Tiered Pricing | Definition, Structure, Calculation, Benefits & more.
February 25, 2022 Edwin Kooistra
When businesses develop their pricing model as well as their growth strategy, it usually involves reaching out to the maximum potential of the target market segment. For this, of course, they need to penetrate the market at all levels, and therefore to achieve that they adopt tiered pricing.
Tiered pricing is a pricing formulation or methodology usually adopted by companies and businesses that want to serve an increased number of customers with their product and service offerings.
By using tiered pricing, businesses can offer their products and services on a multitude of levels when it comes to needs satisfaction and value proposition. Businesses adopting tiered pricing models usually believe in the fact that their products and services should be able to reach out to different markets strata and no one should be left behind only because of prices.
Also, companies that are operating in the manufacturing sector especially wholesale, opt for tiered pricing because it attracts their customers to increase the size of the order being placed.
Pricing your product can make or break your business. In order to effectively create a sales strategy, you should comprehensively plan out the pricing strategy or consult a product marketing expert.
What is Tiered Pricing? – Definition
A tiered pricing method is an approach by which businesses and sellers bifurcate the pricing for their products and services in accordance with different market segments. Tiered pricing is also known as price tiers in the industry.
Tiered pricing basically facilitates a business or organization in offering their products and services at different prices, by adding and subtracting certain features. It is also beneficial for customers in the way that it allows them the freedom to gain access to only those features of a product that are relevant to them.
That too at a decreased price point versus paying a higher price for certain features in the product which are of no use to them. The tiered pricing model is also great for incentivizing your customers, as it attracts them and drives them to make a higher value purchase to receive a better price or discount.
Let us further understand this concept with a tiered pricing example to aid us in visualizing this pricing model in action.
Tiered Pricing Example
Dropbox, a SaaS business (Software as Service) that is essentially a file hosting service, uses tiered pricing to help attract different customer and buyer personas from within different market segments.
They offer both annual and monthly billing for their packages that start from $9.99 and go up to $25, based on access to different features and the number of users. Using this approach, they are able to attract individuals, small teams, families, and even larger organizations to use their services.
Before you plan to begin your pricing structure, it is better to position your product correctly. And if you are interested in taking consultation to position your product, identify your target audience, or crafting messaging that resonates with your audience, get in touch with our product marketing consultants.
Tier Pricing Structure
The structure for tier pricing is also known as a three-tier strategy. This pricing structure outlines three different approaches toward using tiered pricing for your SaaS business or any business in general. We will now look at each of these approaches and explore what makes them different from each other.
1. Basic Tier
In the basic tier model, your product or service is priced at the lowest available option. Under the basic tier, only basic and minimal services or product features are offered to the customer. This approach allows your customer to start using the product and aids them in resolving their pain points or need in the most primitive way.
2. Standard Tier
The standard tier is usually a combination of the basic tier plus added features and advantages that not only add more value to your value proposition but also help bring in increased revenue for your business. This also gives customers a price-saving benefit by offering them added features at a discounted price.
3. Premium Tier
The premium tier is usually priced for such customers or huge enterprises, which understand how all the added and beneficial features being offered under this approach are of use to them and can benefit them in the longer run. The premium tier is priced at the highest and therefore brings you the highest revenue per unit sold.
Difference Between Tiered Pricing Vs. Volume Pricing
It is common for a customer or even a business owner to get confused between tiered pricing and volume pricing. Let us now differentiate between tiered pricing and volume pricing for a better understanding of both these approaches.
When it comes to tiered pricing, you as a business owner will maintain the price per unit of your product in a particular tier, even while you lower or raise the price per unit of your product for other tiers. Whereas in volume pricing you will reduce the price per unit of your product as soon as the customer reaches a certain threshold of units or monetary amount in the purchase.
For example, XYZ Company is using a volume pricing model. The first 10 units of the product are sold at $10 per unit. But as soon as a customer orders 11 units (up to 20 units), you sell each unit for a price of $8.5. This brings the total sales revenue for this transaction to 11 units at $93.5 ($8.5x 11 units).
Now we will apply the same scenario using a tiered pricing approach. If XYZ Company was using a tiered pricing model, then even though the customer placed an order of 11 units, the first 10 units would be priced at $10, while the 11th unit would take on the $8.5 pricing. This will bring the total sales revenue for this transaction of 11 units to $108.5 ($10 x 10 units + $8.5 x 1 unit).
How Is Tiered Pricing Calculated?
As demonstrated above, tiered pricing is calculated by assigning different price points to different product tiers. Within a certain product tier, the product will have one fixed price and as soon as you move on to the next tier then every additional unit will be priced according to the upper tier. Let us demonstrate this further using an example.
SaaS Co. specializes in cloud services for storing photos. It offers the following tiered pricing to its customers.
- $5 per month for 50GB storage ( Single User)
- $20 per month for 150 GB ( Family Pack – 5 users)
- $35 per month for 300 GB ( Large Group – 10 users)
From these different tiers and their pricing, you see that the price point is increasing as the amount of available storage and the number of users is also increasing. But if we take out the price per GB of storage per user, we will realize that as we go up the tiers, the price per unit is decreasing.
Another example is Tech Co. which specializes in the sales of microchips. Using a tiered pricing approach, they have developed the following tiers.
- 1 to 50 units – $5 per unit
- 51 to 75 units – $4 per unit
- 76 to 100 units – $3 per unit
- 101 units and above – $2.5 per unit
Mr. John Doe has placed an order of 95 units with Tech. Co. The pricing is calculated as follows.
(50 units x $5) + (25 units x $4) + (20 units x $3) = $250 + $100 + $60
Total Revenue: $410
How To Implement Tiered Pricing in A SaaS Business?
To implement tiered pricing in a SaaS business you need to follow the following steps as laid out.
- Develop detailed and in-depth customer and buyer personas.
- Using a tiered pricing strategy, develop your pricing tiers in accordance with the different buyer personas that you are targeting.
- Define the role and need for every tier and highlight what you want to achieve with the pricing and feature offering of each tier.
- Validate the price increase from tier to tier by highlighting the increase in value.
- Conduct a competitor analysis to collect market information and stay ahead of the competition.
- Keep an eye on the cost of goods sold and optimize the pricing model as you grow.
Benefits of Using Tiered Pricing for Tech Products
We shall now look at the different benefits and advantages of using tiered pricing for tech-based products.
- You will be able to attract many customers especially if you offer product customization.
- You will be able to increase sales by incentivizing customers to upgrade to a higher tier.
- Different untapped segments would become available to you by offering them added or reduced features at different price points.
- The customers would be aligned at all levels and the value proposition of your product would not be limited because of its price. The product would somehow become affordable to certain segments that wanted to use and try your product in the first place.
- Tiered pricing for tech products adds to the customer buying experience because it helps them visualize the added features and benefits that they are getting for every additional dollar that they are ready to pay.
Tiered Pricing Model Vs. Tiered Pricing Strategy
A tiered pricing model and a tiered pricing strategy are often confused to be one or the other. But what we’ll explain here today is how these two are different strategies and pricing approaches in relevance to your business model and strategic direction.
When we talk about a tiered pricing model it relates that how a business or a tech startup or any retailing entity is using different tiers or levels to mark the same product with different price points.
These price points vary according to the level based on the features and benefits that a customer is ready to avail. So, if a business is following this method to price its products, then it is known to be using a tiered pricing model approach. On the other hand, when talking about tiered pricing strategy we talk about the internal working and operational analysis that a business entity conducts.
Especially to assign the different price points in significance to the features being offered, at different tiers. A tiered pricing strategy includes extensive market research, profit-loss analysis, demand analysis, etc. to come about the most appropriate and optimum price point for a certain product, at a particular tier.
To summarize the concept you can relate that under a tiered pricing strategy, a business works out the optimum pricing and features to be used for their tiered pricing model, based on extensive market research including segmentation, positioning, and demand generation.
Frequently Asked Questions
What Is Meant by Two-Tier Pricing?
Under Two-Tier Pricing, the same product is priced at two different prices for two different segments. For example, a country is famous for making silicon chips. The price of silicon chips for the domestic market would be considerably lower in comparison to the pricing for imports of the same. This is known as two-tier pricing.
What Does Tiered Stand For?
The term tiered means different levels or hierarchical grades that are used for different purposes i.e assigning prices, defining product features, delivering after-sales services, etc.
Tiered pricing is an interesting approach for putting a price tag on your product or service, especially in the SaaS industry. It does have its benefits along with certain cons, but for the tech-based industry and the SaaS sector, it is one of the most effective pricing methods that you as a business owner can deploy.
This method will earn you maximum revenue while increasing your customer base. We recommend that before deciding on a certain pricing methodology for your product or service, you should do thorough market research and conduct a market intelligence analysis via third-party consultants and experts in the field.
This will help you in obtaining an unbiased opinion regarding the most appropriate pricing fit for your business.