Tiered pricing guide: How to level up your subscription pricing strategy
Aug 4 2021
For many SaaS products, one size doesn't fit all, and forcing customers into a one-size-fits-all solution can leave many of them choosing to opt-out instead. Rather than lowering conversion rates, or increasing churn rates, with a pricing strategy that doesn't fit customer's needs, such companies should consider a tiered pricing strategy.
Tiered pricing is a pricing strategy that scales the price of a product according to a certain metric. For example, a B2B SaaS Company may have an entry-level tier that allows one employee to access the system, and a higher-end tier that lets unlimited employees use it. By tiering the price based on the number of users, businesses can find the plan that fits their needs best and get the most value for their dollar. The goal is to get more customers by providing better value.
4 reasons to implement tiered pricing for your subscription business
We've discussed what the goal of tiered pricing is. Now let's take a look at some of the ways the strategy helps to achieve that goal, including some ways that it goes above and beyond simply bringing in new customers.
Expand your customer base
When you only have one tier, customers who don't need everything in that tier will be overpaying, sometimes drastically. This means that many of those customers will choose not to purchase the product at all. Rather than having a customer paying a little less than may eventually pay more, you have no customer at all.
Enables upsell to the next tier
Upselling is a big part of successful SaaS operations. When you have a customer that has very limited needs, and you provide them with a tier that fits those needs, you've got them in your ecosystem. As the needs of that customer grow, it becomes easy to sell them on a higher priced tier. If they went elsewhere because your prices did not fit their needs at the time, you've simply lost out on that money.
Maximizes revenue potential
With well-designed tiered pricing, there's a plan that fits everyone's budget and needs. Customers won't be leaving your website and looking to competitors because they can't get what they need from you. Instead, they'll sign up for whatever tier fits them best and then change tiers as their needs change. They may move up or down a tier, but regardless of which direction they go, their money is staying with you.
Increases the value of new features
When you have a single tier of pricing, any new feature does little to increase your revenue. Features that set you apart may bring in new customers, but only if they need the feature at the current time. Putting features into an appropriate tier will make that tier more attractive as an upsell, while retaining the ability to draw in users who don't want to pay for that feature.
How does tier pricing work?
We've already given examples for two of the most common types of tiered pricing strategy. Now let's take a more in-depth look at all three of the commonly used strategies for setting up pricing tiers.
Tiers based on features rely on the fact that not everyone needs advanced features. By breaking your tiers up with the most basic features in cheaper plans, and more advanced ones in higher priced plans, you can capture the needs of every one of your customers.
This is a common tier strategy for services like cloud computing or mailing list providers. The amount of time spent utilizing a computer resource or the number of recipients in a mailing list determine the cost to the customers.
User count tiers
This is usually for B2B applications, where it isn't uncommon for many different users to need access to the product. By splitting the tiers up according to the number of users given access, you can cater to both small business that are just starting out and large enterprises.
Tiered pricing in SaaS
Let's now move away from generic descriptions of the different types of tiers commonly used by SaaS companies and look at some concrete examples. Below are several popular SaaS businesses along with a description of their pricing tiers.
Zendesk's feature tiers
Zendesk splits their tiers in two different ways. The tiers mentioned on the page are broken down by feature. Each of those plans is priced per agent. So Zendesk is utilizing both the feature-based strategy and the user-count strategy. As we go through the other examples, you'll see it's fairly common to mix tiers like that.
ConvertKit's usage based tiers
If you go to ConvertKit's pricing page, you'll find that they also split their service tiers in two different ways. When you first visit the page, you're presented with three options split by feature. However, you'll notice that those tiers are for a specific number of subscribers. Adding support for more subscribers increases the cost of the two paid tiers.
FYI Workspaces' user count tiers
FYI does something similar to Zendesk with their pricing. Again, you'll notice that there are three tiers of pricing based on the features provided; however, each of those tiers is priced per user. This allows businesses to pay only for the exact number of employees who will be using the service. Such pricing maximizes the revenue from all types of businesses.
CartHook's hybrid tier pricing
Now let's look at CartHook's pricing page. As you'll see, they have two tiers that users can choose from: one for companies in the growth stage and one for enterprise. However, they've taken a different approach to combining the types of tiers than the other companies on the list have. CartHook has a flat monthly fee for each of their tiers, but on top of that there's an additional fee based on the revenue they recover for you.
Tiered discounts in DTC
Another way of doing tiered pricing is by offering discounts at different tier levels. Unlike volume discounts, tiered discounts only take effect once the given threshold has been reached. Let's see some examples.
Tier discounts by volume purchased
A company may decide to charge full price for the first 100 sales of a given item. Then, they may give a discount of 5% on the next 100, 10% on the 100 after that, and so on. Unlike volume pricing, which would be 10% on the entire order if the number of items is high enough, tiered discounts apply only for the given tier. So the first 100 items in are always full price, the next 100 are discounted 5%, and so on.
Tier discounts for different subscription membership levels
Another common tactic is to have different membership levels in a traditional tiered setup, but offer increasingly large discounts for customers who have chosen a higher priced membership plan. You'll see this with some payment processors, who charge less of a percentage per sale for customers who are paying more per month.
How to implement a tier pricing strategy
Implementing a tiered pricing strategy requires a great deal of research to get the right values. Our service with Price Intelligently will do extensive research on the market you serve to determine exactly which features customers in your industry value and how much they are willing to pay for them. The general steps are laid out below.
Know thy customer base
Finding the perfect price for your customer base requires you to know who that customer base is. You can't get away with charging premium pricing to a customer base that's looking far bargain-basement deals. Therefore, understanding the average income and the motivations for your average customer is an important first step.
Understand the perceived value of your product
This goes back to what we said earlier. Getting the right pricing is all about understanding what your customers think your product is worth. If you charge less than they think its worth, you'll leave money on the table. If you charge more than the perceived value, nobody will purchase. Tiered pricing makes this process more difficult as you must break your product down into logical segments and analyze them each individually.
Communicate pricing tiers clearly
Many of us have come across a pricing page that was too confusing. Breaking things down into tiers is a great way to let customers customize the amount that they'll be paying, and what they'll get in return. But if you provide too much customization, and too little explanation of how things work, things can get confusing quickly.
Implement localized pricing to expand potential customer reach
This isn't specific to tiered pricing, but rather a good strategy in general. Different areas of the world have different levels of disposable income. Furthermore, different cultures value some features more than others. Tailoring your pricing to each locality in which you do business helps amplify the profit maximizing effects of tiered pricing.
Tiered pricing FAQs
What are the benefits of tiered pricing?
Tiered pricing creates a situation where every potential customer can find a pricing plan that fits their current needs. This allows you to sign up more customers, who will then upgrade to higher tiers as their needs expand.
What is an example of tiered pricing?
An example of tiered pricing is when a company has a product with a large number of features, and offers access to a limited subset of those features for a cheaper price. As the customer grows into the service and needs more features, they can upgrade until they are at the highest tier and have unlocked all the advanced features.
How to calculate tiered pricing?
The pricing for each tier, as well as the way the tiers themselves are structured should be based on a thorough analysis of what your potential customers value the most. You can think of tiered pricing as being value-based pricing, but broken down to cater to several customer segments instead of attempting to be a one-size-fits-all solution.
Tiered pricing vs. volume pricing — what's the difference?
Discount tiered pricing may seem a lot like volume pricing, but there is a subtle difference. With volume-based pricing, the discount is applied to the total order. Tiered discounts work more like tax brackets do. For example, the tiers may say that the first 100 items cost $1, and item counts between 101 and 200 cost $0.80. In this example, the total cost for 200 items would be $180: $100 for the first 100 and $80 for the next hundred. Volume pricing would apply the discount across the board, for a total of $160.
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