businessman placing a wooden cube with check percent or percentage symbol on top of tiered wooden cubes 218070076

Tiered Pricing Model Guide

July 29, 2021

Tiered pricing is a method where you will sell items and provide quantity discounts to your customers. While it sounds like volume pricing, it operates differently from that format.

Tiered pricing entails a product or service being priced within a segment or range it supports. The price per unit will drop when each quantity in a tier is sold.

The process also works for services. You can offer multiple tiers of something and charge more for tiers that provide more functions for people to use.

Tiered pricing is popular among manufacturers, wholesalers, and others that sell bulk quantities of different items for sale. Software-as-a-service providers also use this model to help them sell what they are providing to clients.

An Example of How Tiered Pricing Works For Product Sales

Here’s an example of how a tiered pricing platform works when selling products:

  1. You can charge $100 for the first unit of an item you sell and then $90 for the second to fifth units of that item. The price drops to $80 from the sixth unit onward.
  2. A customer wants to buy ten units of that item.
  3. You’ll charge $100 for the first item, $360 total for the next four, and $400 for the remaining five. You’re charging $90 each for the second to fifth items and $80 for the ones after that fifth unit.
  4. The customer will pay $860 for the ten items.

The customer is paying $86 per item for the ten units. Meanwhile, if the customer only needed three items, that person would spend $280 on the entire purchase. It would cost about $93 per unit in this case. The customer is saving money by buying more items at a time.

Get a Greater Profit on Product Sales

You will enjoy a more substantial profit through a tiered pricing platform than if you offered a volume discount. While you could cut the price per item for something when a customer orders more units, you’re risking a substantial drop-off in how much you earn in a transaction. A customer could buy the bare minimum number of items to reach one pricing tier, for instance. Your business won’t receive as much money on a volume discount as if you offered a tiered pricing system.

How Tiered Pricing Works For Services

Tiered pricing is good for more than offering multiple products for sale. You can also use tiered pricing when selling services to people. You could sell monthly or annual access to something like a subscription-based club, an online service, or anything of value. But the features your customers will access will vary over how much they spend each month or year.

For example, a hosting company can offer a package for $20 a month where a customer will get access to a website and a specific amount of disk space or bandwidth. But that person can also pay $40 a month to handle three websites and an unlimited amount of disk space and bandwidth.

The customers will spend more money to get access to more features and services. You can plan your tiered pricing plan surrounding the values you wish to highlight for whatever you provide.

What Makes Tiered Pricing Useful?

Tiered pricing is beneficial for how it is flexible and affordable. Customers can switch between different tiers as necessary, or they can plan their purchases surrounding what tiers work. Businesses can also adjust the values of each tier based on what is profitable and what will help cover their operations.

Tiered pricing also targets more audiences. A business can produce tiers for high-value clients or for those who don’t want to spend as much money on things.

You can also use tiered pricing to upsell things to people. You can promote better deals for buying more items or for subscribing to high-value tiers that offer more things of use.

Planning Your Tiered Pricing the Right Way

You can establish a better tiered pricing platform by using a few steps:

  • Create some differentiation between whatever tiers you offer. The customers should recognize a difference between each tier.
  • Look at the possible customers for each tier. Plan your tiers over what customers are more likely to use them.
  • Provide a sensible pricing alignment plan for each tier you produce. A tier that offers twice the benefits of a lower one if it costs twice as much, for example.
  • Review the profit margins you’ll get for whatever items you will sell through a tiered pricing platform. The reduced prices for each tier should be useful to the customer while still being affordable.
  • Every tier you provide must have a reasonable explanation that highlights everything it has to provide to the customer. The potential buyer should see some benefit with whatever tier one wants.
  • You can create names for each tier, but the names should be reasonable and descriptive. They can include points surrounding what makes a product or service useful, or if the value of something is reasonable enough.

Is This Better Than Volume Pricing?

The potential profits and simplicity of tiered pricing make it an ideal choice versus volume pricing. But it may not always be the right choice. Volume pricing is best if you have a significant amount of product you’re trying to unload soon. It could also work if you need to sell items that are in low demand due to seasonal or economic concerns. Customers might be more interested in these products if they know they can spend less on them.

In other cases, tiered pricing is the way to go. Tiered pricing gives you a greater opportunity to make money from people and to encourage them to spend extra with you. You can plan whatever tiers you want when selling things to people. But be certain whatever tiers you prepare are reasonable enough and that you have a plan for making them work well, especially when running a suitable solution that can attract more people.

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