This article is the fourth in our pricing strategy series and it examines base and overage pricing—also referred to as tiered and overage pricing. It also touches on recurring add-on price plan components, which enable your customers to customize their core plans to add additional value.
Examples of base and overage pricing
In the offline world, this type of pricing is most commonly seen in car leases or rentals where there's 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.
Online, base+overage is the pricing strategy of choice for communications and data storage companies. And depending on how these companies set up their pricing, it can be very confusing for the consumer.
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.
- When you want to create a 'teaser' package—often with relatively low included usage—the usage charges encourage an upgrade.
- When there's 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.
Base and overage best practices
If you are thinking about using base and 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 no one’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.
- Let your customers know when they're getting close to their limit.
While this may not be feasible in every case, attempt to do this whenever possible. 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.
This 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 than your overage fees, especially if you bump them automatically.
Recurring add-on price plan components
Add-ons are recurring components your customers can purchase in addition to their base plan. Popular examples of add-ons are premium support packages or additional features. For example, a phone company might offer voicemail as an add-on component for an additional $7 per month.
Value is extremely important to subscription customers. If they're going to be paying for something every month they need to be able to recognize the value immediately. Hand-in-hand with value is choice. Subscription customers don’t want to pay for services they don’t need or want. Offering add-ons gives your customers the ability to customize your service to their needs.
Many subscription businesses take this idea of customization to a level beyond just offering a particular feature as an add-on. For example, not only might a customer have the option to add a messaging feature to their phone core plan, but she can also choose how much of that feature she wants, paying only for the amount of the feature she needs.
Customers can pick and choose the add-ons they want (there’s usually no limit) and the cost of each is added to the cost of their core plan and charged on a recurring basis. A dynamic recurring billing system will let you easily create and offer as many add-ons as you want.
Add-ons are a great way to upsell your product or service. They can also help strengthen relationships with your customers—those who don’t need them will appreciate that they don’t have to have them and can pay less, and those who do need them will like that they have choices and again, are only paying for what they want/need.
Be it real or perceived, value is important to customers and can be a big factor in how they view you and your business.
Remember, happy customers are long term customers and effective communication can go a long way, especially if base and overage is your pricing strategy of choice, and if you're offering add-ons as a price plan component.
To read more from our pricing strategies series, check out: