Your customers expect a specific level of experience when they do business with you, which will determine how much money they are willing to pay. Each level of service is what we call a market tier. These market tiers are very valuable to us entrepreneurs as they can guide us in creating more profitable solutions, help us scale to a wider customer base, and even help us identify future trends. We will be going over all of this and more in this lesson. 

Steak Anyone?

Let's say it is a Friday evening, it was a long but productive week of work, and you want to unwind and get something to eat with some of your colleagues. You all agree on steak. 

One colleague recommends a high end stake house. They have the highest quality cuts, it is an upscale environment, and an extravagant ambience.... along with an extravagant price. 

But after a long week, you really are not in the mood for something fancy. You want something with a more casual and upbeat feel so you recommend Texas Roadhouse. Decent cuts at a moderate price. 

Then your final colleague says he just wants something low key and simple. Good food selection, low price. And he recommends Golden Corral. 

Notice what is happening here. All three recommendations are steak. But all completely different. This is what we call Market Tiers. Within every industry, there are different tiers of service one can choose from. Obviously tiers that provide a higher level of quality will require you to spend more money. While tiers that offer a lower quality of service will be provided at a lower price point. 

Market Tiers - Within the same industry, there are different levels of service a company can compete in. The higher quality services will generate higher price points, and the lower quality services will generate lower price points.

In business it is important for you to know what market tier you are competing in. More importantly does the quality of service that you provide, along with the price that you charge match the tier that you are competing in? Let's go over how understand what market tier is best for you can help advance your business.

3 Primary Markets Tiers

In every industry, as a rule of thumb, there are 3 primary market tiers:

• Premium
• Mainstream
• Economy

Premium

You are offering a high quality product and charging a high end price.

In the steak example above, think of the upscale steak house. This would be the premium tier. In this tier you will provide the highest level of service. It will be costly to execute this level of quality, thus prices will be more expensive. However, if the level of quality is truly superb, you will attract a customer base that is willing to pay the premium price for this level of service.

In premium tiers, you will earn a higher profit margin than the other tiers. However, the downside is there is a smaller customer base who is willing to pay the higher price point. Premium tears are often niche markets, meaning they only intent to appeal to a specific group of people, with a specific product line.

Examples of premium brands are Lamborghini, Rolex, Versace.

Mainstream

This is a solid quality product that works and is dependable. It is priced at a level where the majority of people can afford.

In the steak example above, think of Texas Roadhouse. In this tier you will provide a reliable level of service that will be priced at a point in which the majority of people can afford. In this tier, customers are not expecting the highest quality with all of the bells and whistles, but they are expecting something that is reliable and fulfills their needs. 

In mainstream tiers, you will earn a moderate profit margin, and this tier will have the largest customer base. This tier also normally has the most amount of competition. Mainstream tears are broad majority markets, meaning they only intent to appeal to a large group of customers, with more generic based products.

Examples of mainstream brands are Ford, Gap, Fossil Watches.

Economy

This is a good product, but a lower quality at the cheapest price point. 

In the steak example above, think of Golden Corral. In this tier you will provide a level of service that works, and will be one of the cheapest in the market. In this tier, customers are expecting a lower level of quality, however this group is OK with it as it fulfills a need and is cheap. 

In economy tiers, you will earn a small profit margin. You are relying on the lower cost of service provided as well as a larger customer base to make up for the small profit margins. 

Examples of economy brands are Dollar stores, McDonalds.

What Tier is Walmart in?

This is a great example. Walmart is cheap but they are not quite the economy level Dollar Store cheap. However they are still cheaper than most department stores such as Macy's or the Gap. 

Companies like Walmart and Amazon we could say are in-between tiers. They are on the higher level of Economy or on the lower level of Mainstream. They have a nice positioning right in the middle.  

Companies in Different Tiers Do Not Compete with Each Other

Is Golden Corral really in competition with that high end steak house? Is Old Navy in competition with Versace? A rule of thumb is companies in different market tiers do not compete with each other. They offer completely different features in their products catered to completely different targets (thus the importance of the "why" in the segment section). Those companies who are in the same market tier that you are competing in will be your primary competitors. 

Now there will obviously be exceptions to the rule. I am more of a Texas Road House guy, however it would not be out of the norm to see me at Golden Corral or a fine steak house on occasion. Also, if there is a brand that is in-between two tiers, like Amazon, it may be competition for both a Macy's and a Dollar General. However as a rule of thumb, those companies closer to you in a tier will be your biggest competition.

Task #1 Identify Your Tier

What tier are you competing in? Who else is competing in this tier? Are you truly providing the level of service this tier requires? Are you charging the right price point this tier expects (you could be over charging, you could also be under charging). 

Premium is Not Always Better

I often hear people say they want to be a premium brand. But do they really? Just because your restaurant serves fantastic food, that does not mean you need to be a premium establishment. Your clientele may like the casual atmosphere you provide, they may like your prices, they may like the ambience. 

Premium may work for some, however it is not always the best tier. Don't forget, Walmart sells more than Versace. 

You can have Different Price Points in the Same Tier 

Most of us have heard the phrase give the customer 3 options (one high, one in the middle, and one low) and they will normally chose the one in the middle. No this is not you satisfying all 3 tiers. If I go to Texas Roadhouse there are items I can buy for $10 dollars and there are things I can buy for $40. However I am still in the mainstream tier. If I go to Ford, there are cars I can buy for $25,000 and there are cars I can buy for $60,000. Yet still mainstream. 

In our tier, we will have different price points. We will most likely have an entry level product at a lower price point (think appetizers or linch specials), we will have our average ticketed priced items (think a $20 steak meal at Texas Road House), and we will also have a higher priced option (porterhouse with ribs and extra sides). Though we have multiple price points, we are still in the same market tier. 

To satisfy all tiers, in one restaurant you would need to serve McDonald style hamburgers for a $1, Texas Roadhouse Steak for $20, as well as a high end steakhouse option of a $300 steak. As you can see, this is  a huge challenge for a single restaurant. 

Task #2 What are Other Tiers Doing

Even though they might not be your direct competition, what is trending in the other tiers? Is it something you could adapt into your tier?

Market Tiers Help Predict Trends

One of the amazing elements of market tiers is they can help predict future trends. Think of the TV's you have in your living room. When TV's first came out, this black and white TV was a premium tiered item only available at the highest price. Then what happened, color TV came out. This was now the premium tier item, and the black and white TV now became accessible to the mainstream. So products that serve the premium tier today will serve the mainstream tier tomorrow. Follow the trend, we can say the same about plasma TV's, Big Screen TV's, 4K/5K TV's.

If you are a mainstream tier, be mindful of what is popular in the premium tiers. This may be a future trend.

Trends can also start in the lower tiers and work themselves up. In the early 2000's, cell phones started to have cameras in them. It was much cheaper to buy a cell phone with a camera than to buy a regular cellphone and a digital camera (which was the norm back then). But these cameras were HORRIBLE! Only a few people would buy them because they were so bad. But in time, the quality get better, and now everyone has a camera phone.

Always be mindful what is happening in other tiers, as this can help you identify what is coming for your their.

#3 Are You Looking to Shift Tiers Eventually

Companies Can Shift Tiers

I want you to think of Toyota. When the brand first came out they were an economy tier brand. Toyota was know to be a reliable car at a cheap price. No bells or whistles, but it would last forever. Toyota quickly solidified the economy space of the car industry.

In time, Toyota began to increase the quality of the vehicle by incorporating popular features in the mainstream brands such as power windows, power seats, and AC. Then they focused on car design and comfort. Toyota's reputation grew, and they began to attract a mainstream audience. Today, Toyota is in the same tier as other mainstream brands such as Ford and GM. 

It is common for a new company to start in the lower tiers. Why? Less competition, and an easily satisfied customer. Then, as the brand begins to build loyal customers, it will slowly start to incorporate features that are popular in the mainstream. In time, if the brand does a good enough job pleasing it's customer base, it will slowly ascend into the higher tier. 

Are you looking to be like Toyota who started in the economy tier and eventually emerged into the mainstream? Are you like Tesla who started in the premium tier and is looking to scale downward to the mainstream tier. Or are you happy where you are?

You just need to ensure you have a transition plan if you do decide to shift. What is that tier currently doing, how can you gradually shift into this expectation? 

Conclusion

Now you should be able to identify what market tier is best for your business. Here is an example of how your targeting strategy should look up until this point:

In future lessons, we will go over how to match your pricing, product offerings, and communications with your market tier. 

The SUCCEED Business Strategy provides you with simple to follow, step by step guides on how exactly you can develop an effective targeting strategy to help grow your business. Click here to learn more!