Tiered Pricing Vs. Volume Pricing: What Would Be The Best Strategy

TL;DR

• If you're torn between tiered pricing vs volume pricing, consider tiered pricing for its ability to cater to diverse customer needs through different service levels.
• Volume pricing might be your go-to for encouraging larger orders at discounted rates, especially if you're selling physical goods or digital assets in bulk.
• The key difference lies in how each model scales pricing: tiered pricing adjusts prices based on service tiers, while volume pricing reduces unit cost with larger orders.
• Your business's nature—whether it's more service-oriented or product-focused—will significantly influence your choice of pricing strategy.
• Effective pricing strategies are crucial for minimizing churn and maximizing satisfaction, requiring a careful balance that aligns with both your and your customers' goals.
• Togai's flexible solution can implement any pricing model swiftly, reducing launch time from months to days.

Choosing the right pricing strategy can make or break your business's success. It's like walking a tightrope, with each step determining whether you'll soar with profits or stumble into losses. Today, we'll delve into two intriguing contenders: tiered pricing and volume pricing. Let’s check out both strategies in detail.

An Introduction to Tiered Pricing Benefits & Limitations

In tiered pricing, services are grouped into tiers according to the features and services they offer. First-timers should begin with the basic tiers. If they find the product or services useful, they can go from one tier to the next, where advanced tiers are priced higher with more added features.

By offering monthly or annual subscriptions, customers are encouraged to build
long-term relationships with SaaS companies.

One of the best examples of tiered pricing implementation is HubSpot. The tiers are named Starter, Enterprise, and Professional. Each tier is accompanied by a list of features and ROI that potential customers will receive.

The benefits of tiered pricing

Many businesses prefer tiered pricing because :

• It is very flexible and allows users to scale when they have more requirements.
• It is affordable and appeals to various spending levels and customer needs.
• It gives customers a chance to try the product by lowering the commitment bar.
• It is universally understood by most users and service providers.

The drawbacks of tiered pricing

There are some disadvantages that hold back tiered pricing from delivering full results. The strategy may not always work for the following reasons:

• Not all customers know what they are buying and how the different tiers and their features work.
• People may feel overwhelmed with too many options and choose something that doesn’t work for them.
• Businesses must differentiate between tiers and decide where to limit the features and pricing. If not, it may not be profitable.

An Introduction to Volume Pricing: Benefits & Pitfalls

Volume pricing strategy is all about offering discounts for large orders. As per this concept, the larger the purchase, the higher the discount value. Volume pricing is selling large quantities of goods or services.

Shutterstock relies on volume-based pricing to sell its downloadable stock images. Bundle packages can be selected by the user according to how many images they want to download.

The pros of volume pricing:

• Simple, straightforward, and easily understandable for customers and service providers.
• Encourages large orders, allowing manufacturers to focus on quantity sales for lower prices per unit.

The pitfalls of volume pricing:

If you are considering volume pricing, you ought to also understand the challenges:

• You cannot totally rely on volume pricing as it will portray your brand as a discount brand and runs the risk of becoming the new standard for customers.
• Businesses that constantly offer discounts to sell might give the impression that they have low-quality products.
• Giving frequent discounts all the time also dents your revenue and your profits in the long run.

Now that we’ve seen the two different pricing strategies in detail, it's time to vet one against the other and see how they differ.

Tiered Pricing Vs. Volume Pricing: How They Differ

How is tiered pricing designed? As the name suggests, there are multiple tiers in tiered pricing. Your price for every unit falls within a certain range, and once that tier is complete, you move on to the next. Prices are discounted when customers purchase a certain number of units within a certain range. For example, when the customer purchases more units and moves to higher tiers, the discount also increases. Thereby the customer ends up paying less per unit.

How is volume pricing designed? In this strategy, each unit's price is within a fixed price range. Tiered pricing and volume pricing have similar ranges or levels of pricing. The biggest similarity between both cases is that they are designed to encourage larger orders. Here’s an example to understand how tiered and volume pricing differ from each other.

Let’s assume you are a business selling widgets. You can choose either a tiered or a volume pricing model to determine your prices.

So, if you used the tiered pricing model to sell 60 widgets, you can figure out your total.

[($20x10) + ($10x20) + ($5 x 30)] = $550

Once you complete the next tier, you can move onto the next. On the other hand, when you adopt volume pricing, your total will be ($5 x 60) per the total number of widgets purchased. This falls within the 31+ widgets price point.

Also Read: Unveiling the Power of Three-Tiered Pricing for SaaS Success

The difference between both pricing strategies is simple: In a tiered pricing model, your customer pays the same price per unit throughout the entire range of their purchase. In volume pricing, your customer pays the same price for every unit for their entire purchase.

What’s Best: Tiered or Volume Pricing?

The success of either pricing strategy depends mainly on the type of business. SaaS businesses prefer tiered pricing because it allows them to target various customers and provide additional benefits. It is also most suitable if you want to make new customers test your product before deciding whether they like it or not.

However, volume pricing is more apt for quantity purchases like digital products and commodities. It will work in your favor if you know how to handle discount prices and ensure future pricing increases are protected.

Wrapping Up

The primary objective in selecting the right pricing model is to minimize churn rates and maximize customer satisfaction. It is essential to strike a balance where your pricing strategy not only meets your business goals but also resonates with your customers, leading to mutually beneficial, enduring relationships.

Togai is here to help you implement any pricing model in a matter of hours. Curious? Explore our sandbox. Or schedule a demo with us today!