The Tiered Pricing model (also known as graduated pricing) is used to market a service, solution, or application at different prices based on needs and/or usage. It involves pricing tiers. When you reach the upper limit of a tier, you move to the next tier and are billed based on the number of purchases, resources used, or consumed in those respective tiers.
“Tiered Pricing” differs as a model and strategy. These two terms are often confused with each other.
The Tiered Pricing strategy is used by companies to offer a service, solution, or application through multiple subscription plans. Each plan displays a different price and includes a set of different features/functionality/service levels.
Now that the definitions are clear, let’s delve deeper.
Tiered Pricing as a pricing model
The Tiered Pricing Model is ideal for companies selling users, licenses, etc. It encourages customers to purchase/use/consume more and benefit from increasingly attractive prices.
Before we delve into the details of this model, we need to understand the difference between tiered pricing and volume pricing, as these two pricing models are often used interchangeably. The former helps generate higher revenue, while the latter encourages customers to consume more but generates lower revenue.
Tiered Pricing vs Volume Pricing
Tiered Pricing: The per-unit price you sell is within a specific tier. Once you fill a tier, you move to the next level. The customer is billed based on all the tiers traversed/filled.
Volume Pricing: The price for all units you sell is within a given price tier. The customer is billed based on the price of the highest tier reached.
Still confusing? Let’s understand the difference with a simple example.
Suppose you are a company selling an accounting solution, and the price for a given customer varies based on the number of users. Here’s how your prices would vary if you opt for a tiered pricing model or a volume pricing model.
|Tier||Min Quantity||Max Quantity||Unit Price|
How to calculate pricing for the Tiered Pricing Model?
In the Tiered Pricing Model, you calculate your total as follows:
- $200 for 20 users (20 * $10),
- $330 for 35 users (25 * $10 + 10 * $8), which means $10 (per unit) for the first 25 and $8 (per unit) for the remaining 10,
- $1,125 for 150 users (25 * $10 + 75 * $8 + 50 * $5.5), which means $10 (per unit) for the first 25 units, $8 (per unit) for the next 75, and $5.5 (per unit) for the remaining 50.
On the other hand, in a Volume Pricing Model, the total is calculated as follows:
- $200 for 20 users (20 * $10), which means $10 (per unit) for the entire quantity,
- $280 for 35 users (35 * $8), which means $8 (per unit) for the entire quantity,
- $1,125 for 150 users (150 * $8), which means $5.5 (per unit) for the entire quantity.
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Tiered Pricing as a strategy
Many SaaS companies typically have three subscription plans, and some have even more. The main idea behind a multi-plan strategy is to offer prices and features tailored to different needs and use cases of your customers.
You need to be careful in choosing the pricing and service offerings. Your plans can have different quantities, different usage, different feature sets, or a different perception of your product/service by your customers. The number of plans should allow you to target different audiences or different market segments without losing revenue.
Let’s see how you can structure your multi-plan pricing model.
Three-plan pricing structure
Basic Plan: The basic plan provides your customers with essential features at an affordable price. This plan essentially allows customers to start using your product and solve the problem they are facing.
Standard Plan: The standard plan is usually a combination of basic features and some advanced features. It offers customers benefits that will save them money and generate significant revenue for your business.
Premium Plan: This plan is typically designed for larger companies or customers who want to take advantage of all the advanced features of your product. The Premium plan will be priced higher and bring you the highest return.
Examples of Tier Pricing strategy implementation
Pipedrive, a cloud-based sales CRM, offers everything a sales team needs to achieve its sales goals. Here’s how the company priced its services with progressive tiers based on different feature sets to attract customers ranging from small businesses to large enterprises. As the company grows, it can evolve to higher subscription plans based on its needs.
Let’s take another example of “Tiered Pricing” based on needs and usage. Azopio is an accounting automation software that simplifies daily administrative and financial management for businesses. Below is an image of their pricing grid with four subscription plans. The features are grouped into different price levels. The customer is billed based on their usage according to the subscribed plan.
The main goal of your pricing strategy should be to maximize CLV (Customer Lifetime Value). You need to ensure that you don’t overwhelm your customers with too many pricing options or confuse them. Therefore, it’s important to have multiple plans in your subscription offering with progressive prices to allow them to choose the subscription plan that best suits their needs.