Price is always a critical decision for businesses. The wrong pricing decision can lead to disastrous consequences. One of the most challenging aspects of pricing is figuring out how to price your product or service so you can make a profit while still attracting customers. Many businesses use a tiered pricing model to help them with this challenge. In this post, we’ll discuss what is a tiered pricing model and how it will help you generate more revenue by bringing in more customers.
What is a tiered pricing model?
Tiered pricing is when you sell products at different prices within a price range. You fill up a tier and then move to the next tier. You are billed according to the number of products you buy in each respective tier. The tiered pricing model and volume pricing strategy are often confused with each other.
The tiered pricing model works best for businesses that sell products or services like seats, licenses, or widgets. It’s a great way to incentivize customers to buy more and get discounts.
Calculating prices in a tiered pricing model
Before we get into the details of the Tiered Pricing Model, let’s discuss the difference between Tiered and Volume Pricing. Both pricing models are often used interchangeably, but they are quite different.
In tiered pricing, the price per unit you’re selling is within a particular price range. After filling one tier, you move to the next one. But in volume pricing, the price of all the units you’re selling is within the set price range. Here is an example.
Consider that your company is selling licenses. This is how your prices would vary based on volume and the tiered pricing model. Consider that you sold 70 licenses. Then, this is how your price will be calculated:
|Tiered Pricing||Volume Pricing|
|Total amount||(20x$50) + (30x$30) + (10x$10) = $2000||Total amount||70x$10 = $700|
In tiered pricing, you will earn a higher revenue of $2000 because you move to the next tier only after filling one tier.
Whereas, in a volume pricing model, the total amount is calculated based on the total number of licenses bought. In this example, 70 falls under the 51-100 price range.
What is a tiered pricing strategy?
Tiered pricing as a strategy is a way for companies to offer their products and services at different prices, based on the features and functionality of each tier.
Many companies in the SaaS space adopt a tiered pricing strategy to offer different prices for their products, depending on how much the customer needs or wants. Here, the prices and features are tailored to fit the needs of your different customers.
You need to choose the right value metric and price each tier correctly. Your value metric might be based on how customers see your product, the features it has, how often it’s used, or another quantifiable factor. You should have enough tiers to cover all of the different market segments without losing out on revenue.
Popular three-tier strategy to structure your pricing model
Basic Tier: Through the basic model, you will give your customers the essential features at an affordable price. This model will allow your customers to start using your product and thereby solve the problem they face.
Standard Tier: In the standard model, you will combine the basic features with some advanced features. This allows your customers to save money while also bringing in more revenue for your company.
Premium Tier: The premium model will be structured mostly for big enterprise customers or for those customers who know what they want and how they can benefit from all the advanced features offered by your product. This tier will be priced more and will bring the highest return to your company for every unit sold.
Tier pricing strategy examples
ZNetLive is a cloud services provider offering cloud infrastructure and managed services to partners and end customers across the globe. Here is how it has priced its Microsoft 365 services in incremental tiers based on different feature bundles to attract a customer base from small businesses to enterprises.
RackNap is an end-to-end subscription billing management platform that helps service providers build a profitable subscription cloud business. Here is a snapshot of how it has priced its offering for emerging and established businesses.
By having different tiers in which each one can choose an appropriate level for their needs depending on what’s best suited according to their specific requirements, you’re not overwhelming or confusing them with too many options.
Price is always a critical decision for businesses, so it’s important to get it right. Implementing a tiered pricing model in your business can be a great way to maximize profits while still providing value to your customers.
RackNap, as a subscription business billing and management software, can help you automate various aspects of your subscription business. Learn how you can optimize your business processes via automation and deliver a better customer experience and build a strong customer base for higher revenues. Book a demo today.