Pricing Strategy 101: The Tiered Model
This is a guest post by Dan Wilkinson, Content Manager of Paddle. Formerly a high-flying copywriter, Dan now oversees the content for Paddle, writing weekly for the Paddle blog as well as being the author of Paddle’s in-depth guides and white papers.
There are many pricing models, but not all work for your business. When rolling out the correct pricing model for your product, you must have your audience in mind every step of the way.
Finding the right pricing model is key to aligning the value your customers see in your product (which is essential for long-term retention and growth).
Ask yourself, do your customers want to judge your pricing based on the units they buy or on the added value that your product will bring?
Nonetheless, the right pricing model is as valuable as your product road map and will ultimately impact the success of your business.
But for now, let's examine the impact and differences of how tiered and volume pricing operate.
What exactly is tiered pricing
Tiered pricing is a technique implemented to define a price per unit which varies depending on the range and quantity of the product sold. The price of the product often goes down as the quantity increases, below is a table which demonstrates tiered pricing in action.
Volume pricing is often spoken about alongside tiered pricing but they’re not to be confused, in the case of volume pricing the key difference is that you have to hit a certain number of units in order to receive a discount whereas with tiered pricing you’re reliant on hitting a certain threshold of units to receive the cost per unit at a lower price.
For example, if a customer purchases 80 licenses, all licenses cost $20 each but once you hit 100 licenses the cost lowers to $18 per license as with volume pricing you’ve hit the desired number to receive all licenses at the lower price.
Advantages of the tiered model
Is tiered pricing demonstrably more lucrative? Only if this works for your customer base.
You’re appealing to a customer looking to buy large quantities in the first place, looking into the above, the outcome of the two pricing strategy examples shows that the business using the tiered model made a higher profit.
Albeit, It’s got to work for your customer base to be more lucrative and isn’t always the right strategy for everyone.
Volume pricing can be attractive to a customer, nudging them to increase the volume of their units to receive a more substantial discount. However, tiered pricing is a strategy that works best rolled out to a captive market, seeing your product as a necessity, so are enticed to see the greater deal in the reduction of price as the unit tiers go up.
Take a look into this example:
When we look at the total sum received by the company as demonstrated above and use volume pricing strategy then we would have something like this:
Here you can see where there’s a clear drop in the cost of all units and where there are drop-down points. This demonstrates the drawback of using a volume pricing model and running the risk of selling more units without increasing the revenue at the same rate.
Using a tiered pricing model clearly demonstrates the gradual increase in profits when larger volumes are sold. It’s not rocket science, but once this process is implemented at scale, it can achieve substantial rewards.
One of the challenges when using a tiered pricing model is ensuring your customer understands the structure as it’s not as user-friendly than that of volume pricing. Therefore often not as appealing. However, if your product is somewhat a necessity and you have a keen audience, it’s an excellent means to incentivize your customer whilst increasing profit.
Is tiered pricing right for your business??
As we’ve seen pricing strategies are incredibly personal and when choosing one that works for you, take in to account your product and your customer base. Of course, tiered pricing could work.
All companies benefit from an influx in quantity sales, but you need to make sure your customer understands the value behind your pricing strategy. If they do, then they will not hesitate to convert. We’ve looked further into these strategies to help you optimize your pricing in our pricing strategy guide.