When it comes to pricing strategies, there are a lot of different options out there for businesses to choose from. One option is the tiered pricing method, which can be a great way to maximize profits. But what exactly is this method and what is an example of the tiered pricing method in action?
The tiered pricing method is a strategy where businesses offer different price points for their products or services based on certain criteria. For instance, they may charge more for customers who use more of their product or service than others. Or they may have different tiers based on features, with each successive tier offering more features at a higher price point.
What is an example of the tiered pricing method? One common example of the tiered pricing method can be seen with cell phone plans. Many providers will offer multiple tiers of service, with each one providing more data and minutes than the last. The customer can then choose the plan that best fits their needs and budget.
Another example could be a subscription-based business model like Netflix. They offer three different tiers: basic (one screen), standard (two screens), and premium (four screens). Each level gives access to HD content as well as increasing numbers of devices that can stream at once.
What Is an Example of the Tiered Pricing Method?
Tiered pricing enables sellers to segment their product pricing to best suit their different markets.
Tiered pricing is a great way to optimize your offerings and appeal to a wider customer base. By providing different options for different demand rates and price points, you can make sure that everyone can find something that meets their needs.
Here’s an example:
Unit 1: $200
Units 2-4: $170 per unit
Units 5-9: $160 per unit
Units 10-19: $140 per unit
Units 20+: $120 per unit
As demand goes up, the discounts increase.
This creates an incentive for customers to buy more units, because the per-unit price decreases as they purchase more. This makes it cheaper for customers to buy in bulk, and encourages them to do so.
Everyone loves a good deal!
Tiered pricing is a great way to offer discounts to larger businesses or customers who have a higher demand for your product. By offering a discount, you incentivize these customers to increase their demand, which can benefit your business in the long run.
Benefits of a Tiered Pricing Model for SaaS Businesses
The tier-based pricing plan works well for businesses that sell things like software or licenses that are purchased in tiers.
The tiered pricing model is more beneficial for businesses as it allows them to make more profit per sale. This is because, with this model, fewer units are offered at a discounted rate, meaning that businesses make more money per unit sold.
Check out these charts:
When you choose a tiered pricing model, your profit never drops. You have a steadier revenue stream because customers who purchase more units are charged a higher price.
As you can see, when customers buy a certain number of units, their total price is significantly lowered when they qualify for a certain level of discounts.
This decrease in price is due to the significant discount that is applied to all units when using volume pricing. This can help encourage customers to buy in larger quantities, which can be beneficial for businesses.
When demand hits the bulk of 10 units, the profit from each unit sold drops below that of 9 units. This is because a discount is applied to each unit when volume pricing is used. While this may be a great deal for businesses buying in larger quantities, it’s not as beneficial for the seller.
But it’s not just about the monetary benefits. The opportunities that come from this pricing strategy are great for growing software-as-a-service (SaaS) companies.
A tiered pricing model for SaaS businesses can have many benefits, such as appealing to a wider audience, increased conversion rates, upselling potential, better customer experience, and focus on individual target audiences.
Volume pricing can be a great benefit for businesses that have tangible products. With volume pricing, businesses can take advantage of stock levels, storage, timing, and inventory control to move excess inventory quickly or sell in large volumes.
The volume pricing model can be a great way to move excess inventory quickly or to sell materials in large volumes. Thanks to the fact that more customers are likely to opt for larger orders when given the option, this type of pricing model can be extremely beneficial for businesses.
5 Examples of Tiered Pricing Strategies
There are different ways to implement tier-based prices.
1. Basic or Three-Tiered Pricing
Most businesses use a three-tiered pricing model, where each tier is differentiated by the type of customer. For example, small businesses, medium-sized businesses, and large enterprises.
Tier-based pricing models are very common in software as a service (SaaS), but can also be found in many industries. It’s a simple way to categorize different packages and is beneficial to businesses because it allows them to easily identify the package that best fits their budget.
Our basic product can already help companies sell their complex products and services. However, we make it easy for them to identify which package is right for them, so they can save time and cut costs.
It’s not always easy, but some companies can divide their offerings into just three basic categories. However, there are instances where a company may need to use up to 7 different segments.
HubSpot’s three-tiered pricing structure is based on the number of users or companies you need to track. This makes it easy to see which tier is the best fit for your company. This makes it easy to get started and is scalable as your company expands.
2. Feature-Based Tiers
Feature-based pricing models allow companies to offer different tiers of service based on which features the customer wants.
Any feature can be turned into a benefit, so make a list of everything you can offer. Don’t forget to mention your customer support and your self-service knowledge base.
If you’re looking for more support or training, it may be worth upgrading to a higher tier. This way, you can get the most out of your subscription and maximize your investment.
Microsoft has different tiers of Office 365 subscriptions, including personal, family, and student.
The price comparison chart compares the value of 365 to the classic plan, incentivizing them to choose the monthly package.
The pricing of the lifetime plan makes it seem more appealing than the one-off payment. The tiered plans make it obvious which plan is the better value.
Technical support is an important feature to consider when choosing a product or service.
3. Usage-Based Tiers
A usage-based approach can be great for services that have a clear value proposition, such as phone, Internet, or cable. When customers can clearly see what they’re getting for their money, they’re more likely to convert.
It’s easy to see why the price increases with volume for each tier. Many heavy users will upgrade their plans if they consistently find themselves maxing out their usage limits.
Usage-based tiering is designed to prevent abusers from abusing the system.
Stacking plan levels horizontally or vertically allows customers to easily compare two or more options.
The traditional way of organizing your contact database by horizontal tiering can be intimidating when there are too many options.
4. Preferred Options
The preferred option strategy is most effective when there is little ambiguity around who the ideal customer is. In these cases, it can be used to identify the optimal choice from among the various tiers. This approach can be applied in any tiered pricing situation.
While many companies will have different tiers of service for different types of customers, some will have similar audiences for all their levels.
If you have multiple tiers of service, then highlighting the most popular one can help you target customers who are feeling overwhelmed by too many options.
The only thing to keep in mind if you choose to highlight a specific tier is that the justification for doing so must be clear.
For instance, if you say “Best Value” for a plan that doesn’t appear to be the best value, you run the risk of losing out on potential sales or creating a sense of mistrust in those viewing your pricing options.
One example of a preferred option strategy is Gamepass from Microsoft Xbox.
The “Best Value” tier is colored differently from the other plans, making it easy to remember. The additional price compared to the “Basic” plan can be easily justified by the additional features.
The pricing structure for this gaming service is cleverly designed to appeal to gamers who want the ultimate gaming experience. The ability to use multiple devices and access games in the cloud makes this service an attractive option for gamers who want the best of both worlds.
5. Penetration Pricing
Penetration pricing strategies are often used when a company enters a crowded marketplace.
The pricing structure is designed to convert as many customers as possible by starting at a low price point and offering excellent value for money.
This marketing strategy is not a long-term solution and is most useful in gaining a foothold in a competitive marketplace.
When Disney first introduced Disney Plus, it was priced lower than Netflix in order to encourage customers to subscribe to both. By undercutting Netflix’s price, Disney Plus made it more affordable for customers to have access to both streaming platforms.
One downside to a penetration pricing strategy is that your team will likely have to raise prices at some point down the road.
Smaller telecom companies and internet service providers commonly use this strategy to gain customers against more well-established, bigger players.
We have shown you what is an example of the tiered pricing method which you can apply to your business to maximize profits. And while it may seem complicated, it’s quite simple once you understand how it works.