Professional Businesswoman analyzes pricing report at home office.
Tiered pricing models can help customers save money based on high-quantity purchases and also give them the flexibility to scale up or down, depending on what they need. — Getty Images/ Pra-chid

If you have a subscription-based business, you may have considered tiered pricing models as an alternative to flat-rate pricing. Tiered pricing offers flexibility and scalability to your customers while offering you opportunities to upsell different service levels for added revenue.

[Read: How to Create a Subscription Membership for Your Business]

Tiered pricing models can work for many types of businesses, including streaming services (music or video), software-as-a-service (SaaS), apps, video or mobile games, e-commerce clothing retailers, food delivery companies, and companies that sell other consumer goods.

But did you know that tiered pricing can also be applied to one-time orders, rather than subscriptions? Once you understand how they work, tiered pricing models can apply to virtually any product or service.

Flat-rate pricing vs. tiered pricing: What’s the difference?

Flat-rate pricing

Flat-rate pricing is the simplest way to price your subscription goods or services. Everyone pays the same price for the same subscription. This pricing model makes it easy for customers to opt in — they don’t have to choose a level; they either make the purchase or they don’t. Flat-rate pricing makes it easy for business owners to forecast revenue based on seasonal patterns, sales trends, customer retention and churn rate.

Tiered pricing

Tiered pricing, on the other hand, offers customers and business owners multiple options. Tiered pricing models can help customers save money based on high-quantity purchases and also give them the flexibility to scale up or down, depending on what they need.

Business owners gain upsell opportunities with a tiered pricing model because the cost per unit or cost per feature goes down the more the customer buys. Additionally, in the case of SaaS tiered pricing models, customers pay more for increased capabilities, which can refer to the number of users that can access the software, the features of the software, or the volume of work the software can complete.

For instance, an email marketing program may have different pricing tiers that correspond with the number of subscribers to the email list and the number of individual, differentiated lists the business owner can manage at one time.

A tiered pricing strategy or tiered pricing model may work best for your business if customers typically order in bulk or higher quantities, or if you have a subscription-based business model that lends itself to different levels of service.

Tiered pricing model

A tiered pricing model refers to the cost of goods going down — or discounts increasing — based on the quantity purchased. Let’s say you are a B2B manufacturer selling components to another company. If they purchase five items, the cost is $5 per item. But if they purchase 10, the price for the first five is still $5, but the next five only cost $3 each. If they purchase 20, the final 10 will cost them just $2 each.

Don’t confuse tiered pricing with volume pricing, where the price for all the products purchased drops to the lowest price. For instance, if the customer purchased 20 items, the price for all would be $2 each.

The most well-known example of a volume discount might be Amazon’s Subscribe & Save program. Amazon customers receive 5% off subscription merchandise when they have two to four items in their cart for delivery that month. Once they have five items to their subscription, they unlock 15% savings on everything in their cart.

Both tiered pricing and volume pricing can entice customers to purchase higher quantities at one time to save money.

[Read more: Amid Supply Chain Disruptions and Demand Shifts, Brands Rethink Pricing Strategies]

Tiered pricing strategies

A tiered pricing strategy, or tiered pricing structure, refers to subscription-based services in which customers pay for only the services, features, or quantity they need by choosing from one of multiple “tiers.”

Business owners can base the various tiers on a number of different factors, or a combination of these:

  • Product features and capabilities.
  • Number of users.
  • Frequency or depth with which customers use the service.

For instance, a cloud-based email marketing software might offer three tiers, with the first providing capabilities for a single user within the company, up to 500 subscribers and limited graphics and templates. The second tier might include up to five users, 2,000 subscribers, and additional graphics and templates for a variety of purposes. The third tier might accommodate up to 10 users, 10,000 subscribers, and added features such as the ability to customize a landing page or create a custom URL for each email.

[Read more: A Beginner’s Guide to Creating and Managing an Email Marketing List]

Companies often use different names for their tiers of service, such as “Basic, Standard, and Premium,” or “Entrepreneur, Small Business, and Enterprise-Level.”

Benefits of a tiered pricing strategy

Tiered pricing strategies can be the perfect way for SaaS companies, streaming services, and even video game developers. This can help increase revenue through upselling, which offers their customers scalability and flexibility, and allows the business to roll out new features to an exclusive audience.

Enterprise-Level or Premium users may receive perks and benefits, including special deals that are not available to other customers, which can help build brand loyalty and entice people to upgrade to the next level of service.

A tiered pricing strategy or tiered pricing model may work best for your business if customers typically order in bulk or higher quantities, or if you have a subscription-based business model that lends itself to different levels of service.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published November 15, 2021