How to Use Tiered Pricing — Plus Examples and Template
If you’ve ever signed up for an app or website and had a choice between the basic, standard, or premium membership, you’re already familiar with tiered pricing. By giving your customer a convenient way to tailor your offerings to their needs, you can maximize your sales and revenue — but you need to have a solid strategy for it to be effective.
At Upscribe, we’ve worked with various clients to help them curate tailored packages to offer the best experience possible, and we know that strategies like tiered pricing can make a huge difference. In this article, we’ll run through what tiered pricing is, key examples, and how to use it for yourself. Let’s go!
What is tiered pricing?
Tiered pricing involves setting different levels of prices for your products or services. It’s therefore the opposite of flat pricing, where pricing is the exact same for all customers, and there are no variations in your offerings.
In the case of SaaS companies, higher-tier software packages may offer more features, support a larger number of users, or allow for more depth of use (e.g., storage space) than lower-tier packages.
Some common types of price tiers include:
- Free and paid plans
- Basic, standard, and advanced plans
- Business and personal plans
- Individual and family plans
However, you can also use tiered pricing for physical products. For instance, a phone manufacturer may sell three versions of their phone: the standard version, a more pared-down version, and a version with more sophisticated features. This is the case with the Google Pixel 7, Pixel 7 Pro, and Pixel 7a.
Tiered pricing examples
Since tiered pricing can manifest in different ways depending on a company’s offering and customers, it’s helpful to look at a few examples in action.
Shopify is one of the best-known ecommerce platforms in the world thanks to the ease with which you can set up an online store. Businesses don’t have to go through the hurdles of creating their own website or even stocking inventory.
To get started on the platform, you need to subscribe, and there are three tiers of subscription pricing: Basic, Shopify, and Advanced. As the tiers increase, users can benefit from lower credit card rates and access more sophisticated reports, inventory locations, and staff accounts.
Notice how the platform simply calls its standard tier “Shopify.” This incentivizes customers to think they should choose the middle tier to get the complete Shopify experience rather than the muted-down “basic” version, despite the price difference.
A second example is Freshdesk, a platform that carries out customer service over the cloud on behalf of other businesses.
Freshdesk has a more comprehensive tiered pricing model than Shopify, offering five different tiers with incrementally rising prices. It also has descriptions that suggest which types of user personas may be interested in different tiers — its free version (Sprout) is “for getting started,” while the most expensive package (Forest) is “made for enterprises.”
This allows businesses to select a tier before even reading about the features each package offers.
Tiered pricing vs volume pricing
Now you’ve started to get familiar with tiered pricing, it’s important to make a quick distinction between volume pricing, a different pricing strategy you may have come across. The two concepts may seem similar at first, but there’s a significant difference.
In volume pricing, a customer will always pay the same for every individual unit they purchase, and as they purchase more units, the cost per unit gets lower. For instance, a business may lower prices on an item if it’s bulk purchased.
As for tiered pricing, different prices may apply to different ranges. Using the same example as above, a company that wanted 101 users would pay $1008 — $10 multiplied by 100 for the first 100 users, then $8 for the 101th user.
Tiered pricing therefore works out more profitable for businesses when customers want a large number of units (which will generally be users in the case of SaaS companies).
Why is tiered pricing important?
As you can see, tiered pricing is pretty widespread, especially among SaaS companies — and there’s a good reason for that. Let’s look at three ways tiered pricing can benefit your business.
Ideal solution for upsale promotions
Tiered pricing options encourage customers to buy more from you so they can save money — the more they buy, the more value they’ll get relative to the cost per unit or user.
It’s a form of upselling and can help Shopify store owners become more profitable.
When you offer tiered pricing, different tiers can meet the needs of different types of customers or user personas. Not only those with different budgets but also those with different needs. Not everyone uses or requires the same features.
Tiers also offer a degree of flexibility for customers. They can periodically upgrade or downgrade depending on their needs or their performance as a company, without having to part ways with your services altogether. This helps you retain customers you might have otherwise lost.
Customers are more likely to upgrade
Using a tiered price system can encourage users to upgrade to higher tiers, if there are enough advantages that come with the costs. This is why it’s an excellent idea to include a basic or free tier, to help get customers on board first.
It’s crucial that every tier you offer is functional, even basic and free tiers. You still want to provide your users with an excellent experience, whether they’re testing the waters with a free plan, or opting for your most expensive service.
If you’re hiding certain features behind paywalls, you should ensure that you aren’t locking features that are needed to use a product or service effectively. This can come off as manipulative to some customers, which might dissuade them from upgrading.
A competitive advantage
Based on what we’ve said already, implementing a tiered pricing strategy might sound like common sense. But the reality is that it’s difficult to get tiered pricing right, and not all your competitors will be able to pull it off.
If you address your user personas and their needs successfully through your tiered packages and others in your market don’t, you’ll have a significant competitive advantage.
How to create tiered pricing
Now, we come to the most important section of all. How exactly can you create a tiered pricing model? We’ll run you through the process in four easy steps.
Step 1: Identify your target market
Tiered pricing is all about reaching different customers. You need to know exactly what those different groups of customers look like.
To design your tiers effectively, you need to understand your target market. This means crafting a buyer persona: A hypothetical portrayal of a customer based on factors such as:
- Daily habits
- Biggest problems
And whatever else you deem relevant. The number of buyer personas you have reflects how many tiers you need.
Step 2: Build your service packages
Now you know who you’re gearing your tiers toward and how many of them you need, you can build your packages.
Think carefully about the names you use here. Take a leaf out of Freshdesk’s book by giving customers clues about different levels — for instance, you might offer “Startup” and “Established” tiers for companies of different sizes.
Also, make sure the difference between the tiers is obvious by listing the features in a clear yet concise way. For instance, you may use a comparison table.
Step 3: Align pricing and value in each tier
When you’re offering multiple tiers with different prices, the jumps between the price levels need to make sense. In other words: If you’re charging double the price, you need to offer double the value.You could also consider other subscription pricing strategies, such as loyalty programs that incentivize your customers to stay subscribed. You could also use bundles, which provide customers with better value for money. Upscribe is a useful tool to explore these possibilities and improve your customer experience.
Step 4: Manage recurring and deferred revenue
Once you have your tiered pricing structure in place, it’s time to start thinking about how you’re going to manage it properly. Compliance can be slightly more difficult when you have multiple tiers, but it doesn’t have to be overly difficult. To make things easier, consider using automation to handle your billing for you.
Tiered pricing template
We’ve given a few examples of what tiered pricing may look like already, but now, it’s time to present our final gift: A template you can use to create our own tiers.
Tier 1 (Name)
- Features (should be the most basic)
- Lowest number of users (or other metric)
- Lowest cost
Tier 2 (Name)
- Features (should be more comprehensive)
- Higher number of users (or other metric)
- Higher cost
Tier 3 (Name)
- Features (should be the most advanced)
- Highest number of users (or other metric)
- Highest cost
You don’t have to stop at Tier 3 — you can also add additional tiers if you wish.
Tiers: Not a bad idea
We all have our upper price limits — the challenge of businesses is that two customers may be totally different in this department, so it’s tough to keep everyone happy. Offering tiered pricing is about as close as we can get to achieving this aim.
Ready to skyrocket the revenue of your online store? Upscribe is an invaluable tool for optimizing your subscriptions and boosting your conversions. Schedule a demo to find out more.