Your Ultimate Guide to Tier Pricing

While comparable, tier pricing and volume pricing are calculated differently and used to achieve different business objectives. A favorite among software-as-a-service (SaaS) companies, a tiered pricing model refers to a step decrease in the cost of goods. Put a different way, an increase in the discount based on the quantity purchased or number of features needed.

What’s the Difference? Tier vs. Volume Pricing

Tier Pricing Example

This pricing model involves scaling the price based on different thresholds of a certain metric. This allows customers to choose from a variety of price points, where each one offers certain features, functionality, services, and benefits. For instance, Mailchimp, an email marketing automation company, offers four pricing tiers – Free, Essentials, Standard, and Premium.

Volume Pricing Example

While volume pricing still provides for multiple tiers, price is determined by the number of units purchased. Commonly used by wholesale markets, as the purchase volume increases, the amount per unit decreases. For example, Shutterstock, a provider of stock photography, stock footage, stock music, and editing tools sells content both on a subscription basis and on demand. They provide customers with credits, making the annual subscription a better value for the money.

Aside from the above benefit of decreasing the per image or per video cost, the subscription packages provide premium image editing tools, whereas the pay-as-you-go model only provides basic image editing tools. Additionally, the subscription model provides substantial discounts that are based on the package selected.

Comparing The Two

Let’s do a simple side-by-side comparison of tier pricing versus volume pricing.

In both scenarios, we’ll assume that a customer purchased 30 widgets.

Tiered Pricing Calculation

First 15 widgets: 15 x $25 = $375

Next 10 widgets: 10 x $20 = $200

Final 5 widgets: 5 x $15 = $ 75

All tiers are then added together ($375 + $200 + $75), making the total for 30 widgets $650.

Volume Pricing Calculation 

Since 30 widgets fall within the 25 – 35 group, the total would be $450 (30 x $15).

So which one is right for your company? Unfortunately, this question doesn’t have a one-size-fits-all answer. While a favorite pricing strategy among SaaS businesses, companies with other business models have also successfully deployed tiered pricing. Basically, it comes down to your business goals.

If your objective is selling high quantities, volume pricing may be right for you. To help ensure profitability with this pricing strategy, ensure discounts are small and you give yourself the ability to periodically increase price. However, if your goal is to attract new users across a variety of buyer personas, tiered pricing may be more appropriate.

Types of Tier Pricing Models

Let’s uncover the various types of tiered pricing models, its advantages and disadvantages, and how to implement this strategy. There are numerous variations, but here are some of the most common.

Three-tier pricing

Offers three levels, such as Basic, Standard, and Premium or Personal, Professional, and Business. The Basic or Personal tier offers fundamental features and functionality at a nominal price. The Standard or Professional tier combines features of the first tier with some additional functionality, or alternatively higher levels of service. Designed for customers with more complex requirements, such as enterprises, the final tier (Premium or Business) is the most costly and typically includes the features and functionality found in the first two tiers, as well as additional robust features, functionality, and service.

Multi-tier pricing

Meets the needs of a large customer base or numerous customer segments, this pricing model consists of more than three tiers that provide customers with a broad range of pricing options for different capabilities for the same product or service.

Usage-based tiered pricing

This model is priced based on how much of the product or service the customer consumes, enabling organizations to charge based on the amount of resources used. This pricing strategy allows companies to easily scale their services to meet customer needs and simplifies the forecasting of revenue. From a customer perspective, they have the flexibility to use as little or as much of the resource as needed, providing more control over their spend.

Feature-based tiered pricing

Tiers are differentiated based on the features provided, not the number of features provided. Lower priced tiers contain basic features and functionality, while higher priced tiers provide more advanced features. This pricing model provides businesses with the ability to monetize their offerings based on different feature/service levels, while enabling customers to get the most value from their purchase.

User-count tiered pricing

Similar to usage-based tiered pricing, user-count tiered pricing allows companies to charge based on the number of users that access their product or service.

Some pricing models work better for some industries than others. For instance, feature-based tiered pricing is favored among software organizations, whereas user-count tiered pricing is often deployed by companies that sell B2B applications.

Advantages and Disadvantages

Tiered pricing provides significant advantages, but the full range of benefits varies between companies, industries, and the pricing tier strategy deployed. Although not a comprehensive list, these are some of the benefits and drawbacks of this pricing model.

Benefits

1. Appeals to customers. With a variety of pricing tiers, companies can appeal to a wide range of markets, budgets, and use cases.
2. Creates upsell opportunities> As customer needs/requirements increase, customers are provided a clear path to the next tier that provides additional features/functionality. Additionally, this pricing strategy lends itself to creating hybrid pricing tiers that consist of a combination of freemium, user-based, feature-based etc. to promote upsells.
3. Improves customer retention. Aside from the variety of tiers to initially choose from, should customers need to downgrade due to limited cash flow or business modifications they can easily make the change – reducing churn.
4. Maximizes revenue potential. Aside from generating more revenue than other pricing schemes such as volume-based (see above – tiered pricing vs. volume pricing, a side-by-side comparison); customers can choose the tier that best meets their needs, as well as easily move up or down tiers.
5. Aligns pricing to value. Given tiered pricing’s natural progression, customers can more easily recognize the value each tier provides.
6. Shifts responsibility to the customer. This pricing strategy puts the customer in charge of choosing the pricing tier that best meets their requirements and budget.
7. Improves revenue and cash flow predictions. Over time and given the high rate of customer retention, companies are better able to accurately forecast revenue and cash flow.
8. Enhances the customer experience. Since customers select the tier that best aligns with their budget and requirements, they are more apt to recognize the value of the product/service, as well as feel recognized by the organization.

Drawbacks

1. Overly complex. When too many pricing tier options are provided, customers may not understand the offerings, become confused, and ultimately opt for a competitor. For this reason, it’s recommended that companies limit pricing tiers to 3 or 4.
2. Tier vagueness. Along the same vein as the bullet above, if the tiers don’t provide adequate descriptions of the features, functionality, and benefits, customers may select the wrong tier – which could result in customer churn. For this reason, companies need to do considerable groundwork in creating tiers that will not only attract their target market but be easily understood.
3. Incorrect pricing. Poorly priced plans that barely cover the cost of the products or services will leave money on the table. Like the bullet above, it’s important to do the necessary research before creating tier descriptions and pricing.

Want to dig a bit deeper into SaaS pricing models and how technology is playing a critical role in its future? Check out this Overview of SaaS Pricing Models blog.

Getting Started with Tiered Pricing

With the benefits far outweighing the disadvantages, are you ready to implement this pricing strategy? If so, here’s eight key processes that will ease your journey. Depending on your industry, you may need to add more to ensure each tier is profitable. Additionally, if your organization sells internationally, tiers need to be tweaked to capture customer attention, as well as appear in region-specific currency and language.

1) Know your target market

Having a comprehensive understanding of your customers is key in choosing the right type of pricing tiers. This step includes identifying your target market by developing buyer person(s) that include the target market’s average income, what motivates them to purchase your products/services, and pain points. For B2B organizations include information such as the role they play in the buying process, industry challenges, and short- and long-term goals.

2) Understand the perceived value of your product/service

This may take the form of a customer survey or interviewing internal sales reps. The goal is to understand what your customers and prospects believe your products/services are worth and why.

3) Determine tiered pricing type(s)

Use your industry as the foundation in selecting the type(s) of tiered pricing models to offer. Be sure to conduct competitive research on the variations of pricing tiers they offer.

4) Assign roles to each pricing tier

Determine if a freemium tier will be offered, select the number of tiers you’ll offer, and name each tier with a title that clearly describes its incremental value.

5) Design each tier

Determine the features, functionality, and services each tier will include and create descriptions that clearly explain tier content.

6) Price the tiers

Be sure pricing aligns with your business goals, takes into consideration the cost of products/services and other expenses, reflects the value of your offerings, and take into consideration competitor pricing. Finally, test the tiers with a test group and make modifications based on feedback.

7) Communicate pricing tiers

Provide transparent and clear communications on your tiers, their roles, descriptions, and pricing. Essentially, let customers know how much they will pay and what they’ll receive in return.

8) Optimize pricing tiers

Using data collected, frequently revisit the tiers, their offerings, and pricing. To increase revenue and attract new customers, you may need to raise or lower prices, offer discounts, add a fremium tier, highlight best value tiers, etc.

Drive New Revenue with Tiered Pricing

While there are many benefits, it’ll only get you so far if you don’t have a billing system that can handle its complexities. BillingPlatform provides the industry’s most robust, cloud-based billing solution that can easily adapt to any billing need or business requirement.

Our complete solution gives companies – like yours – the ability to support any combination of one-time charges, subscription, consumption, or hybrid billing. With us, you’ll fulfill 100% of your business requirements – mediation, rating, invoicing, collections, reporting, analytics, collections, and A/R subledger – with minimal manual effort. And when market or business needs change, BillingPlatform’s unmatched agility enables you to easily make the necessary adjustments, without the cost of custom development.

Are you ready to roll out a tier pricing plan and drive new revenue? Get in touch with our team today or request a demo if you want to see BillingPlatform in action.