What Is Your Product Pyramid?

What Is Your Product Pyramid?

Behold the power of upselling. Here are some compelling findings from Bain, Marketing Metrics, and McKinsey:

  • The average conversion for a first-time purchaser is just 5-20%, while conversion on upsell offers is 60-70%.
  • The average new e-commerce customer spends just $24.50, but the repeat customer spends $52.50 — more than double!
  • It costs 6-7 times as much to acquire a customer relative to retaining or upselling them.

If all this is true, why aren’t you more focused on the art of the upsell? There’s something obvious that sometimes impedes a company’s ability to upsell customers: they don’t have enough different products to sell!

We’ve developed what we call the “Product Pyramid.” It’s a practical framework for ensuring you have the right portfolio of products to offer your customers.

What Is a Product Pyramid?

Here is an example Product Pyramid from a B2C client:

Product Pyramid in B2C Company

As you can see, at the base of the product pyramid, you have low cost, low margin (or even free, negative margin) products to attract an audience. As you move up the pyramid, the number of customers in each level decreases, but the margins increase. Chances are, a bulk of your overall profits come from the top few layers of your product pyramid.

How Do I Build My Product Pyramid?

Take It From the Top

Start top-down! If you don’t have an attractive, high margin offering at the top of your pyramid, you should reconsider your business model altogether.

Work With Whales (Yes, Whales!)

How should you determine which products fit into each layer? Start by talking to your “Whales” — your most engaged and enthusiastic customers. Nielsen has done research that shows that the top 10% of your customers (what we call “Whales”) account for 30-70% of overall sales. For niche businesses, we have seen even higher percentages. There are other benefits to focusing on Whales:

  • Whales are less price sensitive, so you can earn higher margins by meeting their needs.
  • They generate credible word-of-mouth marketing to the non-Whales.
  • These customers love being part of your product development process. For one client we got a 38% response rate on a product development survey when we sent it to the Whales! Normally you only get a low, single-digit response rate from surveys.
  • Whales behave more predictably. Because they are so passionate about your space, they give more honest feedback. When they say they will buy, they are more likely to actually buy, unlike unpassionate fans who might say “yes,” but never follow through with a purchase.

Your Whales will tell you what problems you can help them solve, then you can create product concepts that leverage your brand, products, and core competencies in the format that appeals to your Whales.

Consider Your Entire Customer Base

If you have multiple “personas” (segments) in your customer base, you should develop a pyramid for each persona. Individual products can appear in multiple pyramids, so long as they are persona-appropriate.

Pay Attention to Profit Margin

Be sure to create economic models for each product — confirm that expected gross margin increases as you move up the pyramid. At the top of the example above is “events.” These are not small, localized events that you might be lucky to break-even on (that could be a bottom of the pyramid idea). These are exclusive, high-priced, premium national events that monetize the deepest customer relationships.

Metrics: How Do I Know I’m On the Right Track?

Measure your conversion rate from one level of the pyramid to the next. You should see the conversion rate increasing as you get higher in the pyramid. For example, using the sample pyramid above, while only 10% might convert from free content to a magazine subscription, you’d want to see more than 10% of magazine subscribers convert to a basic digital membership. If 20% of magazine subscribers join the basic digital membership, then you’d want to see more than 20% of those customers upgrade to the premium digital membership.

If you see a decline in conversion rate as you move up the pyramid, you have identified a bottleneck. Investigate to see if you have the right product, price, and marketing message.

Added ROI Benefits of the Pyramid

Customers are unlikely to take the leap directly from free to premium products. View the pyramid as a path for your customers. Make any initial barriers to making that first purchase relatively low — wow them, impress them, give them what they want. Then you’ll see them move up the pyramid. It takes some patience, but if you stay disciplined, you will end up better off.

How The Sterling Woods Group Can Help

We work with clients to build and implement their product pyramids. For a free consultation, contact us at info@sterlingwoodsgroup.com.

About the Author, Rob Ristagno

Rob Ristagno is the founder of The Sterling Woods Group and partners with companies to drive rapid digital revenue growth. The key is a successful digital membership program. Prior to creating Sterling Woods, Rob served as a senior executive for several niche media and e-commerce companies. Rob started his career as a consultant at McKinsey and holds degrees from the Harvard Business School and Dartmouth College. He has taught Product Strategy at Boston College.

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