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Tiered Pricing, Explained

Finding the sweet spot with tiered pricing

If you’re struggling to bring in new customers, the issue may have nothing to do with your products. Product pricing can play a large role, and can deter what would otherwise be high-value customers. When this happens, it’s harder to close sales and you potentially leave openings for the competition to swoop in.

Tiered pricing allows you to create appeal outside of your core audience while giving you several advantages to position yourself advantageously. Let’s explore tiered-based pricing to give you a feel for how it may work for your company and potential buyers.

What is tiered pricing?

It’s all about different strokes for different folks.

Tier-based pricing establishes various layers to your products to give customers more choices. It’s helpful to create buyer personas for these tiers based on their needs and characteristics in order to create the most effective product packages and pricing.

Here are general buyer tendencies, needs, and concerns in a three-tier structure:

Low end

These buyers tend to be cost-conscious; minimalists in terms of product needs; unsure of their true needs, or all of the above. Some low-end customers may also come from other tiers that decided to scale back on costs or functionality needs.

Standard

Calling these customers “standard” may be downplaying their importance. They’re your core audience – people that want and use your products as they were intended. You may also gain these customers from low-end upsells or high-end down-sells.

High end

These buyers want a superior experience in terms of functionality, user experience, convenience, support, or all of the above.

The number of tiers is truly up to you, just don’t go too crazy. Too many layers could lead to your model tipping over on itself as complexity tends to create more confusion than clarity.

Who uses tiered-based pricing?

We live in a world of tiered-based consumerism. And that’s a good thing – who doesn’t like choices, after all? Do you like to board flights before everyone else? Are you a tall, grande, or venti at Starbucks? Single or two-ply toilet paper? In business to consumer (B2C), electronics manufacturers offer cell phones or televisions built with different levels of features and component quality. An automobile manufacturer rolls out different models to let consumers pick the best fit. The list goes on.

For manufacturing or wholesale companies, tiered pricing establishes discounts based on order ranges.

For example, A low-end tier may offer a good discount for up to five widgets. Next, the standard tier would offer a better discount for widgets six through 10. Finally, units 10 through 15 would see the greatest discounts.

(Note: Tier-based differs from volume-based discounts. With volume-based pricing, all units 1-15 would receive the same discount percentage based.)

Whether you’re a B2B or B2C company, it’s important to remember that tier-based pricing isn’t always about the units sold or what’s under the hood. Many times, the line between tiers are the levels of service, warranties, and support coming with the product.

You don’t need to limit a tier’s functionality necessarily. But perks, quality-of-life upgrades, and white-glove service may be the only additions needed to justify a top tier. This can be a highly profitable strategy if it works, as these are often less cost to the business as having to shell out resources for better component quality, etc.

The benefits of tier pricing

Offering Door A, Door B, and Door C doesn’t just create value for customers – it brings several advantages for your business. From a sales perspective, the most obvious benefit is appealing to a wider spectrum of buyers. Also, if you create valuable offerings to customers at all levels, you’re leaving less room for competitors and niche disruptors to elbow into the market.

If you look closer at each tier, you’ll find unique growth opportunities at every level. Here are some of the highlights:

Low end

Though you’re charging less for low-end customers, you introduce new customers to your brand and open them to your ecosystem. As a less expensive option, you may also find that you have less need to hold sales and promotions – which diminish profits on higher-quality products.

Many of these buyers are good candidates for upselling to other tiers as their needs grow or their income levels change. However, stripping too much away from these customers may not only lead churn – the unsatisfied customers could hurt your brand reputation. The key is to provide a solid, if limited, experience to urge customers to the next tier.

Standard

Not too hot or too cold, the bulk of your customers should fit here. Many businesses don’t create tiered pricing to add customers to low or even high tiers – they use the other tiers to boost customers at this level. There’s a little bit of a mind game going on with tiered pricing.

A well-crafted model shows clear value at each tier, making it easy for low-end customers to see clear value of going up a level. At the high end, many businesses use pricing that makes buyers happy to “save money” by going with the cheaper standard option.

By simply offering choices – rather than a yes/no scenario with a single product – you gain the advantage of letting people talk themselves into a sale. And if they happen to spring for the high-end option, all the better!

High end

At the high end, many businesses focus on quality-of-life and peace-of-mind improvements.

Sure, there may be a fancier version to your product that fits here, but if you look beyond upgrading features (which likely increases costs) you can attract people with extended warranties, dedicated customer support, or other “low cost” enhancements too. For SaaS companies, this may be deeper data insights, while for a clothing company it may be a lifetime guarantee.

Tier pricing considerations

When creating tier-based pricing, it’s important to balance functionality with your costs and upsell opportunities. Consider:

  • Cost of materials and overhead
    Knowing your cost of operations and overall expenses may keep you from overextending yourself as you divvy up the offerings at each tier. You don’t want to give the cow away for free, but you also need to provide an experience that leads to happy customers.
  • Customer needs
    Clearly identify personas for each tier so you know what people do and don’t need. This will and make sure you provide value regardless of their subscribership.
  • Upsell opportunities
    Each tier should naturally progress to the next. Understanding the technological, functionality, and use cases of your tiers will help you know when and how to upsell users as their needs change over time.

Putting all of these variables together into tier-based pricing that makes sense for you and your customers takes research, data, and planning.

Building a pricing model

If you’re curious about how to model the impact of different pricing tier structures, Causal can help. Causal lets you build completely custom financial models, which you can use to understand how decisions like pricing strategy affect your bottom-line metrics.

It's free to get started, and you can quickly build models that you and your team can collaborate on, to help understand what sort of pricing structure is going to drive the most profit for your business.

Get started for free:

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