What is tiered pricing?
Tiered pricing is often confused with volume pricing. Both pricing strategies offer customers a greater discount the more they buy - but the unit thresholds are important. Take a look at this table:
|Number of licenses||Price per license|
A cursory glance at this table and you’d likely assume that that the price per license would apply to all the licenses you buy. It’s not only a more common pricing format in B2C transactions, it also makes a lot more logical sense. What you’re thinking of here is a pricing strategy known as volume pricing.
With volume pricing, the price per license (displayed against the license quantity the customer intends to buy) applies to all licenses the customer purchases. So, if a customer chooses in this instance to purchase 60 licenses, all licenses will cost $70 each, with a total cost of $4,200.
In the case of tiered pricing, however, a lower rate per license is offered once the license quantity threshold is met. The cost reduces as the customer ‘fills’ each tier. Using this example, a customer purchasing 60 licenses with this pricing strategy will buy the first 9 licenses for $100 each, the next 40 for $80 each and the final 11 for $70 each. The total cost in this case would be $4,870.
Package pricing is not too dissimilar from tiered pricing, but in this case a company offers a set number or ‘package’ of licences it is willing to sell in one transaction, as explained in our blog Volume Discount Pricing: The Formulas to Calculate the Best Deals for your Business and Buyers.
The benefits of the tiered model
You may have noticed one crucial difference in the outcome of these two pricing strategy examples. For the same number of units purchased, the business using the tiered pricing model made a greater profit than the company employing the volume pricing model.
Volume vs. tiered is a debate that rumbles on, but surely tiered is demonstrably more lucrative? The simple answer: only if it’s a pricing strategy that works for your customer base. With tiered pricing, you are offering different price rungs for your product which a likely to be more appealing to a customer looking to buy large quantities in the first place.
While volume pricing may entice a customer to increase their units purchased because of the promise of a reduced cost for all units, tiered pricing is often best employed with a captive market who see your product as a necessity - and the price reduction as the unit tiers go up as a great deal.
Tiered pricing also has the major advantage over volume pricing in terms of there never being drop-down points in your profits. Take a look at this example:
|Unit quantity||Price per unit|
If we were to plot the total takings of a company using the pricing structure above and employing the volume pricing strategy it would look like this:
As you can see, where a customer buys a number of units where the threshold has considerably dropped the cost for all units (most significantly, here, at 10 units and 20 units) there are drop-down points in profits. With this pricing model, you run the risk of selling more units but actually taking in less revenue. For example, as demonstrated on the graph, it’s possible to purchase 22 units for a lower cost than 19 units.
Using the tiered pricing model, conversely, would have no drop-downs and therefore the security of increased profit per unit sold:
The most significant drawback when using a tiered pricing model, however, is the difficulty of explaining the pricing structure to customers. The pricing logic is far less user-friendly than that of volume pricing and, often, the price not as appealing as the sort of totals that volume pricing produces. But if your product is in demand and your customers are keen, it’s a great way to incentivize your customer while reaping the financial rewards.
Think tiered pricing could work for your business?
All companies benefit from promoting quantity sales; it’s all about working out what works best for your product and customer base. Discover what sort of pricing structure is optimized for your product with Paddle’s handy pricing strategy guide.
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