Idea in Brief

The Problem

Companies often crimp profits by using discounts to attract price-sensitive consumers and by failing to give high-end customers reasons to spend more.

The Solution

A multitiered offering (typically with three options) can use a stripped-down product to attract new customers, the existing product to keep current customers happy, and a feature-laden premium version to increase spending by customers who want more.

The Implementation

Key steps include identifying “fence” attributes that will prevent current customers from trading down from the existing offering; carefully choosing features and names to create clear differentiation and value; and setting prices using feedback from in-house experts and, when possible, drawing on market research.

For decades the auto insurance industry operated on a simple assumption: Consumers are highly price-sensitive, and most will buy the least-expensive plan they can find. But in the early 2000s Allstate conducted some research that caused it to revisit that assumption. Price does matter, it learned, but there’s more to the story: Many drivers worry about being hit with premium hikes if they’re in an accident. And drivers with clean records want to be rewarded.

A version of this article appeared in the September–October 2018 issue (pp.106–115) of Harvard Business Review.