Tiered pricing has turned out to be effective strategy for companies to segment their audience/ consumers smartly and grow their business..

Tiered pricing (sometimes also called as pricing tiers) gained huge popularity with the emergence of software as a service (SaaS). SaaS businesses started using different tiers to attract/convert users/business of varied background/usage pattern/paying capacities, etc. But tiered pricing as a concept has been in use for decades. Airlines have been using tiered pricing with its in-flight seating & service arrangements. Banks have started offering various service levels, various credit cards from banks are examples of tiered pricing. It is everywhere around us.

The good thing: tiered pricing is becoming main stream. If you aren’t using tiered pricing currently, you are seriously missing the opportunity and leaving money on the table.

 

What is tiered pricing?

The business dynamics are changing at a rapid pace, so are the pricing strategies. One can define tiered pricing as a pricing strategy but it is more than a pricing strategy these days.

Tiered pricing is a business strategy used by professional services companies to offer their products or services at different price points. The tiers are created and distinguished by offering different features/functionalities or offering varied limits on the features/functionalities offered in each tier price.

It would not be appropriate to say that tiered pricing is merely a pricing strategy. Right from the beginning tiered pricing has been a business strategy.

Why?

To create tiers, to decide pricing, to offer different features, to serve features included in each tier, it requires all business functions to get involved. It is not just marketing, it also requires sales, operations, support, professional services, finance to make pricing tiered strategy successful.

From the perspective of customers, they will see different tiers with separate price points and services/features included in each tier. They can choose the option which is best suitable for their needs and usually offers them incentives to move to higher tiers at some point in time.

How does it work as a pricing model?

When software as a service (SaaS) gained popularity, it was very common (rather assumed) for the product to have pricing page and on the pricing page, visitors would typically find three tiered pricing.

Initially, project management tools would have tiers for customers to subscribe and the subscription cost would multiply by number of projects or number of project-managers or team members using the tool. CRM tools would also have pricing tiers and the pricing would be multiplied by the number of seats. Few software vendors would offer software licenses with keys; or widgets to be activated.

This landscape started changing quickly as more SaaS solutions were launched and almost flooded the market for business solutions. It was great for prospective customers and users. They could see the pricing upfront, transparently. It broke the old way of guarding pricing as holy grail

Thou shalt not disclose it publicly

SaaS providers literally shattered the heavily vaulted/guarded pricing strategies used by many businesses. It brought transparency, it brought confidence to the users to try their solution. It started a new era of how business solutions are offered to customers.

Things are changing for good these days.

It is not only restricted to SaaS businesses. Companies have started offering their professional services through tiered pricing model. Take an example of accounting firms that does

• Bookkeeping
• Accounting
• Tax preparation
• Payroll services
• Virtual CFO services

These firms are now offering services as specially packaged services, present in different forms and create more opportunities to grow.

Does tiered pricing create exclusivity?

I mentioned about heavily vaulted pricing strategies used by some companies. Unlike such guarded pricing strategy, pricing tiers/ tiered pricing creates does not create exclusivity. In fact, if you take a look at examples given below, you will realize, tiered pricing captures/ appeals or attracts different customers to their most appropriate tiers.

You will see Basic or Essential or Standard tier wherein low pricing taps customers who are cost conscious. The Advanced or Professional tier pushes customers who are not driven just by cost factor but see the value in the higher tier. It usually has a tag of ‘Most Popular’ or ‘Recommended’ or ‘High Value’. The middle tier is supposed to be the significantly selling tier for your business. Now the highest tier is where you can establish bit of exclusivity or offer your premium service to those customers who do are not driven by cost but want someone to help them grow or solve their problem better than others.

So in this sense, sometimes pricing tier may create exclusivity and people pay for the exclusive service/treatment/experiences.

Tiered pricing strategies with samples

It got prominence with software as a service (SaaS) businesses started using different tiers to attract/convert users/business of varied background/usage pattern/paying capacities, etc. But tiered pricing as a concept has been in use for decades.

There is no one way or pattern to categorize tiered pricing models or strategies. The best part is, various businesses have smartly adopted pricing strategies to adept their business environment and growth momentum. And tiered pricing software make it possible to create, present service/product offer, include tiered pricing examples

Broadly speaking, tiered pricing can be attributed to following kinds

• Feature based pricing tiers
• Usage based pricing tiers
• Duration based pricing tiers

Feature based tiered pricing

Each tier offers different functionality, services. This is most common type of tiered pricing.

example: airline seats/class pricing. Every passenger in a given flight is going to start journey at the same time, everyone is going to be traveling at the same speed, everyone is going to reach the destination airport exactly at the same time; still different passenger pay differently depending on the class, why? Experience, features.

e.g. accounting services pricing

Let’s look at another example like Asana task management software. It has pricing tiers based on the features offered in each tier.

 

 

Usage Based Tiered Pricing

Common example is email marketing / email service providers like Sendgrid. It charges users based on the number of emails sent per month. Lower pricing tiers restricts or limits the number of contacts/emails you can use; as you hit the upper limit of the current tier, you have to opt for next tier.

Here is another example for usage based tiered pricing of bookkeeping service. The usage parameter is number of transactions per month to be entered in the books of account.

Another example for this is HubSpot. While it has lot complex set of services and multiple tiers, number of marketing contacts decides the pricing as well as tiers for each plan. It is similar to the example we saw above i.e Send grid; but this one is bit complex due to sheer number of products/services/ options available to the user.

 

Duration Based Tiered Pricing

In this type of tiered pricing mode, the provider creates tiers based on the duration of the service offer e.g. Weekly, monthly, yearly;

This type of tiered pricing is common where the duration of service or processing time is the main driver of the service e.g. video processing services or commercial advertising slots on Radio, TV

The best tiered pricing strategy

There is no one ultimate rule or approach to categorize and identify best tiered pricing for your business. You can research about your own business pricing, how clients have responded (or responding now), how competition is offering its products/services. It is a process to learn, experiment, tweak to come up with right set of pricing tiers for your business offering.

You can even consider mix/combination of following types of tiered pricing models

• Volume based tiers
• Simple two/three tiers
• Solution as a service (SaaS)
• Monthly Retainer tiers
• Yearly Retainer tiers
• Unit Multiplier tiers
• Two Unit Multiplier tiers

 

Here is an illustrative example using combination of  three tiers, calculating usage based pricing along with add-on services.

 

Hope this helps you understand the types of tiered pricing along with samples.