This is the first in a mini-series of articles on pricing strategies.
At Fusebill, we've found that many subscription businesses believe they have a complex pricing model—not because of anything inherent in the model itself, but because they find it difficult to track manually.
We hope that these articles will provide a better understanding of the different types of pricing within a metered price plan.
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What is tiered and volume pricing?
A good place to start is to answer the question, what is tiered pricing? This is important because most people think tiered pricing and volume pricing are the same, but they are very different.
Volume pricing: defines a price for ALL units within the range.
In the volume pricing model, there are still various ranges or levels of pricing as there are with tiered pricing. And in both cases, the general idea is to encourage larger orders. However, each unit in this pricing model is assigned the same pricing based on the volume level reached by the purchase.
Tiered pricing: defines a price PER unit within a range.
In this pricing model, there are often multiple tiers or ranges. When a customer purchases a certain number of units that fall within a specific range, pricing is discounted accordingly. And as the number of units purchased increases and moves into higher ranges, discounting increases and customers end up paying less per unit.
Still confused? The difference is simple. With a tiered pricing model, your customer pays the price per unit in every range their purchase rises through. But in a volume pricing model, your customer pays the same pricing per unit for their entire purchase.
It’s easier to see how it works using an example. Let’s say you have just sold 60 units.
This is in the range of 41+; all widgets will cost $5.5 each.
First 20 widgets cost $10 each
The following graph makes it even easier to visualize our example of 60 widgets purchased using a volume pricing model versus a tiered pricing model. As you can see, while these two models seem very similar at first, at around 20 widgets purchased it becomes a much better deal for the customer paying on a volume model.
Total cost = 60 x 5.5 = $330.00
Total cost = (20 x 10) + (10 x 8.5) + (10 x 7) + (20x 5.5) = $465
With tiered pricing, once you fill up a ‘tier’—in this case, the first 20 widgets—you move to the next tier and start charging a different price. The first 20 widgets will cost $10 each. Once you’ve sold all 20 from tier one, the next tier costs $8.5 each, the next tier $7, and so on.
Volume pricing, on the other hand, means that as soon as you hit a particular number, all units will cost the lower price. If someone only buys 20 widgets, each widget will cost $10; but once they get over 20 widgets, the price of all the widgets in their purchase drops to $9 each; then to $8.
See the difference? If you were using volume pricing strategy you would have made $330 for your 60 widgets, but if you were using a tiered pricing strategy you would have made $465, and this difference is based on the cost of each widget.
Which subscription pricing model is more strategic?
The other difference between tiered and volume is that a tiered pricing model increases the reach to your potential audience because you’re offering different pricing versions for your product. People will pay up to what they can afford. So lower price plans can draw customers who may eventually move to higher priced packages. Tiered pricing also allows for creative options such as grouping products by quality, quantity, service etc.
Refer to this article to discover the best practices that your subscription business should be considering in creating a SaaS billing strategy.
Are you having recurring billing and pricing challenges? Learn how adaptive subscription billing software can help you reduce errors and simplify your billing and invoicing with flexible catalog capabilities, real-time analytics, and automated subscription and customer management.
To read more on our pricing strategies series, check out:
- Freemium + Upsell
- Multiple Editions
- Pay As You Go
- Base + Overage
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