This is part of a series of blogs on pricing strategies.
Should we use tiered or volume pricing? It's a really common pricing model quandry 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, a tiered or volume pricing strategy is based on the number of unique email addresses you have in your database.
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Pay Per UserNumber of users is a popular volume measurement, especially when it comes to corporate or enterprise licensed software.
As you can see in this example there are three options. A free package for a single user, a $34.99 package for 2 users, and a $64.99 package for 3 users.
Pay Per Feature
The number of available 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, 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 and the edges are included to capture prospects slightly deviated from your target market, while make the mid-tier pricing appear like an option that can't be passed up.
For example, when you see only a single price point, you 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... It's best to have your prospects selecting between options you give them rather than have them shop your offers against your competitors. Often prospects faced with a single option won't make any choice at all. 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 their selected tier, they are bumped up to the next tier 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. But properly managed, this is a great way to grow your revenue.
- 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 use 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 . Once you hit 501 contacts you are automatically moved up to the next tier. The price goes up but often so does the perceived value. Thats key here. You have to demonstrate some additional value in the higher priced package if you want to keep your customers satisfied.
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.
To read more on our pricing strategies series, check out: