The fourth in our pricing strategy series, this post examines base and overage pricing, also referred to as tiered and overage pricing.
Examples of Base and Overage Pricing
In the offline world, this type of pricing is most common in car leases or rentals where there is a base to a certain mileage and then a price per extra mile.
For example, the base price of the car rental is $25 a day with 100 free miles, then 35 cents per each additional mile.
Your total cost varies depending on how many miles over the mileage allowance you exceed.
In this example, the base price for 250mb of data is $14.99. But if you look in the small print, you see there is an overage charge for exceeding 2GB in a billing cycle. What this example doesn’t say is what that overage fee is.
Online fax is another example of a business that used to model this pricing strategy. The difference between this image and the one above is that the overage fee is clearly stated.
Despite the potential this pricing strategy has to create some customer confusion, there are several situations where it's use is advantageous. For example:
- When you want to create a 'teaser' package, often with relatively low included usage, the usage charges encourage an upgrade.
- When there is a true incremental usage cost, and flat rate or unlimited plans create the opportunity for customers to become unprofitable.
- When you want to establish a minimum spend with customers: for example, clients negotiate a lower rate based on a committed level of volumes – then the 'base rate' includes the commitment and the usage is as negotiated.
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Base and Overage Best Practices
If you are thinking about using base+overage pricing for your business, there are some best practices to keep in mind.
- Let customers know upfront what the overage prices are. Spending the day after your billing period on the phone with angry customers is noone’s idea of a good time. And with social media making it extremely easy for people to voice their complaints about a large network, it just isn’t worth the hit to your brand.
- While it’s probably not feasible in every case, where it is, let your customers know when they are getting close to their limit. You can send automated emails or texts or if you have a customer portal, include a meter that shows their usage.
- Offering a tiered usage pricing system is effective for bumping customers up to the next level, especially if they get charged for going over their limit. However, make sure the price of the next tier isn’t more that then your overage fees, especially if you bump them automatically.
Remember, happy customers are long term customers and effective communication can go a long way, especially if base + overage is your pricing strategy of choice.
To read more on our pricing strategies series, check out: