Tiered pricing is not a new concept. We see examples of tiered pricing around us all the time, e.g. Amazon Prime that allows us to speed up the delivery vs regular delivery option is an example of tiered pricing. Flight tickets based on the economy class, business class are examples of tiered pricing.
Yet, many businesses are failing to adopt it or making the best use of it. Tiered pricing can be built and offered by nearly every business. If done right, tiered pricing can be a game changer for your business.
- It can differentiate your business, your offer from competitors,
- It can bring more business your way
- It can help you identify right customer segment for your services
What is Tiered Pricing?
Tiered pricing definition: It is one of the most important pricing strategy for businesses. In this pricing strategy, the service-provider segments its services into multiple tiers. Each tier has distinct price point and has a set of services bundled into it. Each tier typically caters to separate segment of customers.
By bundling services and optimizing each bundle, your offer can appeal a larger audience, wider customer base than before.
Many people get confused between volume pricing and tiered pricing. Tiered pricing can be used much more effectively than volume game. We will cover this topic separately in another post.
Why do you need Tiered Pricing?
To do more business
If you were offering single services with various options, you were missing on potential business opportunities. With well crafted tiered pricing, you will be able to offer greater choices to your customers e.g. eCommerce services like Amazon are able to get more business with Prime for those who want faster delivery. This became huge addition to its existing eCommerce business and now it is evolving as a separate driver for Amazon’s business growth.
To improve business profit
As this HBR article Good-Better-Best mentioned, you are not making the most of the bottom-line growth if you do not offer tiered pricing. When you present value of your service instead of cost-plus or markup pricing, you moving up in the value-chain. Take a basic example of logo design. If you look at logo design as number hours of work, it is cost-plus model; however when you talk about researching competitor, understanding ideal customer profile, company value-system/vision/etc; you are talking about something lot superior than number hours spent on the graphic-design. Since research, insights are immensely valuable, you are set apart from the rest of players and you can ask for higher pricing.
In year 2022, Amazon hiked its Prime membership service yet it has seen increase in its membership count. Hiking membership pricing turned out more profitable for Amazon.
Reach & appeal larger audience
Tiered pricing allows more customers consider your offer. e.g if you are a graphic design firm, you can bundle logo + website design as one bundle but there would be people who are willing to pay for social media panels as well. With more tiers for such services, more customers can opt for your service.
Taking above AMZN example, Amazon was able to reach 157.4 million users as Prime subscribers in 2022. And it is exceptionally significant that was a missing segment before. It did’t gain users overnight. It carefully considered & refined its Prime membership offer over the period.
Up-sell to existing customers or lower tier customers
To up-sell existing customers who have been using your product/ service is like mining accounts. They are happy using your service and you offer them something which of superior value. The thing is you don’t know their response unless you offer them something. With trial and error, you will surely get there and come up with something highly converting. Upselling to existing customers also adds to customer loyalty, so you should definitely go for it.
Enable customers to see value
Right from the
- Tier names
- Tier Price
- Tier features
- Tier option
You can enable your clients to see the value in your offer rather than text info.
Yes, it is a perception game and there is nothing wrong about offering something which different customers perceive differently. It takes marketing genius to build/ offer something like this.
Instead of comparing you with competitors, clients can compare within tiers offered by you
This is epic. Instead of clients comparing your single service offer / solution to competitor, you can hook them up to compare options offered by you only. I’d say,
In reality, if you think about it, Tiered Pricing packages is inverse of cannibalization. It is helping grow revenue /market share as you introduce new packages without reducing revenue of existing services/offer.
The trick is to build packages such that prospects should not be able to compare your offer line by line with your competitor. Many companies are applying this strategy successfully even with (so to say) commoditized products.
How to set Tiered Pricing?
Congratulations, if you are thinking about using tiered pricing in your offer/ quote/ proposal/ contract.
The first thing you will need to do, is to clearly understand spectrum of services you offer.
Segment Services : Identify Tiers
Let’s say you have range of products, services or combination of both. Without losing the focus on customer value, we will build packages or tiers in a meaningful ways. The meaningful ways can exist by the way of
- Differentiating packages based on the quantity offered (e.g. number of pages, designs, transactions, users)
- Differentiating packages based on the quality of product/ service offered (e.g. iPhone with varying camera quality)
- Differentiating packages based on the service level offered (e.g. SL1, SL 2, SL 3)
- The duration of the service, support offered (SaaS: yearly vs monthly, crash-course, instant results)
- Differentiating packages based on the product/ service experience offered (Theatre seats, Classes in Airlines)
- Differentiating packages based on the customization offered (e.g. Do it yourself, Done with you, Done for you)
- Differentiating packages based on the attributions offered (think of Linkedin Premium, Twitter Bluetick, Verified handles)
What’s in Name? A lot. Set tier names correctly
Don’t let the ignorance fool you. Names you assign to your tiered pricing are crucial & they decide the fate of your tiered priced packages. You can not make the mistakes of naming your service packages casually.
The intricacies: how you name your tiers plays huge role in how your clients/ prospects perceive your services/offer as a whole.
What if you name it so abstract like ‘Service 1’, ‘Service 2’, ‘Service 3’?
Not only it will make your clients unsure of what you offer, they are unwillingly forced to go through the specific of each tier.
It is undeniable fact of the today’s internet age, people have lesser attention span. If you are going to make it harder for them, they may simply ignore the offer and move forward to the next one.
You should spend some time in coming up with tier names, which will appropriately reflect the essence of services being offered. You can be creative but keep in mind the thumb rule, ‘Don’t Make Them Think’ (remember Steve Crug?). It is okay if you are unable to come up with entirely unique name, you can resort to & use classical terminology like Silver Gold Platinum.
Set /assign pricing
Now the biggest deciding factor.
How do you price your tiers?
Honestly, there is no one correct answer to it. No one has figured out it 100% accurate and make it work all the time without improving.
You don’t have to make it cheap or uber expensive. So I’d say, deliberate about the pricing of each tier to reflect value (or perceived value).
As long as you start seeing some results (positive or negative | happy / resisting clients) and you keep experimenting to make it favorable for your business, you will do well.
Tiered pricing software
Consider using tiered pricing software to create the packages you would like build, Such software offers templates and examples of tiered pricing used in various sectors, professional services. Use tiered pricing packages in your next proposal, quotation, engagement letters, contracts, etc and present your offer. You can present your offer to your clients/prospects and they can compare tiers, select desired tier, opt for add-ons and sign the document to close the deal with you.
That’s all for this post. Hope you’ve enjoyed reading it.
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