Tiered or volume pricing is a very common pricing model in the SaaS and a subscription-based world. Basically, a company offers different price packages where volume is the key differentiator. What constitutes volume varies of course. Let's take a look at few examples.Refer to this article, if you are wondering what is the difference between tiered and volume pricing.
In the world of email marketing, for example, tiered or volume pricing is based on the number of unique email addresses you have in your database.
Pay Per UserNumber of users is an another popular volume measurement, especially when it comes to corporate or enterprise licensed software.
As you can see in this example there is a free price for 1 user, a $34.99 for 2 users and $64.99 for 3 users.
Pay Per Feature
A number of features can also be a volume metric.
As you can see in these examples, the main benefit of offering tiered pricing is that you can accommodate different prospects who are interested in your product to varying degrees.
You’ll often see three tiers because it creates a frame of reference for the pricing. The goal is usually to sell the middle tier and the edges are included to make the pricing seem reasonable.
For example, when you see only a single price point, you might don't know what to make of it – is it a good price for the value of the service? - and don't make a decision. When it is bracketed by two other prices, the purchase conversion goes up.
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How is Tier and Volume Pricing Beneficial for a Subscription-Based Businesses?
There are two other things that make tier and volume pricing strategy attractive to subscription businesses.
- Most contracts include the caveat that if your customer goes over the tier they are in, they are bumped up automatically. Which means the upsell takes care of itself. Of course, it’s a good idea to let your customers know their next bill is going to be higher to avoid angry calls to your support lines.
- Perceived value is an intrinsic part of human nature. Many people will buy the tier higher than the one they actually need because it’s perceived to be a better deal.
If you using or are thinking of implementing a tiered and volume based pricing strategy, it’s very important that you do a market analysis where your goal is to adequately address each segment.
You’ll see much better results than if you just pull your prices out of the air.
In this example, you pay one price until you have 500 contacts and once you hit 501 you are in a different tier and the price goes up.
Of course, depending on the tiers or packages you create, the revenue recognition for these will be defined by their parameters. Billing automation will take care of the complexity of recognizing the revenue for each package. To learn more, read the Revenue Recognition datasheet for more information.