Table of Contents
What is Tiered Pricing?
Tiered pricing is a complex pricing strategy where companies offer different discounts or benefits based on the quantity of goods or services purchased or the level of features included in the product or service. This pricing model can encourage larger purchases, reward customers who buy frequently, or incentivize customers who opt for more feature-rich products.
There are a few ways tiered pricing can be structured. For example, a company might offer a 10% discount for purchases of $100 or more, a 20% discount for purchases of $200 or more, and a 30% discount for purchases of $300 or more. Or, a company might offer free shipping for orders over $50, and discounts on future purchases for customers who spend a certain amount in a single transaction.
Tiered pricing can effectively boost sales and revenue, but it’s important to structure the discounts to benefit both the customer and the company.
- Price tiering
- Tiered pricing model
- Tiered pricing strategy
- Tiered pricing structure
What are Tiered Pricing Models?
Tiered pricing is one of the most common pricing models businesses use today. With this model, businesses charge different prices for their products or services based on different tiers. The tiers are usually defined by quantity, features, quality, or usage factors.
For example, a business might charge a higher price for its premium products and a lower price for its standard products. Or, a business might charge different fees for its services based on how often they are used.
Tiered pricing can be an effective way to increase revenue and profits. It allows businesses to capture more value from their customers by offering different quality or service levels. And it incentivizes customers to purchase more products or services since they will get a better price if they do.
There are several tiered pricing models businesses can use to price their products and services. The most common are volume-based, feature-based, usage-based, and subscription-based.
The most common type of tiered pricing is volume-based pricing, where the price per unit decreases as the quantity purchased increases. This model encourages customers to buy large quantities which can help businesses increase their overall sales. Volume-based pricing is often used by businesses that sell physical goods, such as clothing or electronics.
Another common tiered pricing model is feature-based pricing. This model allows customers to pay for access to certain product or service features. Businesses often use this model to encourage customers to buy higher-end products or software with premium features.
In subscription-based pricing, the price per unit decreases as the length of the subscription increases. This type of model is often used by businesses to encourage customers to sign up for longer periods of time. Businesses that sell recurring services, such as software-as-a-service (SaaS) products, often use subscription pricing.
Usage-based pricing is based on the amount of a product or service a customer uses. The more a customer uses, the higher the price per unit. This type of tiered pricing is often used by businesses that sell digital goods or services, such as web hosting or cloud storage.
The type of tiered pricing model that a business uses will depend on its goals and objectives. For example, a company looking to increase its overall sales may use a volume-based pricing model, while a business looking to encourage customers to buy higher-end products may use a feature-based pricing model.
Benefits of Tiered Pricing
There are many benefits of tiered pricing. By having different price points for different products or services, businesses can appeal to a broader range of customers. This pricing strategy can also help companies to increase their profits by generating more revenue from customers willing to pay more for certain items.
Tiered pricing is a flexible pricing strategy that can benefit businesses and customers. Here are a few benefits of tiered pricing that can be helpful for businesses to consider:
- It allows businesses to target different customer segments.
With tiered pricing, businesses can offer different prices based on their target customer. This can help them to attract different types of customers and generate more sales.
- It can increase perceived value.
When customers see a range of prices for the same product, they may perceive the item as more valuable. This is because it gives the impression that the product is worth more than if there was just a single price point.
- It can boost sales.
Offering a range of prices can help to increase sales, as customers may be more likely to purchase an item if they feel like they are getting a good deal.
- It can encourage customer loyalty.
If customers feel like they are getting a good deal on a product or service, they may be more likely to return. This can help to increase customer retention and create loyal customers who are more likely to stick with a business in the long run.
There are some drawbacks to tiered pricing, however. It can be complex to set up and manage since businesses need to track which customers are in which tier and adjust prices accordingly. And it can alienate customers who feel like they are being charged too much for a product or service.
Best Practices for Implementing Tiered Pricing
Implementing tiered pricing takes research and flexibility to determine the best strategy. Here are a few best practices:
- Know the Company’s Customers
The first step in any pricing strategy is to understand the target market. Who are the company’s ideal customers? What are their needs and wants? What are they willing to pay for the product or service? Market research will help revenue leaders determine whether a tiered pricing strategy makes sense for the business.
- Identify the Business’s Goals
Before businesses can determine the right pricing strategy, they need to know their goals. Revenue operations managers need to determine what they are trying to achieve, whether it be increasing sales, boosting profits, or attracting a certain market segment.
- Consider the Costs
Regardless of the pricing strategy, revenue leaders need to ensure that prices are in line with costs. The cost of manufacturing, shipping, marketing, labor, materials, and overhead must be factored into the price.
- Decide on a Structure
The factors above will help company leaders decide on the right tiered pricing structure for the business.
- Set Prices
Once the pricing structure has been determined, prices can be set. When setting prices, revenue managers should keep a few things in mind: competitors’ pricing, covering costs, and aligning prices with what customers are willing to pay.
- Test Prices and Be Flexible
Finally, sales leaders must test the pricing tiers to see how they perform in the market. Then, they can try different price points and discounts to see how customers respond.
Creating Profitable Pricing Tiers
There are a few key things companies must keep in mind when creating pricing tiers that will be profitable for their business. First, CROs need to clearly understand direct costs (i.e. materials and labor) and indirect costs (i.e. overhead). Then they can design profitable pricing tiers.
Next, it’s crucial to determine how much value your product or service provides. This will help determine price levels customers are willing to pay based on perceived value. When developing pricing tiers, each tier must represent a different value level in the form of features, access, or support.
In addition, make sure the pricing is simple and easy to understand. Also, give customers a risk-free way to try the product or service through a money-back guarantee or free trial.
Finally, revenue leaders want to consider the competition when creating pricing tiers. Determine what other businesses are charging for similar products or services and ensure the company’s prices are competitive to attract customers.
By keeping these things in mind, companies can create pricing tiers that will be profitable for their business.
Setting Up Tiered Pricing in CPQ
Tiered pricing is essential for businesses to quote and configure complex products accurately. Tiered pricing allows CPQ users to price products according to the features, options, or levels of customization that the customer selects. By using a tiered system, businesses can better optimize their pricing structures to maximize profits while incentivizing customers to purchase more robust versions of the product or service or a higher volume of products.
Tiered pricing also helps ensure that no customer is charged too much or too little for a given product or service. This is especially useful when dealing with products that come in various configurations, such as software applications or computer systems. For example, suppose a business offers a basic software package at one tier and an upgraded version at another tier. In that case, customers may be more likely to purchase the upgraded version if it offers additional security features or other benefits that would be worth the extra cost. This strategy allows businesses to increase their sales volume while maintaining reasonable profit margins on each sale.
Setting up volume-based or term-based discounts is easy in CPQ. Volume-based tiered pricing can be built into CPQ by setting up factors that impact list price. Using DealHub CPQ as an example, the user navigates to List Factors and creates a discount table. The user can set up discount tiers and see how the discount impacts the price in the visualization chart. Next, the user navigates to Products, selects the product the discount will apply to, uses the Quantity drop-down to select the tiered pricing, and hits Save. Watch this video to see how simple it is to set up tiered pricing in CPQ.
People Also Ask
Who uses tiered pricing?
Tiered pricing is a pricing structure that charges different prices for different consumption levels. This type of pricing is common in industries with high fixed costs and low marginal costs.
Tiered pricing is often used by utilities, such as electricity and water companies. In these industries, it is common for customers to have a set monthly fee, plus an additional charge for each unit of consumption. For example, a customer might pay a $10 monthly service fee, plus $0.15 per kilowatt hour (kWh) of electricity used.
This type of pricing can also be seen in subscription-based businesses, such as streaming services or software-as-a-service (SaaS) products. In these cases, customers are typically charged a lower price for a basic level of service and a higher price for premium levels of service.
For example, a customer might pay $9.99 monthly for a basic streaming service subscription, allowing them to stream standard-definition (SD) content on one device. If they want to upgrade to HD content and be able to stream on two devices simultaneously, they would pay $13.99 per month.
Tiered pricing is also standard in the cellular phone industry. In this case, customers are typically charged different prices based on the data they use. For example, a customer might pay $30 per month for 2 gigabytes (GB) of data, plus $10 per GB for each additional GB used.
Some businesses use tiered pricing to encourage customers to consume more of their product or service. In other cases, companies may use tiered pricing to maximize their profits. For example, a business might charge a lower price for a basic level of service to attract new customers.
However, once these customers are committed to the product or service, they may be willing to pay a higher price for a premium level of service.
What is the advantage of a tiered pricing system?
The advantage of a tiered pricing system is that it can encourage customers to purchase larger quantities, which can lead to increased sales and profits.
Additionally, it can help to simplify pricing structures and make them easier for customers to understand.
Finally, tiered pricing can also be used to reward loyal customers who purchase frequently.
How is tiered pricing calculated?
There are a few different ways companies calculate tiered pricing. The most common method is usage based, which means that the more a customer uses a product or service, the more they will pay.
Another way to calculate tiered pricing is to base it on features so that the more features a customer uses, the more they will pay.
Finally, some companies charge based on both usage and features.