costs of your programming.
Second, three tiers make it easier for users to balance between cost and experience. What do users do when they can't decide how much they want to pay? They pick the safe choice, the one in the middle.
How to create fee tiers
Think about everything you currently offer a user who pays a particular fee. What things do you give them? What services do you perform for them? What facilities or equipment do you let them use?
To create a lower-fee tier, what could you decrease or eliminate from your offer? Would it still be attractive to some users if the price was right?
To create a higher-fee tier, examine your offer from a different angle. What could you increase or add to your offer that at least some users would be willing to pay more for?
After you've finished, use this trick to make it easy for users to compare one tier to another. Make sure each tier has everything the tier below it has plus something more (or better).
If you do this, it will be easy for users to see what they'll get if they pay more and what they'll give up if they pay less.
How to encourage some users to willingly pay more
Make sure your fee tiers reflect a trade-off between what a user pays and what they get in exchange.
You're making your low-fee option available to every user. But you don't want every user to select that option.
You want some users to spend more. (Remember, these are the users who help you pay for the good you are doing!)
This will happen if users who pay more get more in return, and users who pay less get less. Some users will choose to pay more rather than accept less.
Follow these rules for creating profitable fee tiers
To create profitable fee tiers, you must follow three rules. The first two rules ensure some users will "profit" from spending more. The third rule ensures your organization will benefit financially.
For any two fee tiers:
Rule #1: Pretty much every user must agree that tier 2 is more desirable than tier 1.
Rule #2: For at least some users, the extra benefits they’ll get from selecting tier 2 has to outweigh the extra fee they must pay.
Rule #3: The extra fee revenue you get from tier 2 must be greater than the extra costs of providing it.
Three great things a tiered fee menu does
Great thing #1: A tiered fee menu is a tool for aiming a lower fee at the most budget-conscious users. You don't have to sacrifice fee revenue from users who are willing and able to pay more.
Great thing #2: A tired fee menu makes your programming more inclusive. Less-expensive options put an event or activity within the reach of more people.
Great thing #3: Users think a tiered fee menu is fair because every user has the same opportunities to save money. Users can pay more, but only if they think they'll benefit if they do so.
But watch out for these potential pitfalls!
Potential Pitfall #1: Luring the wrong users to your lower-fee option
The purpose of adding a lower-fee option is to attract new users. But, a new, lower-fee option may cause some of your higher-fee users to switch to your less expensive option. This will cause your fee revenue to drop unless you gain enough new users to offset this.
Here’s how to safeguard against this. Make users feel they'll have to give up too much to get a lower fee. You do this by decreasing or eliminating enough stuff that the fee savings aren't worth it to this set of users.
Potential Pitfall #2: Making your fee menu too complex.
The more complex a fee menu is, the harder it is for users to figure out which is the best choice for them. When users don't know what to choose, they often choose nothing at all.
You can safeguard against this possibility. Limit your fee menu for something to no more than three tiers. Make it easy for users to understand what they can do to pay less and what they'll gain if they choose to pay more.
Conclusion
Users will pay up to the limit they can afford, and what they can afford differs from one user to the next. So when you charge every user the same fee, two bad things happen. First, you price some users out of your programming. Second, you pass up fee revenue from users who are willing to spend more. (Remember, that extra revenue could help you serve more users.)
Do you want to increase the number and income-diversity of your users? Could your organization do more good things for your community if it had more fee revenue? Use tiered fee menus.
Mark Nagel, former Assistant City Administrator for the city of Elko New Market, Minn., contributed to this article.