This is part of a series of blogs on pricing strategies.
Should your business use a tiered or volume pricing strategy?
It's a really common pricing model in the SaaS and subscription-based business world. With this strategy, a company offers different tiers of price packages or plans 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’re wondering: what is the difference between tiered and volume pricing?
Pay per userNumber of users is a popular volume measurement for a tiered pricing model—especially when it comes to corporate or enterprise licensed software.
As you can see in this multi tiered pricing model example, there are three options.
- A free package for a single user
- A $34.99 package for 2 users
- A $64.99 package for 3 users
Pay per feature
The number of features available in a software can also be a volume metric for price tiering.
As you can see in this example, the main benefit of offering tiered pricing is you can accommodate different customer prospects, all of whom have different needs and are interested in your product.
You’ll often see three tiers because it creates a frame of reference for the pricing. The goal is usually to optimize your pricing and business plan for the middle tier. The edges are included to capture prospects slightly deviated from your target market, while making the mid-tier pricing plan appear like an option that can't be passed up.
For example, when customers only see a single price point, they might not know what to make of it—is it a good price for the value of the service?
People relate to an offer in relation to other offers. Therefore, it's best to have your prospects selecting between options you give them rather than have them shop your offers against your competitors. Prospects faced with a single option often won't make any choice at all. But when it's bracketed by two other pricing tiers, the purchase conversion rate goes up.
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Pay per unit
A pay per unit tiered pricing strategy uses a usage based pricing model. The price your customers pay will increase based on the volume of their usage of any number of measurable units.
In the world of email marketing, for example, the tiers of a volume pricing strategy might be based on the number of unique email addresses a customer has in their database.
Per unit pricing tiers are also often used in the internet of things (IoT) space. For example, customers might fall into a certain pricing tier based on the amount of data they use, content they stream, or gigabytes of storage they require.
How is tier and volume pricing beneficial for subscription-based businesses?
There are two other things that make the tier and volume pricing strategy attractive to subscription businesses.
- Upsells take care of themselves: Most contracts include the caveat that if your customer goes over their selected tier, they’re bumped up to the next tier automatically. This means the upsell takes care of itself, which ultimately reduces the workload for your sales and/or customer success team.
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. But when properly managed, this price tier uplift strategy is a great way to grow your revenue.
- Perceived value works in your favor: Perceived value is an intrinsic part of human nature. Many customers will buy the tier higher than the one they actually need because it’s perceived to be a better deal. This encourages higher monthly recurring revenue for your subscription business.
Is a multi tier volume pricing strategy right for your SaaS business?
If you use—or are thinking of implementing—a tiered and volume based pricing strategy for your SaaS business, it’s very important 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. Once you hit 501 contacts, you’re automatically moved up to the next pricing tier. The price goes up but often so does the perceived value. That’s key here.
You have to demonstrate some additional value in the higher pricing tiers if you want to keep your customers satisfied.
Of course, depending on the tiers or plans your business creates, the revenue recognition for these will be defined by their parameters.
While it’s extremely important to maintain accurate revenue recognition for your subscription-based business, this process can get complicated—especially if your customers are migrating between pricing tiers mid billing period.
However, the right billing automation solution will take care of the complexity of recognizing the revenue for your business.
To learn more, read this Revenue Recognition datasheet for more information.
To read more on our pricing strategies series, check out: