The Ultimate Guide to Tiered Pricing

Today pricing strategies are as diverse as the customers businesses aim to attract. 

Among these, tiered pricing stands out offering businesses a simple way to cater to different customer needs and preferences. 

From startups looking for cost-effective solutions to enterprises demanding premium features, tiered pricing allows you to speak directly to your audience's desires.

And if you’re wondering if tiered pricing is right for you, welcome to this ultimate guide. We’ll be exploring all things tiered pricing and looking at real-world companies using tiered pricing among other things.

Let’s get into it.

TL;DR:

•  Tiered pricing involves offering products or services at multiple price points, catering to different customer needs and budgets.
• Customers choose from various tiers based on their usage or feature requirements, often saving money as they move to higher tiers.
• Tiered pricing offers many advantages like customer flexibility, increased sales opportunities, encouraged upgrades, and enhanced customer experience.
• It also comes with its challenges like complexity in managing pricing structures and potential customer confusion about tier differences.
• Tiered pricing comes with many specific models like basic three-tier, volume-based, feature-based, user-based, usage-based, and subscription-based models.
• Companies like HubSpot, Netflix, and Canva successfully implement tiered pricing to cater to diverse customer needs.

What is Tiered Pricing?

Tired pricing can be defined as a pricing model where businesses sell products or services at different price points or tiers. This pricing model gives customers the flexibility to scale up and down by charging prices based on factors like benefits or features.

Unlike flat-rate pricing models, which mean a single price regardless of usage or features, tiered pricing structures encourage customers to choose the tier that best fits their requirements. 

For instance, Canva offers tiered pricing for individuals, teams, and enterprises, where higher tiers provide increased features like a dedicated customer success manager.

How does Tiered Pricing Work?

With tiered pricing, a business sets the price for the first tier of a product at a specific rate. As customers purchase more, they progress to subsequent tiers where the price per unit typically decreases. For example, if a customer buys software licenses, the initial 10 licenses might cost $100 each, but purchasing 20 licenses could reduce the price to $90 each.

Microsoft uses features to differentiate between tiers for family and personal use (Microsoft 365) and for students (Office). 

The pricing table shows that the 365 family has additional features like cloud space and member sign-ins. This helps customers understand the value of each tier and incentivizes customers who select recurring subscriptions.

Benefits of Tiered Pricing

Like everything in the world, tiered pricing has boons and banes.

Let’s discuss the boons first —

Flexibility for Customers:

Tiered pricing allows customers to choose a pricing tier that aligns precisely with their needs and budget. For example, small businesses might opt for a basic tier with essential features, while larger enterprises could select a premium tier at a higher cost.

Increased Sales Opportunities:

Businesses employing tiered pricing can appeal to a broader market segment. Offering multiple tiers helps target diverse customer purchasing behaviors like budget-conscious customers looking for basic features.

Encourages Upgrades:

Tiered pricing encourages plan upgrades through higher tiers as customer needs evolve. For instance, a startup may begin with a basic tier and later upgrade to a premium tier as it grows. This also increases customer loyalty and expands revenue opportunities for businesses without aggressive sales tactics.

Enhanced Customer Experience:

Tiered pricing allows customization to enhance customer experience as customers perceive they are getting value-aligned pricing options that cater to their requirements. It also reduces the likelihood of customers feeling constrained by one-size-fits-all pricing models.

Challenges of Tiered Pricing

Now, time for the banes —-

Complexity in Pricing Management:

One of the primary challenges of tiered pricing is the complexity it introduces in managing pricing structures. 

You must carefully define and communicate each tier's pricing, features, and benefits. This requires ongoing evaluation and adjustment to ensure that each tier remains competitive and aligned with market dynamics.

Potential for Customer Confusion:

The availability of multiple tiers can lead to customer confusion. 

Customers may struggle to discern the differences between tiers and understand which tier best suits their needs. This confusion can result in decision paralysis or dissatisfaction if customers perceive they have chosen a tier that does not align with their expectations.

Market Fit and Product Alignment:

Not all products or services are suitable for a tiered pricing model. Nor do some products need it.

You must check the product-market fit and customer personas to determine if tiered pricing aligns with your business objectives.

Types of Tiered Pricing

Tiered pricing is a broad term, and has several types that businesses adopt to improve their pricing strategy, like—

Basic or Three-Tiered Pricing

The basic or three-tiered pricing model involves offering three distinct levels of service or product packages — Basic, Standard, and Premium. 

The Basic tier includes fundamental features at an entry-level price, the Standard tier combines the features of the Basic tier with additional enhancements, and the Premium tier offers the most comprehensive set of features and the highest level of service. 

This structure simplifies the decision-making process for customers and allows them to choose the package that best fits their needs and budget.‍

Volume-Based Tiered Pricing

In this pricing strategy, the price per unit decreases as the quantity purchased increases.

This approach uses economies of scale, which means that the cost of producing or delivering additional units diminishes as the volume increases. Consequently, suppliers can afford to reduce the price per unit for larger orders without compromising their profit margins. ‍

Feature-Based Tiered Pricing

Feature-based tiered pricing involves creating different pricing tiers based on the features included in each tier. This model is especially common in SaaS industries, where products can be easily segmented based on capabilities. 

The basic tier offers features that cater to a broad audience, while higher tiers include advanced features that provide more value to users.‍

User-Based Tiered Pricing

OpenView Partners' State of Usage-Based Pricing Report stated that nearly 45% of SaaS companies had a UBP model in 2021. 

This pricing is structured around the number of users who access the service. It allows companies to start with a smaller number of users and gradually expand as their team grows or their requirements increase. 

Usage-Based Tiered Pricing

Usage-based tiered pricing charges customers based on the amount of the product or service they use. This model is best if consumption varies significantly among customers, such as cloud storage, data usage, or utility services.

Subscription-Based Tiered Pricing

As the same sounds, subscription-based tiered pricing offers different pricing levels based on the length of the subscription commitment. Customers are encouraged to subscribe for longer periods, such as quarterly or annually, by receiving discounted rates compared to shorter-term subscriptions. This leads to longer-term commitments, predictable revenue streams, and reduced churn rates.

Tiered Pricing vs Volume Pricing

Volume-based pricing is a part of tiered pricing and is one of the most commonly used methods. 

While both tiered pricing and volume-based pricing offer structured approaches to pricing, they differ significantly in execution and impact. 

The primary difference between them is that tiered pricing provides different prices for specific ranges of features, whereas volume-based pricing offers a uniform price per unit based on the total quantity purchased.

But there are some other key differences between tiered pricing and volume based pricing as well —-

Suppose you’re a business selling subscription plans for an online educational platform. This is how the prices would vary —

Tiered Pricing

• 1-10 subscriptions: $50 each
• 11-20 subscriptions: $45 each
• 21-30 subscriptions: $40 each
• 31+ subscriptions: $35 each

If a customer purchases 25 subscriptions:

• First 10 subscriptions: 10 x $50 = $500
• Next 10 subscriptions: 10 x $45 = $450
• Final 5 subscriptions: 5 x $40 = $200
• Total cost: $500 + $450 + $200 = $1,150

Volume Pricing

If you choose to go for volume-based pricing, here’s what it looks like —-

• 1-10 subscriptions: $50 each
• 11-20 subscriptions: $45 each
• 21-30 subscriptions: $40 each
• 31+ subscriptions: $35 each

If a customer purchases 25 subscriptions:

Total cost: 25 x $40 = $1,000

Examples of Tiered Pricing

Now, comes the fun part— analyzing different tiered pricing strategies used by real-world companies.

Hubspot’s Marketing Hub

HubSpot's Marketing Hub uses a volume-based tiered pricing model. The cost per contact decreases as the number of contacts increases, leading to larger purchases.

At $800 per month for 2000 contacts which is for smaller campaigns or businesses. And, for 10000 contacts, the tier offers a reduced cost of $3600 for larger contacts.

Drift

Drift focuses on a three-tiered pricing strategy. The use case for each plan is explained and it only uses five items per tier to make it easier for potential customers to understand and compare different plans. As you scroll down, you will find detailed information on each plan's features and additional options.

Zoho CRM

Zoho CRM uses feature-based tiered pricing to differentiate between plans. The standard plan comes with basic features, while the professional plan adds forecasts based on territories. You can expand on all the features or hide common ones to make decision-making easier for your customers. It's also a great example of a 5 tiered pricing model.

Userpilot

Userpilot applies a usage-based tiered pricing model that applies limits to user segmentation, feature tagging, and survey responses. This helps them charge per user or based on which features are needed but also include usage limits into the pricing model.

Jira

Jira has a user-based tiered pricing model on certain plans. The free ones allow up to 10 users and the standard pricing allows unlimited users. 

Netflix

Netflix uses subscription-based tiered pricing and offers different subscription plans that vary in price and features such as video quality, HD content, etc. Customers can choose the plan that best fits their needs and budget, with higher-tier plans offering more features and benefits at a higher cost.

How to Calculate Tiered Pricing?

Here’s a general approach to calculate tiered pricing —

1. Define Tiers: Determine the different tiers or levels of service you want to offer. For example, Tier 1 might be for basic users with limited usage, Tier 2 for moderate users, and Tier 3 for heavy users.
2. Set Pricing for Each Tier: Typically, higher tiers with more features or capacity will have higher prices. For instance, Tier 1 might cost $10/month, Tier 2 $20/month, and Tier 3 $30/month.
3. Establish Thresholds: These thresholds determine which tier a customer falls into. This can be based on usage volume, service level, or any other relevant factor.
4. Calculate the Price: When a customer qualifies for a tier, charge them the corresponding price. For example, if a customer’s usage places them in Tier 2, they will be charged $20 for that billing cycle.
5. Monitor and Adjust: Regularly review your tiered pricing structure to ensure it aligns with customer needs and market conditions. You may need to adjust tiers, criteria, or pricing based on feedback and business goals.

Let’s look at it more clearly. 

Say you offer a cloud storage service with tiered pricing based on storage capacity. Here’s what your tiered pricing can look like —-

Tier 1: Up to 100 GB for $5/month

Tier 2: 101-500 GB for $10/month

Tier 3: 501 GB - 1 TB for $20/month

If a customer uses 300 GB of storage, they would fall into Tier 2 and be charged $10 for that month.

Tiered Pricing Best Practices

We’ve divided the best practices to follow for tiered pricing into two parts– creating a tiered pricing plan and managing an ongoing one.

Let’s break down these two points —-

Creating a Tiered Pricing Plan:

Market Research: 

Market research is a no-brainer, we know. But let us repeat this part for the sake of it, please. Understanding your audience's needs and willingness to pay will help you define tiers that provide clear value and resonate with your target market.

Cost Analysis: 

Ensuring your pricing covers costs and contributes to profitability is important. Each tier should be priced to reflect the value provided and justify the expense.

Competitive Analysis: 

Benchmarking against competitors helps set competitive yet profitable price points and differentiate your offerings.

Clear Value Propositions: 

Transparency builds trust and aids decision-making. And, each tier should communicate its benefits and why a customer should choose it over others. 

Managing an Ongoing Tiered Plan:

Monitor Customer Behavior: 

Regularly track how customers interact with your tiers to identify trends, popular features, and potential areas for improvement.

Review Costs and Margins: 

Periodically reassessing costs helps ensure each tier remains profitable and sustainable between market changes.

Feedback Integration: 

Use customer feedback to refine tiers, add valuable features, or adjust pricing strategies to better meet customer expectations.

Promotional Incentives: 

Occasional promotions can lead to upgrades to higher packages, boosting revenue and customer satisfaction.

Transparent Communication: 

Clearly communicate any changes to your tiered plan to customers in advance, fostering trust and reducing confusion.

Customer Support: 

Offer excellent support across all tiers, with options for premium support at higher tiers to enhance customer loyalty and satisfaction.

And with this, we mark the end of your guide to tiered pricing. But wait, there’s more.

Or rather, an easier way to simply tiered pricing for your business.

Why Zenskar?

Tiered pricing is like serving different desserts to people at a restaurant. Everyone has different tastes and preferences, and it can get confusing!

But with Zenskar, you cook and serve like a seasoned chef.

Zenskar makes tiered pricing easy by offering a structured approach where product or service costs vary across different levels based on specific factors such as quantity, quality, or customer segments. 

Whether you're selling software licenses, computing resources, or consumer goods, Zenskar provides the flexibility to set and adjust pricing tiers efficiently, ensuring clarity and value for both businesses and customers alike.

Frequently Asked Questions 

1. What is Tiered Pricing?

The tiered pricing method involves offering multiple products or services at different price points, each providing different features or benefits.

2. How to Calculate Tiered Pricing?

To calculate tiered pricing, determine the different tiers or features, set the price for each tier, establish thresholds for each unit, and then calculate the cost of each unit.

3. How to Set Up Tiered Pricing?

Here's how you can set up tiered pricing:

• Conduct market research to understand customer needs.
• Define tiers with different features.
• Set profitable yet competitive prices for each tier.
• Cleary state the value proposition for each tier.
• Monitor and adjust tiers on the basis of customer feedback.

4. What is the Four Pricing Strategy?

The four common pricing strategies are:

• Cost-Plus Pricing: Adding a markup to the cost of goods sold for profit.
• Competitive Pricing: Setting prices based on competitors’ pricing.
• Value-Based Pricing: Setting prices based on the perceived value to the customer.‍
• Dynamic Pricing: Adjusting prices in real-time based on demand and supply conditions.