Tiered pricing is a model that is used for monetizing services and products based on different tiers that consumers prefer. The tiers are different packages with specific features as preferred by consumers.
If you have a service or product you are providing in your online business that can be divided up into different segments, then the tiered pricing model enables the visitor to buy a segment at a time instead of the whole package as a whole.
Using the tiered pricing model, you appeal to a broader and more varied audience as you provide different price ranges and a slower capital layout. Read on to find out how to use a tiered pricing model in your online business.
1. Tiered Pricing Example
Feature sets for each tier should be linked to a specific audience, if possible. These different tiers should, in the end, build-up to the ultimate service or product.
For Instance, Zoho books have three levels of their service; Free, Basic, and Professional. Each one of their tier options comes with increased features as their price increases. They have highlighted the most popular version for prospects.
You can also take one product that is generally bought in bulk and lower the price per unit with the more units you buy.
That way, clients will get a better price the more units they buy, which means excellent savings, and everyone likes to save! So you make the client feel great about the amount of money they saved and get a more significant turnover.
2. Tiered Pricing Structure
Typically your tiered pricing will include three plans to choose from.
- A Basic Plan: The basic tier will provide the necessary amount of services or products to the customer at an affordable price. You want to enable people to start using your service or product to see if that solves the need they have.
- The Standard Plan: The standard plan will include the same basic service products or services with a few advanced features included. This package will help customers increase their satisfaction of their need significantly.
- The Premium Plan: Here, customers will get everything included in the standard plan with a few extra features to satisfy all the service or product’s needs.
3. Benefits Of Tiered Pricing
Tiered pricing models are mostly used by companies that sell digital products like licenses and software. The most valuable general benefits of tiered pricing are the following:
- Flexibility. Customers can buy what they need, and if their need increases, they have the ability to step up to the next level.
- Appeal To A Wider Audience.Because you cater to all consumers from small to big, everyone will benefit when buying from you.
- Boosts Conversion Rates. More customers because of the appeal to a broader audience will increase conversion rates.
- Upselling Potential. Some customers will see this as a chance to buy cheap for an extended period and go for the premium option.
- Better Customer Experience. Prices and offers are geared to suit customers, and that leaves you with happy customers.
- Affordability. Customers who find the standard pricing too high can easily opt for the higher packages and save more.
- Targets Multiple Audiences. Because tiers are optimized to serve the needs of different audiences, you can satisfy the needs of a larger audience.
- Boosts conversion rates. The segmented tiers appeal to larger audiences, and through word of mouth, leads are converted into more clients.
If we go and compare tiered pricing to regular volume-based pricing, then we can see an even more significant advantage in tiered pricing. Look at the following graph.
In this graph, tiered pricing is the red line, and volume-based pricing being the blue line. On the Y-axis, you have the Total cost against the number of items on the X-axis.
With volume-based pricing, the blue line, you can see that as soon as you start giving discounts because of sheer volume, then the actual profit you make goes down.
With tiered-based pricing, the red line, you get a nearly exponential steady increase in price without the drops as affected by discounts given on big volume deals.
4. Tiered Pricing Versus Volume Pricing
We have a good idea of what tiered pricing entails. Let’s have a look at volume pricing with that in our minds.
Volume pricing is where a customer gets a discount if they buy more than a certain amount of products or items at one time.
With tiered pricing, you keep a set price for every item in every tier without any flexibility.
With volume pricing, you lower the price of all items in the order if the customer buys above a certain threshold.
5. Drawbacks And Limitations Of Tired Pricing
Due to these drawbacks and limitations of tiered pricing, it is not advantageous for certain businesses to use tiered pricing.
- Vagueness. Some customers might not understand the concept at first, and you will have to explain it to them. Even then, they can just leave the product because they don’t understand the principle of tiered pricing.
- Complexity. It is more complex for merchants to compute the total price.
- Wrong tier. Customers can select the wrong tier to satisfy their current needs and end up paying more than they anticipated. You must explain to them the advantages of every tier.
6. How To Create Tiered Pricing (Best Strategies)
When creating different price structures with tiered pricing, it is essential to keep things simple and understandable. Keep the following criteria in mind when planning tiered pricing plans to eliminate confusion.
- Design the tiers based on customer personas. Try and visualize which customer in your niche will be attracted to which tier. Then you can design a price range and product for that hypothetical customer.
- Align pricing with value in the tiers. Ensure that the pricing of a tier is reflected in its worth.
- Differentiate the different tiers. Ensure that the value customers will get from each tier is clearly expressed and validated. If the differences are not shown out clearly, customers will have difficulty seeing the advantages of buying a specific tier.
- The number of tiers. Using a lot of tiers is allowed, but to eliminate confusion, it is better to stick to a maximum of four. If pricing is too confusing, you might lose leads from becoming conversions.
- Package names. Avoid names that might confuse you. The best practice is to use generic tier names like Starter/Beginner, Standard/Enterprise, and Profesional/Business. If you only have two tiers, of which the first one is free, you can stick to Free and Paid. Names need to be straightforward and must always be presented with the belonging price.
- Efficient Presentation. Be efficient and explain the first tier in detail to ensure that your audience understands it. For the second tier, use the first tier “+” to describe that you get the first tier plus additional features in the second tier. Apply this principle to all tiers.
- Recommend The Best Value For Money Tier. Most companies using their pricing usually recommend the best and most popular tier. The recommendation should be genuine and honest and based on sales results.
- Keep Price Ranges Far Apart. Calculate the prices so that the price range and features of one are apart from the other. If the price ranges are close to each other, customers tend to go for the cheaper option, which is not what business owners want.
7. Pros and Cons Of Tiered Pricing Strategy
- This pricing option leads to higher conversion rates as it is targeted to specific persona’s
- It possesses the ability to upsell customers from a lower tier to a higher tier
- The different levels and features can confuse customers
- Businesses can easily overcomplicate the tiers and then end up with confused customers
How to calculate tiered pricing?
The payout rate at each tier is the total percentage of payout in the tier, divided by the total percent of attainment possible in the tier. This is basically the amount paid for each percentage increase in attainment in each tier.
Tiered versus volume pricing, what’s the difference?
Tiered pricing is simply selling your products in tiers that have to be filled before moving up to the next tier. Volume pricing is simply selling your products or services in bulk. As soon as the number of products hits a certain number, all new units will be priced at the new lower rate.
Why are pricing structures so important?
It strongly influences the way your customer will perceive your business. A well-developed pricing structure will attract the right kind of customers: those who found your product/service useful….it’s even more important in making sure that the customer gets all the value out of the product/service they paid for.
Tiered pricing strategies are not stable and set in stone. With the right accounting software, it is possible to update pricing continually. This will allow you to scrutinize and update different tiers of your pricing continuously.
Tiered pricing is a versatile tool that allows us to target different personas in an audience if it is done correctly.
At the same time, carefully thought through and planned tiered pricing based on financial figures can give you the best pricing model to generate the optimum amount of revenue.
We recommend that you carefully think about ways to introduce tiered pricing into your business. Just make sure that it is well thought through and planned as discussed.