TL;DR
- You can enhance customer satisfaction and minimize churn by adopting a tiered pricing strategy, allowing for personalized plan selection.
- Explore four main tiered pricing models: volume, feature, subscription, and usage-based, to identify which best aligns with your business model.
- Implementing a three-tiered structure (Basic, Standard, Premium) is recommended for effectively addressing diverse customer needs.
- The tiered pricing method boosts sales by offering various price points, improving the perceived value of your product or service.
- Despite its advantages, be aware of the potential drawbacks, such as the complexity of managing multiple tiers and the risk of customer confusion.
- To successfully implement tiered pricing, focus on identifying your target audience, ensuring price alignment with product costs, and keeping your pricing model clear and flexible.
- Togai's solution significantly reduces pricing & billing system launch time, demonstrating a practical application of tiered pricing.
Tiered Pricing: What Is It All About?
SaaS products that offer a one-size-fits-all pricing strategy risk losing customers who need more tailored solutions. A better approach to pricing is to offer a tiered pricing method that caters to the diverse needs of customers. This allows customers to select a plan that matches their requirements, which ultimately reduces the likelihood of churn.
For instance, let's say a SaaS product offers three pricing tiers: Basic, Pro, and Premium. The Basic plan is designed for small businesses with limited needs, while the Pro plan caters to larger enterprises that require more advanced features. Finally, the Premium plan is ideal for organizations with complex requirements and high-level support. By offering such a pricing structure, customers can choose the plan that best suits their needs and budgets.
The tiered pricing model is most apt for businesses offering a variety of pricing plans or packages for their customers. The strategy involves scaling the price of a product based on different thresholds of a certain metric. It allows customers to choose from a variety of prices, where each one offers certain benefits, features, and services. The availability of varied prices encourages larger purchases and richly rewards customers who choose feature-rich products.
4 Common Tiered Pricing Models
When choosing a tiered pricing strategy, businesses are free to make each tier more attractive than the previous one by adding more features and improving the product’s quantity, quality, and usage factors. Amongst the several tiered pricing models available, the following four are some of the most commonly implemented models.
1. Volume-based model
In this tiered pricing model, the price per unit decreases as the quantity of the purchase increases. It is mostly preferred by businesses selling clothes, electronics, household items, groceries, etc.
2. Feature-based model
The feature-based model allows customers to get paid access to certain products or service features. It's based on the concept that customers are more likely to buy something if they can see the features and benefits they will get from it. Businesses often use this model to encourage customers to purchase premium-featured high-end products like electronics, software, etc. By offering a premium version of the product with more features, businesses can encourage customers to upgrade and get more value from their purchases.
3. Subscription-based model
Subscriptions are based on specific time periods. Hence, in this model, the price of every unit decreases as the subscription period increases. This model is mostly preferred by SaaS companies and streaming services.
4. Usage-based model
The usage-based model is convenient for web hosting businesses and companies offering cloud storage. As the name implies, this model is priced according to how much of the product or service the customer uses. More usage leads to higher units per price.
Tiered Pricing & Its Structure: An Analysis
Although businesses can choose to go with any number of tiers, most do not opt for more than three tiers because it is both pragmatic and sensible for everyone. Hence, it’s best to consider these three levels or packages when developing your pricing tiers:
1. Basic tier
The basic tier is just what it is: It offers only the basic features at an affordable price for most customers. The basic model encourages customers to try out your product or service and slowly upgrade to the next tier when they want more features. For a nominal price, your users understand your product features and benefits and convert from being one-time buyers to loyal customers.
2. Standard tier
In most cases, the standard tier combines the basic features along with some advanced features. By doing so, you can provide customers with a cost-effective product that holds more value. If you are looking for a result-oriented method to widen your customer base and boost your overall revenue, this tier is the one for you.
3. Premium tier
The Premium tier world is best for large enterprise customers who will use your product's features. Of course, this tier will be the most expensive as well. However, it is the perfect win-win solution that gives your customers maximum benefits and brings you the highest returns for every sold unit.
When opting for tiered pricing, it is essential to look at both sides of the coin and weigh your pros and cons before taking the plunge.
Benefits & Drawbacks of Tiered Pricing Strategy
The boons
- Allows businesses to offer the same product at various prices targeting different customer bases and boosting overall conversion rates.
- Improves the value perception of your product because the same product becomes available to all customers at varying prices.
- Varied price points in the tiered pricing method propel sales, as customers are more likely to buy the same product when they understand its value.
- Improves customer conversion and retention rates as satisfied customers are more likely to purchase the product when they like the deal.
- As customers move from one tier to another, your upselling opportunities increase.
- Ensures a flexible selling process by allowing customers to expand their usage and pick the needed tier.
- As you tailor your offerings (and prices) to specific audiences, you provide a better customer experience.
The banes
Despite many advantages, tiered pricing can take much work to implement and manage. With several tiers and several hundreds or thousands of customers in each tier, it can be quite taxing to track each tier and adjust the price accordingly.
Here are some issues that may go wrong when implementing tiered pricing without adequate groundwork and understanding of your target audience:
- Customers may feel overwhelmed and confused with too many tiers. Not all of them can choose what’s best for them, causing them to opt for other choices.
- Requires a lot of groundwork to identify and create tiers based on your target audience. If not, it can attract the wrong customers, causing the effort to backfire.
- If users pick the wrong tier, it may result in a high churn rate.
- Lack of proper strategy may result in poorly priced plans that will eventually cost you unnecessary expenses when you have to meet out the services or products for every tier.
If you feel that tiered pricing is the best option for your SaaS product, you should be ready for in-depth research to make it successful and sustainable. We leave you with some best practices for making the most out of the tiered pricing method.
Also Read: Tiered Pricing Vs. Volume Pricing: What Would Be The Best Strategy
9 Best Practices for Implementing Tiered Pricing
- Understand and identify the perfect target audience for your tiers.
- Ensure your tiered pricing aligns with your business goals.
- Ensure the price points align with your product costs.
- Choose the right structure for your pricing models.
- Ensure your prices cover your expenses.
- Consider your competitor’s pricing and your customer’s willingness to pay.
- Be very transparent and clear in communicating your tiered pricing models.
- Test your pricing tiers to assess the performance in the market.
- Keep pricing simple and flexible enough to benefit you and your customers.
Choose Tiered Pricing to Cover a Diverse Audience
When done well, tiered pricing can work wonders for your business. Many organizations have successfully mastered the art of implementing tiered pricing and have not gone back on their decision.
You should, however, study your business, products, services, competitors, and target audience to make this a winning strategy. And, with Togai by your side, you can easily implement a tiered pricing strategy 10x faster- and that means it can be done in less than a day’s time! Interested to know more? Schedule a free demo today.
