Part 6: Downsell Offers | $100M Money Models Audiobook | Ep 943
In this episode of The Game, Alex Hormozi breaks down three key strategies for downselling: payment plans, trial-with-penalty arrangements, and feature-based pricing tiers. He examines how businesses can make their products more accessible by offering installment payments that align with customer income patterns, and explains how trial periods with penalty fees can drive customer engagement more effectively than traditional refund policies.
Hormozi explores how strategic feature removal can create different pricing tiers without compromising product value. He demonstrates how these downselling approaches can lead to increased customer retention and lifetime value, showing how properly structured payment options and subscription tiers help businesses convert price-sensitive customers while maintaining profitability.
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1-Page Summary
Payment Plan Downsells
Alex Hormozi introduces three effective downsell strategies, with payment plan downsells being a key approach to making offers more affordable. He explains that by splitting costs into manageable installments instead of requiring a lump sum, businesses can convert customers who might otherwise be deterred by high upfront costs.
Hormozi describes various payment options, including third-party financing, credit cards, and layaway plans. He emphasizes the importance of aligning payment schedules with customers' paychecks and recommends incentivizing early payments through upfront payment discounts. This strategy not only makes products more accessible but can significantly boost overall profitability.
Trial With Penalty Downsells
Hormozi presents the concept of "Trial with penalty" as a powerful conversion tool. Instead of charging upfront fees, customers must complete specific onboarding activities to avoid penalty fees. He notes that the motivation to avoid a fee typically drives higher engagement than the prospect of earning a refund.
This approach, Hormozi explains, creates an ideal pathway for upselling. Customers who successfully complete their trials demonstrate commitment, making them excellent candidates for long-term subscriptions or higher-value services. He recommends structuring penalties incrementally rather than imposing large fees for initial mistakes.
Feature Downsells
Hormozi describes feature downsells as an effective strategy for retaining customers who decline initial offers. By strategically removing features while lowering prices, businesses can create different pricing tiers without devaluing their product. He illustrates this with an example of removing a money-back guarantee to justify a lower price point.
The strategy, according to Hormozi, can actually drive customers toward higher-priced options as they evaluate the trade-offs between price and features. He emphasizes that right-sizing subscriptions to match customer usage patterns can lead to higher lifetime value, as customers are more likely to stay when they're paying for features they actually use.
1-Page Summary
Additional Materials
Clarifications
- Layaway plans involve customers reserving items with a seller and making payments over time until the full amount is paid, after which they receive the item. This method allows customers to budget for purchases without incurring interest charges, and the seller holds the item until payment completion. It can be beneficial for those with bad credit as there is little risk for the seller.
- Third-party financing involves obtaining financial assistance for a purchase or service from a company outside of the primary transaction, often used to help customers afford products or services by spreading payments over time. This type of financing can come from various sources like financial institutions or specialized financing companies, providing customers with more flexibility in managing their expenses. It allows customers to make purchases they might not be able to afford upfront, enabling businesses to increase sales by offering payment options tailored to their customers' financial situations.
- Structuring penalties incrementally means setting up penalty fees in a gradual or step-by-step manner. Instead of imposing a large penalty upfront, smaller penalties are introduced for specific actions or failures. This approach aims to encourage desired behavior by making the consequences more manageable and allowing individuals to learn from their mistakes progressively. By incrementally increasing penalties, businesses can guide customers towards desired outcomes without overwhelming them with significant consequences right away.
- "Right-sizing subscriptions" means adjusting the features and pricing of a subscription to align better with what the customer actually needs and uses. This strategy involves tailoring the subscription plan to match the customer's usage patterns, ensuring they are paying for services that are relevant to them. By offering different tiers of features at various price points, businesses can cater to a wider range of customer preferences and maximize the value customers receive from their subscriptions. This approach aims to increase customer satisfaction and retention by providing options that are more closely aligned with individual needs and budgets.
- Lifetime value (LTV) is the total revenue a business expects to earn from a customer throughout their entire relationship. It helps businesses understand the long-term impact of acquiring and retaining customers. By calculating LTV, companies can make informed decisions on marketing, sales, and customer service strategies to maximize profitability. LTV considers factors like repeat purchases, average order value, and customer retention rates to gauge the overall value a customer brings to a business.
Counterarguments
- Payment plan downsells may lead to increased administrative costs and complexity in tracking payments.
- Aligning payment schedules with paychecks could create cash flow challenges for businesses if many customers default or delay payments.
- Incentivizing early payments might not be effective if the discounts offered are not perceived as valuable by the customers.
- Trial with penalty downsells could potentially alienate customers who feel penalized or pressured, leading to negative brand perception.
- The success of upselling post-trial depends on the quality of the product and customer service, not just on the completion of the trial.
- Incremental penalties might still be seen as punitive and could discourage sign-ups if customers are risk-averse.
- Feature downsells could result in a perceived loss of value, prompting customers to switch to competitors offering more comprehensive packages at similar price points.
- Driving customers towards higher-priced options might not always work if customers are primarily price-sensitive.
- Right-sizing subscriptions assumes accurate prediction of customer usage patterns, which may not always be possible, leading to dissatisfaction if needs change.
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Payment Plan Downsells
Alex Hormozi highlights the effectiveness of three downsell processes: payment plan downsells, trial with penalty, and feature downsells, to increase sales. Payment plan downsells are a potent strategy to make offers more affordable and boost profitability.
Downsell Payments Allow Installments Instead of Lump Sum
Hormozi emphasizes the balance between how much customers pay upfront and over time. By splitting the total cost into an upfront payment followed by scheduled payments, offers become more accessible to customers who might be unable to afford a lump sum.
Making Offers More Affordable Through Installment Plans
Hormozi argues that installment plans can make offers more affordable, converting customers deterred by high upfront costs. This approach involves charging a portion of the cost upfront and scheduling the remainder over time. For instance, Hormozi once successfully deployed this method by offering a customer the option to split her payment into two and further reduced it to a third to accommodate her payday schedule.
Downsell: Move From Full Upfront Payment to Pay-period Scheduled Payments
Financing, Credit Cards, and Layaway Options
Hormozi expands his downsell approach to include third-party financing, credit cards, and layaway. In third-party financing, another company pays the business owner immediately, and the customer pays over time. Credit card payments enable customers to pay the business today and deal with the card company independently, while layaway allows customers to receive the product after full payment, mitigating risk for the business owner.
Payment Plans Boost Sale ...
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Payment Plan Downsells
Additional Materials
Counterarguments
- Payment plan downsells may encourage customers to make purchases beyond their means, leading to potential financial strain.
- Installment plans could result in higher overall costs for customers due to interest or administrative fees, which might not be immediately apparent.
- Offering too many financing options can complicate the purchasing process and overwhelm customers with choices.
- Relying on third-party financing shifts the risk to another company but may also involve additional fees or less favorable terms for the customer.
- Credit card payments might encourage debt accumulation for customers, which is not a financially healthy practice.
- Layaway options, while mitigating risk for the business, may be less attractive to customers who want immediate gratification.
- Tailoring payment schedules to align with paychecks can be administratively complex and may not account for the variability in customers' financial situations.
- Incentiviz ...
Actionables
- You can create a personal budget that includes installment payments for big purchases to avoid financial strain. Start by listing out large expenses you anticipate and divide the total cost by the number of months you're comfortable with paying. This way, you can set aside a manageable amount each month, making it easier to afford high-ticket items without the shock of a lump sum payment.
- Consider negotiating with service providers for a payment plan that aligns with your income schedule. For instance, if you're hiring a contractor for home renovations, propose a payment schedule that matches when you receive your paychecks. This ensures you have the funds available and reduces the risk of missed payments ...
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Trial With Penalty Downsells
Alex Hormozi brings attention to the "Trial with penalty" concept as one of the most powerful downsell processes aimed at converting potential customers.
Avoid Fee in Penalty Trial
Align Actions With Long-Term Customer Behaviors, Incentivizing Trial User Engagement
Hormozi suggests a trial method that incentivizes user engagement by aligning actions with desirable long-term customer behaviors. The essence of this method is that customers don't have to pay an upfront fee but must participate in specific onboarding activities—such as attending Zoom calls or activating profiles—to avoid incurring a penalty fee. The software company's offer to Layla exemplifies this, where she could receive free onboarding by completing the required training, avoiding the otherwise mandatory fee.
Penalty Fee for Incomplete Trials Can Boost Conversions
Avoiding a Fee Motivates Customers More Than Earning a Refund
Hormozi points out that the possibility of avoiding a fee is a more substantial motivation for customers than the prospect of earning a refund. The imposition of penalties for not meeting trial conditions leads to higher customer engagement, since people are driven to engage with the product and derive value from it, which ultimately results in a higher conversion rate than standard free trials.
Upsell Trial Users With Penalty to Long-Term Subscription
Trial-Compliant Customers Show Commitment, Making Them Ideal for High-Value Offers
After a trial with a penalty, Hormozi advocates for an upsell strategy targeting those customers who complied with the trial terms, as they've demonstrated commitment to the process. This approach is thought to potentially double the number of retained customers by converting those who initially declined the offer into customers through ...
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Trial With Penalty Downsells
Additional Materials
Counterarguments
- The concept of a "Trial with penalty" may deter some customers from even starting a trial due to the fear of incurring penalties.
- Aligning actions with long-term customer behaviors assumes that the company knows what is best for the customer, which may not always be the case.
- The effectiveness of penalty fees for boosting conversions may vary greatly depending on the target audience and the product or service offered.
- The motivation of avoiding a fee versus earning a refund is subjective and can differ based on individual customer psychology and financial situations.
- Upselling trial-compliant customers to long-term subscriptions assumes that compliance with trial terms correlates with a desire for long-term commitment, which might not always be true.
- Customers who are compliant with trial terms may feel pressured or manipulated into higher-value offers, potentially leading to customer dissatisfaction or churn.
- Structuring penalty fees by criteria or as a lump sum could be seen as punitive and may harm the customer relationship.
- Mid-trial check-ins, while potentially useful for tailored offers, could be perceived ...
Actionables
- You can create a personal reward system that mirrors trial incentives by setting goals and attaching small penalties for not meeting them, like donating to a charity if you skip a workout. This mimics the trial engagement incentives by aligning your actions with long-term health behaviors and incentivizing you to stay committed.
- Develop a habit-tracking app that allows users to set up their own penalty trials for personal goals, where they can input specific activities and the app automatically charges a small fee to their payment method if they fail to complete the task. This takes the concept of penalty trials and applies it to personal development, encouraging users to stay on track with their objectives.
- Start a subscription box service that offers trial periods with tail ...
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Feature Downsells
Alex Hormozi delves into "Feature downsells," regarded as a crucial strategy to retain customers after they decline an initial offer.
Downsell By Reducing Features and Price
Lower Costs, Core Access
Hormozi explains that downselling by altering what the customer receives – by lowering both features and price – can be more effective than other discounting strategies. He emphasizes the importance of justifying a lower price without devaluing the product. An example Hormozi provides is removing the full money-back guarantee, giving customers the choice to pay less without the guarantee or pay the original full price to keep it. This strategy not only simplifies the decision-making process but prevents the product from losing perceived value.
Adjusting Features and Prices to Drive Customers To Higher-Priced Options
Removing Features Can Make the Original Offer Seem Better
By offering different options at various price points, customers might be inclined to opt for higher-priced options that better suit their needs. Hormozi uses a method where he initially cuts a valuable feature and slightly lowers the price to make the customer re-evaluate the original offer or price. By strategically removing features from the highest to the lowest value offerings, customers are prompted to weigh the saved money against the value they may lose, which often leads them to re-upsell themselves on more expensive offers after appreciating the value of what was removed.
Downsells Retain Customers By Right-Sizing Their Subscription To Active Features
Lower-Priced, Feature-Reduced Plan Prevents Customer Churn Due to Unused Capabilities
Hormozi s ...
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Feature Downsells
Additional Materials
Clarifications
- Feature downsells involve offering customers a reduced set of features at a lower price point to retain their interest and prevent them from completely declining an offer. This strategy aims to align the product with what customers truly value and are willing to pay for, ultimately increasing customer retention and lifetime value. By strategically adjusting features and prices, businesses can guide customers towards higher-priced options that better suit their needs. Downsells can also prevent customer churn by matching subscription plans to active feature usage, ensuring customers feel they are getting fair value for what they pay.
- Downselling is a sales strategy where customers are offered a lower-priced or reduced-featured alternative after declining an initial offer. It aims to retain customers by providing options that better match their needs and budget, ultimately preventing them from completely walking away. This approach can help maintain customer satisfaction and loyalty by aligning the product or service with what the customer values most.
- Customer churn is the rate at which customers stop doing business with a company. It is a crucial metric that measures customer retention and loyalty. High churn rates can indicate issues with customer satisfaction or the product/service offering. Companies often use strategies like downsells to reduce churn by adju ...
Actionables
- You can evaluate your monthly subscriptions and memberships to identify which features you actually use and which you can do without. For instance, if you have a gym membership with access to premium classes that you never attend, consider switching to a basic plan that still allows gym access but at a lower cost. This aligns your spending with your actual usage and can save you money over time.
- Create a personal value hierarchy for your regular purchases by listing out the features of each product or service and ranking them from most to least important. When faced with a decision to buy, choose the option that offers the highest-ranked features within your budget, even if it means foregoing some lower-ranked features. This helps you spend money on what you value most, potentially leading to greater satisfaction with your purchases.
- ...
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