What Is Tiered Pricing? Types and Best Practices (2024)

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Sometimes what you see is what you pay. If a velvet barstool costs $100, buying four sets you back $400, before tax. No bundled deals, no volume discounts. Just simple multiplication. However, companies are increasingly experimenting with pricing that plays on consumer psychology and provides more value.

A vegan meal subscription service might offer 10 meals at $7 each, then $5 per meal for those who order 20. A productivity app might present users with the option between a standard plan with core features and a premium plan with advanced tools like collaborative lists and calendar integration. In B2B retail, an ecommerce packaging supplier might charge 50¢ per box for the first 1,000 units, but drop the cost to 40¢ for each additional box, incentivizing larger orders with better value.

These are all examples of tiered pricing, where you incentivize larger purchases or greater usage while customers benefit from better value at higher tiers. Here are the benefits of tiered pricing and how to implement it.

What is tiered pricing?

Tiered pricing is a pricing strategy where you offer your products or services at different price points based on criteria like quantity, features, usage, or level of service. A tiered pricing strategy creates different pricing tiers that cater to different customer segments. Pricing tiers generally offer greater value or reduced costs as customers upgrade to higher tiers.

For businesses, a tiered pricing strategy can boost profitability by capturing more market share and encouraging customers to opt for higher-priced tiers. Customers get the flexibility of choosing the tier that best suits their budget and needs while gaining access to premium features or bulk discounts not available in a standard pricing model.

Tiered pricing vs. volume pricing: What’s the difference?

Tiered pricing offers different rates based on quantity or usage. Customers pay a set price per unit within each tier, with prices typically decreasing as they reach higher tiers. This incentivizes customers to purchase more to reach better price points, while still accommodating smaller purchases at higher per-unit costs.

Volume pricing applies a single price to the entire order based on the total quantity purchased. Unlike tiered pricing, which assigns different rates to portions of the order, volume pricing offers one consistent rate once a volume threshold is met. This can lead to substantial discounts for bulk orders but may be less flexible for customers.

Let’s say a B2B glass bottle manufacturer catering to perfumiers sells its bottles at the following prices:

Quantity	Price per bottle
1-1,000 bottles	20¢
1,001-5,000	18¢
5,001+	15¢

Here’s how much an order of 6,000 bottles would cost a perfumery, based on each model of pricing:

Tiered pricing

(1,000 × 20¢) + (4,000 × 18¢) + (1,000 × 15¢) = $1,070

This model breaks the order down into tiers, applying the respective price for each tier. The first 1,000 bottles cost 20¢ each, the highest price. The next 4,000 fall in the middle tier, 18¢, and the final 1,000 are at the lowest price, 15¢ each.

Volume pricing

6,000 × .15¢ = $900

With volume pricing, the entire order qualifies for the lowest price tier, so all 6,000 bottles cost 15¢ each, resulting in a lower total cost for the customer.

Tiered pricing models

Whether you’re selling artisanal soaps to boutique hotels or offering specialty chocolate subscriptions to cocoa enthusiasts, you can probably experiment with tiered pricing. But not every company applies this strategy the same way. Your ideal approach depends on your product, market, and business goals.

Here are three different types of tiered pricing models to explore (plus, a few tiered pricing examples for your consideration): 

Feature-based pricing

Feature-based pricing categorizes products or services into different tiers, each with distinct features at varying price points. This approach caters to various customer needs and budgets, like a customer relationship management (CRM) tool offering basic, pro, and enterprise levels, or a refrigerator line with basic, premium, and luxury versions.

Raycon is an audio tech brand that offers headphones with different features at different price points. The product lineup includes the Everyday Headphones for general use with active noise cancellation (ANC), the Fitness Headphones with sweat-proof design and interchangeable ear cushions, and the Everyday Headphones Pro with premium comfort and the longest battery life.

Subscription-based pricing

Subscription-based pricing offers different levels of service levels or product quantities at recurring intervals (e.g., monthly or quarterly). This approach lets you segment customers based on their needs or desired features, with higher tiers often providing better value or additional perks.

For businesses, this model means more predictable, recurring revenue streams, even at lower price points, contributing to financial stability and improved resource planning, like hiring for customer service or executing a brand extension.

Chamberlain Coffee, founded by popular YouTube creator Emma Chamberlain, sells coffee, matcha, and tea products. A one-time purchase of sweet otter cake batter coffee costs $16, but customers can subscribe and save to receive recurring shipments for $14.40 per bag (10% off).

Usage-based pricing

Usage-based pricing—or pay-as-you-go pricing—charges customers based on their product or service consumption. In tech, this might mean paying for cloud storage by gigabyte; in retail, it might be based on items purchased or service frequency.

This model is popular because it aligns costs with usage, offering fairness and flexibility that can increase consumption as customers see value in each additional unit.

Better Packaging, an eco-friendly packaging company, takes an unconventional approach to usage-based pricing. As customers order more mailers and envelopes, they unlock more value and customization options. For orders of less than 500 units, customers can select off-the-shelf options; orders of 500 or more include logo printing; and orders of 2,000 or more offer full customization and access to specialized eco-friendly products.

Tiered pricing best practices

Implementing a tiered pricing model can boost revenue and attract customers. But when poorly executed, you might find customers gravitating toward one particular tier, or leaving for competitors when they reach certain thresholds. To avoid these pitfalls, consider the following best practices for adopting a tiered pricing structure:

Create buyer personas

Design your tiers with a specific customer archetype—or buyer persona—in mind. Consider who will select each category and willingly pay the associated price.

A camera company might design three tiers of cameras—beginner, intermediate, and expert—each with features tailored to its target user level. This approach helps customers easily find the option that best aligns with their needs and goals.

This exercise can also help you replace generic tier names with ones that reflect the user’s skill level, like “Novice Shooter,” “Skilled Photographer,” and “Professional Snapper.”

Communicate unique values

Tiered pricing offers choice, but you need to guide customers toward the right option for them, so provide clear information. For feature-based pricing, make a comparison chart highlighting the unique benefits of each tier, focusing on the added value as customers move up. With subscription-based models, explain the long-term savings or exclusive perks that come with higher tiers or longer commitments. For usage-based pricing, provide calculators or case studies that prove cost-effectiveness as usage increases.

These pricing strategies inform customers but also demonstrate the value proposition of each tier, encouraging upgrades and maximizing customer satisfaction and revenue.

Limit pricing tiers

If you browse pricing pages of companies implementing tiered pricing, you might notice a trend: three distinct tiers for prospective customers to choose from, known as the “rule of three.” This makes it easy to capture different market segments—budget, mid-tier, and premium—by addressing varying price sensitivities and feature needs.

The rule of three also plays on the psychological principle that too many choices can overwhelm consumers, leading to analysis paralysis. It might be tempting to have more tiers, but too many options can lead to confusion and indecision—or worse, cart abandonment.

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Credit: Original article published here.