Block Pricing

What is Block Pricing?

Block pricing is a tiered pricing strategy where a business sets different price points for different ranges (or “blocks”) of quantities. The customer pays the list price associated with the block their purchase falls into, regardless of whether their needs actually reach the upper limit of the block.

For example, a product might cost $10 for 1 unit, but only $80 for a pack of 10 and $150 for a pack of 20. Even if the customer only needs 15 units, they would still pay the $150 price for the larger block.

A block pricing strategy results in decreasing per-unit costs for larger quantities. But the idea here isn’t solely to give a per-unit volume discount or price break. The main goal is to incentivize customers to make an all-or-nothing purchase decision.

Synonyms

• Tiered pricing
• Volume pricing
• Quantity-based pricing
• Multiple unit pricing
• Second-degree price discrimination

Understanding Block Pricing in CPQ

How Block Pricing Strategies Work

Other volume-based pricing models are quite different from block pricing in the sense that the buyer has control over exactly how much they purchase. Block pricing, on the other hand, puts more control in the seller’s hands. The pricing tiers are pre-defined and non-negotiable.

Imagine a stationery store that sells notebooks in two different package sizes: a small pack that can hold up to 12 notebooks, and a large pack that can hold up to 30 notebooks. The small pack is priced at $10, while the large pack is priced at $20.

According to block pricing, you’re paying for the package, not the notebooks themselves. Suppose a customer decides to purchase 15 notebooks, they would then require the larger 30-notebook package. Consequently, the charge would be $20, which is the (considerably higher) price of the large bag.

So, this pricing approach only benefits customers who actually need a large quantity. Otherwise, the unit price actually winds up being higher.

Key Characteristics

1. Fixed Quantity Blocks

Each block contains a fixed range of units with a lower and upper limit. In CPQ, we refer to these as your lower and upper bounds.

• Your lower bound is the minimum threshold to enter the block. In the example of notebooks above, the small package’s lower bound would be 1 and the larger bag’s lower bound would be 13 (one plus the small package’s upper threshold).
• Your upper bound is the first quantity your block doesn’t support. So, the upper bound for the small 12-notebook package is 13. The upper bound for the 30-notebook package is 31.

The lower price tier must have an upper bound that equals the lower bound of the successive price tier. If you do not set an upper bound, CPQ will treat it as infinite.

2. Tiered Pricing

For each of your quantity ranges, you will assign a price. When a customer purchases a quantity of goods or services within the lower and upper bound of that tier, they will pay the corresponding price.

3. Volume-Based Discounts

To make bulk purchases compelling for your buyers, you’ll need to price each consecutive tier at an increasingly lower per-unit rate. That’s how you build urgency, which is what block pricing is all about.

If, say, you priced the 30-notebook package at $25 instead of $20, there would be no reason to buy it. They could simply buy the smaller quantity for the same per-unit price, then restock when they ran out.

Importance of Block Pricing in Modern Sales Processes

Block pricing is a valuable strategy for businesses that sell products in packs or groups with different quantities. It allows you to present the pack on a single quote line which simplifies the pricing process.

Pricing complexity makes it hard for customers to trust you or make purchase decisions, so implementing block pricing can help you drive sales efficiency. Plus, you could use it to (a) sweeten the deal and (b) increase your average order value. This is especially true if your customer base has a high degree of price sensitivity.

Quote Generation Challenges Block Pricing Solves

Setting a specific price for each of multiple different pricing tiers, in many cases, is all you need to streamline the entire quote-to-cash process.

Assuming it’s applied properly, this pricing strategy can help you:

• Simplify complex pricing models, like those in SaaS
• Generate quotes automatically with predetermined quantity blocks
• Eliminate errors from manual pricing calculations
• Streamline negotiation and ensure consistency
• Improve customer satisfaction with fast, accurate pricing

You can also use block price tiers to optimize your pricing for profitability and your customer’s perceived value. If you use pricing automation software alongside CPQ, block pricing reduces the number of variables that influence your pricing, so you can more easily optimize it.

Common Use Cases

If your business falls under any of the following categories, a block pricing model could be beneficial to your sales processes:

Energy

In the energy industry, providers often set rates for specific consumption blocks. For example, a customer might pay a different price for the first 500 kWh of electricity used than they do on any additional usage.

Retail and Consumer Goods

Retail giants, particularly those operating on a bulk purchase model like Costco, thrive on block pricing. Families who need to cook for 3+ people every night can save a lot of money by buying groceries from Costco in bulk.

You should consider selling products in price blocks if you’re selling anything that could be used in an office space, retail store, restaurant, or another type of business. For example, you may sell forks and knives in sets of 10 on your consumer-facing website, but have a separate page for higher volumes restaurant owners can order.

Telecommunications

Telecom companies frequently use block pricing for services like call minutes, SMS, and data. A package may offer 30GB of data at $10, with an expanded 60GB package available for just $5 more. The user pays for the whole 60GB, regardless of whether they actually use it all.

Utilities

Utility providers, particularly in water services, use block pricing to promote conservation. Customers are charged less per unit for lower consumption levels and moved to higher-priced tiers as their usage increases.

Software-as-a-Service (SaaS)

SaaS pricing is almost always based on multiple tiers of service, with the price increasing as features and functionality are added. Customers have the flexibility to choose a package that best suits their needs, but they don’t pay per individual feature.

For example, Salesforce’s low-tier price for its CRM platform is $25 per user per month. If they need forecasting capabilities, custom reporting, or quoting/contracting, they’ll have to upgrade to the next tier — $80 per user per month.

Whether the customer needs all those features or just one, it doesn’t matter. They’ll pay the full price for access to the entire feature suite.

Cloud Storage

Services like iCloud, Google Drive, and Dropbox use freemium and block pricing. Most users access these platforms for free, but if they need additional storage or features, they pay for an additional amount.

Google Drive, for instance, is free up to 30GB of storage, after which users are charged a flat rate of $1.99 for up to 100GB of storage. If a user requires more space, they can purchase the 200GB package for $2.99/month.

Alternatives to Block Pricing

As you could probably tell from the “notebooks” hypothetical, block pricing isn’t always the most practical approach. Restricting the customer’s choice (when they may very well need just a few items, but more than one pack) will probably tank your sales.

There are several volume-based pricing methods that work better for certain types of businesses and products:

• Discount schedules — Increasing ordered quantity leads to a progressively steeper discount (e.g., $10/unit, but 10-19 units at 5% off and 20+ units at 10% off)
• Price breaks — The more the customer orders, the lower their price per unit (e.g., $10/unit for 1,000 units vs. $11/unit for 500 units)
• Bundle pricing — Bundles or fixed pricing for a group of products or services (e.g., a laptop, keyboard, and mouse as a package deal)

If you’re selling physical products and want to optimize your sales according to the customer’s preferred quantity, you might want to consider using multiple pricing methods.

For example, a company selling pens might use:

• Multiple unit pricing for individual pens (1 for $1 or 3 for $2)
• Block pricing for packs of 5 and 10
• Price breaks for authorized dealers and bulk orders of 100+
• Bundle pricing for a set of pens, highlighters, and notebooks

That way, everyone gets lower prices in a way that makes sense for their specific needs.

Benefits of Block Pricing in CPQ

Cost Efficiency

Saving money is the main benefit for buyers. But, moving inventory faster could be a benefit for you if the money you save on carrying costs exceeds the amount you’d have made if you sold each individual item separately. This is especially useful for perishable items.

Simplified Pricing Structure

With too many variables, pricing is impossible to understand. If customers don’t know what they’re buying, they’ll either:

• Assume you’re untrustworthy
• Misinterpret your product’s value
• Find a competitor with more transparent pricing

Even if you do land a sale, you might end up with a dissatisfied customer if they feel the value for money wasn’t there. Block pricing allows you to simplify your prices, set clear boundaries for discounts and promotions, and avoid confusion.

Flexibility for Customers

Customers who need more than the minimum benefit tremendously from a block pricing strategy because they can take advantage of the more attractive prices for larger quantities. And, offering multiple different prices means you can serve customers with different budgets and usage needs.

Streamlined Sales Process

When customers have the flexibility to choose the option that works best for them, and your sales team doesn’t have to spend as much time explaining what goes into your pricing, you’ll close more deals (and faster). Particularly in the SaaS industry, offering block pricing is far and away the most efficient way to bring your product to market.

Implementing Block Pricing in CPQ

Configuration and Customization

Configuring block pricing in CPQ is fairly simple. Follow these quick steps:

1. Open up your product catalog and select the product record you want to edit.
2. Set that product’s pricing method to “Block.”
3. Enter your lower and upper bounds for each block.
4. Input the corresponding price for each block.
5. Save your changes.

On the quote line editor, it will now auto-calculate the appropriate price based on the quantity entered.

If you use price localization and/or work with multiple currencies, you will have to set up your block pricing for each currency.

Integrations with CPQ Software

To get the most out of block pricing (or any pricing strategy, really), you’ll need a CPQ software solution that supports CRM, ERP, billing, and commerce integrations. This is what enables you to automate all your sales touchpoints throughout the customer journey, not just pricing and quoting.

Considerations for Product and Service Offerings

There are a few things you should keep in mind when choosing which products or services to implement block pricing for:

• Products with multiple use cases — Offer a standardized product using block pricing, then sell segment-specific products/features as add-ons.
• High-margin products vs. low-margin products — Block pricing works best when marginal costs and demand are in equilibrium.
• Complementary products — Bundling several complementary products or services creates an attractive package that customers will pay more for in one transaction than they would individually.
• Quote-based pricing — Professional service firms, enterprise software vendors, and other B2B companies can use block pricing for their core offering, but should determine the overall price of the engagement with more consideration for their profit margin.

Pricing Rules and Logic

As an admin, block pricing is one of many pricing rules you’ll configure when setting up your CPQ software. During this step, you’ll have to think about:

• Product hierarchy
• Customer segmentation
• Pricing differentiation by region or vertical
• Discount rules
• Approval workflows

Before you launch your updated pricing across your organization, test multiple sales scenarios in a sandbox environment to make sure it accurately reports the right prices according to customer tier, region, and other variables.

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