Blog / LearnMonday, May 25, 2020

Tiered Pricing

Jakob Soderberg

Tiered Pricing

Calculate the Optimum Tiered Pricing Strategy

Deciding on a pricing strategy for your SaaS platform can be tricky. It’s easy to look at other SaaS providers in your niche and simply undercut their pricing or offer a similar model. What works for one SaaS provider in terms of pricing won’t necessarily work for you. By arbitrarily choosing a competitor and copying what they do, you could be doing yourself an injustice. You could find yourself doing anything from reducing the potential profitability of your business to risking your business altogether.

 

What is Tiered Pricing?

The tiered pricing model is a popular one among SaaS providers, but can also be used if you’re selling a physical product that will be sent to customers.

Tiered pricing offers your customers an escalating discount as they buy more SaaS licenses or physical products.

These discounts are tiered depending on the volume purchased, hence the name.

For example, let’s say you’re offering your SaaS platform at an initial cost of $100 per license.

With tiered pricing, you could say to your customers:

  • The first 10 licenses you buy are $100 each.
  • If you buy more, 11 – 20 licenses are $80 each.
  • If you need more, then 21 or more licenses are $60 each.

What it’s important to remember here is that the first 10 licenses will always cost $100 each.

Therefore, if a customer buys 15 licenses, they will pay $100 x 10, then 5 x $80, for a total cost of $1,400.

 

Using Upodi’s Tiered Pricing Calculator

With our new tiered pricing calculator, you can calculate the optimum price tiering for your service or product.

Simply enter details of your pricing and tiering in the tool and play around with the numbers to discover how much revenue your business will make depending on the pricing and tiering thresholds you choose.

This will help you to discover the optimum tiered pricing structure and model for your business.

Read on to learn more about the benefits of tiered pricing.

 

What are the Benefits of a Tiered Pricing Model?

In a SaaS context, a tiered pricing model can be used to incentivize your customers to purchase more user licenses of your product. At the same time, tiered pricing allows them the flexibility to buy what they can afford or what works for them now, with a view to progressing to a higher tier as their business grows.

The great thing about tiered pricing is that it benefits both you and your customers.

Think back to the calculation we looked at earlier. 

From a business perspective, you’re always making $1,000, or $100 per license, from the first 10 licenses you sell. While your business will have a diverse customer base, with some customers potentially only owning one or two licenses, while others will be in the top tier of having over 21, with most probably falling somewhere between the two, you know that your primary selling price is always $100 per license.

How you adjust your pricing and set your tiers will depend on your business model as well as revenue and profit targets, and while you don’t have fixed pricing as such you do at least know you’ll make at least $100 per customer.

From the customer’s point of view, they’re rewarded for buying more licenses with a lower cost as they move up the tiers.

 

Alternative Tiered Pricing Examples

Tiered pricing doesn’t have to apply only in terms of the volume you sell, although this is the most common context for the examples we have looked at so far.

You can also use tiered pricing if you offer a subscription for your services.

For example, let’s say that a subscription to your service is $40 per month. For $40 you get the basic version of your service, with say 5 selling points.

You then escalate this to encourage your customers to spend more and take out a different version. You might offer 12 selling points for $60 a month, and a premium version with 20 selling points for $75 per month.

Think about the SaaS services you’ve researched while considering tiered pricing for your own business. How often do you see subscriptions presented as an image with tags attached such as “Most Popular” or “Best Value”? All the time!  

 

How You Can Master Tiered Pricing

The key to mastering tiered pricing is to understand your business and to be comfortable with what the optimum pricing model is for your business.

Consider the following and set your pricing accordingly:

  • What is your SaaS platform or the product you want to sell?
  • What is your pricing model? Do you offer license purchases, subscriptions, or perhaps a combination of both?
  • What is your lowest possible price to still achieve a profitable and sustainable business?
  • How can you use tiered pricing to maximize revenues for your business and to ensure customers feel like they’re getting value?

Tiered Pricing vs Volume Pricing

The term volume pricing is often used interchangeably with tiered pricing but is a different thing. Don’t confuse the two or implement volume pricing if it isn’t the right thing for your business.

Where volume pricing differs from tiered pricing is that, once a threshold is reached, everything is priced at a lower price.

In the example we’ve used throughout, this would mean that your first 10 licenses still sell for $100. However, once a customer buys 11 licenses, the price for all 11 would drop to $80.

As a result, with volume pricing, in this scenario you would sell 11 licenses for $880.

We can see that tiered pricing would therefore be more profitable for your business, as for 11 licenses you would make $1,080, an additional $200 in revenue.

 

Implementing Your Tiered Pricing Strategy

If you choose to implement tiered pricing for your SaaS platform or product, you’re giving yourself a fantastic opportunity to maximize your revenue and profit while also rewarding your customers for buying into a higher tier.

While volume pricing can be useful for promotional activity or during the post-launch phase of a product to build brand presence, generate cash flow, and earn positive customer reviews, in the longer-term tiered pricing is likely to be a better means for your business to grow sustainably.

 

Author: Jakob Soderberg

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