Tiered pricing explained: How to grow your revenue
Tiered pricing is a common strategy that helps merchants maximize revenue and grow their customer base. With different levels of value and service at various price points, businesses can cater to a range of needs, from budget-conscious buyers to premium clients. This flexibility not only increases conversions but also creates natural upgrade paths as customers' needs evolve.
According to Wharton Professor John Zhang, tiered pricing is “a lesson for everybody in every industry.” That said, tiered pricing comes with its own headaches, especially when you're trying to figure out the perfect structure. If your lower tier is too attractive that nobody wants to pay higher prices, then you will lose your sales and dissatisfy your customers.
In this article, we will walk you through all the things you need to know about tiered pricing: From what strategies work best, real-life stores that are implementing, to best practices for maximizing profits with tiered pricing.
Definition: What is tiered pricing?
Tiered pricing, also known as price tiering or differentiated pricing, is a pricing strategy that merchants and businesses use to divide their offerings into different levels or price ranges based on the quantity or features the customer selects.
Think of tiered pricing like a value ladder. Each step up offers customers more for their money. For example, a bulk supplier might price pencils at $2 each for the first 50 units, $1.50 each for 51-100 units, and $1 each for orders over 100. Meanwhile, a software company could offer a Basic package with standard features at the entry level, then a Premium package with advanced capabilities at a higher price point.
The difference between tiered pricing and tiered discounts
Tiered pricing | Tiered discounts | |
|---|---|---|
Focus | Offer different features, quantities, and usage limits with corresponding price levels. | Encourage purchase volumes by applying a lower cost per unit to higher quantity brackets. |
Structure | Each tier has a set price and includes a specific, distinct bundle of features. | The price or discount only applies to the units within that specific tier's range. |
Customers are charged based on which tier their purchase volume falls into. | ||
Example | Three-value structure: Basic, Standard, Premium |
If a customer buys 150 units, the price will be: (100 units×$10) + (50 units × $8) = Total cost. |
If a customer buys 150 units, the price will be: 150 units x 8$ = Total cost |
Tiered pricing vs variations: Real-world examples
Flat-rate pricing
Flat-rate pricing charges only a single price for a product or service. This model is straightforward to understand: Once your customers pay, they own it forever. A typical example would be buying a shirt for $30, purchasing a piece of furniture for $500, or paying a one-time fee of $199 for lifetime access to a software.
However, flat-rate pricing limits your revenue potential. Some customers would happily pay for that price, but some may not.
Volume discount strategy
Feature-based strategy
Another tiered pricing strategy is feature-based tiering, where customers choose from different packages at varying price points. Each higher tier includes all features from lower tiers plus additional functionality, creating a clear upgrade path for customers if their needs grow.
Feature-based tiered pricing is extremely popular with businesses that sell recurring services, such as Software-as-a-Service (SaaS). You will see this strategy following the three-tier structure:
Basic tier: The simplest package, usually the cheapest or free, includes some basic features for customers. Some businesses even offer this tier as a free trial so customers can try out the product before committing to a paid plan.
Standard tier: A large portion of customers will fall into this tier, as it provides a good balance between features and price. This package includes all the essentials, plus some advanced features with limited usage.
Premium tier: The most expensive package, offered to big enterprises that know what they want and how they will benefit from all the advanced features. In some cases, these clients will have special needs that require customization, which results in higher profit.
Subscription-based pricing
Usage-based pricing
Also known as Pay-as-you-go pricing. This strategy charges customers based on how often they use a product or service. If they use it more, they pay more, and vice versa.
For example, Black & White Coffee Roasters prices their package based on how many bags of coffee their customers consume. They can choose between one and two bags, and even get a year-round subscription. This way, someone who drinks coffee occasionally pays less for just one bag, while a household of coffee lovers can get two bags without overpaying for what they don't need.
The benefits: How tiered pricing can help your business
Tiered pricing is a smart way to welcome more customers through your door. Instead of offering just one option, you give everyone a choice. Furthermore, having multiple options also helps you increase your revenue by encouraging customers to upgrade their selections to higher tiers.
Here are the benefits of tiered pricing that can make a real difference for your business:
Increase conversion rate: Pricing in tiers offers potential buyers choices, where they feel like they can choose the package that is right for them instead of being forced into one, reducing the risk of sales abandonment.
Reach a broader customer segment: Tiered pricing offers many price levels, which helps your business appeal to different customer segments, meaning more sales and a bigger customer base overall.
Improve bottom line: Customers often start with a basic plan and then upgrade as their needs grow, so your business doesn't need to find new customers. And here's the cool part: Higher tiers with better perceived value also encourage your customers to upgrade their choices.
Control demand and supply: With differentiated pricing, you can make your premium tier more attractive to limit how many customers pile into the basic option. Or if you have extra capacity, you can highlight your entry-level tier to bring in more people.
Provide customer insights: Tiered pricing gives you a clear picture of your customer preferences. You can track which tiers are most popular and adjust your price and offerings accordingly.
Disadvantage: Avoiding the tiered pricing potential pitfall
There are some drawbacks you need to know before implementing tiered pricing to your stores:
Customer frustration: Too many pricing tiers can make your customers feel overwhelmed. As a result, they will get analysis paralysis. When people can't figure out which is right for them, they often just give up and buy nothing at all
Poorly-designed tiered value: The difference in value might not justify the higher price you charge your customers, leading to reduced sales and dissatisfaction.
Sense of exclusion: Your price tierings might miss out on essential content that was locked behind higher-priced packages. When basic users can't even access important tools they need, they will feel like they're being mistreated
Limited flexibility: If customers become too familiar with your pricing structure, it will become harder to adjust the current package. If you still decide to do that, you risk upsetting your customer base.
Complex management: With tiered pricing, you're constantly tracking what's included in each tier, who has access to what, and managing different billing schedules. All that extra work can pile up and strain administrative resources.
What to consider before setting your pricing tiers
Not every industry is ideal for applying a tiered pricing strategy. For a tiered pricing to be successful, you and your store have to meet these conditions:
Be a price maker: You have to be the price maker, not the price taker. In some industries, all businesses are price takers, like commodity markets. In that case, it is impossible because no one has the power to charge different amounts for different levels.
Identify segments and needs: You need to be able to define the different customer groups, what they are willing to pay, and how price-sensitive they are. Understanding these different customer types helps you create tiers that make sense.
Prevent ability to resell: Customers in lower tiers can not resell the offers to ones in a higher-priced segment. That said, you should clearly articulate the unique value proposition for each tier so that each level has distinct benefits that can't easily be transferred or shared.
Understand your cost breakdown: Remember to determine what it takes to produce and deliver the value of each offer. The price of your lowest tier must, at a minimum, cover all associated costs and contribute to a profit margin.
Best practices for maximizing profits with tiered pricing
Understand your customers
The first step before you come up with any strategies is to understand your target market. Look at your current customers and see if you can spot patterns: Talk to them, read their feedback, and figure out what matters most to them.
The better you know your customers, the easier it becomes to create tiers that actually appeal to different groups instead of just guessing what might work.
Shopify has different plans for a range of merchants from start-out entrepreneurs to complex enterprises
Decide on pricing tiers
After defining the segments you want to target, you need to think about your winning pricing structure.
Start by mapping out what features or benefits matter most to each customer segment, then build your tiers around those needs. You can get creative and strategic when designing your tiered pricing structure. Just remember to pay attention to external factors such as competitors’ pricing, covering costs, and customers' expectations.
Highlight your unique value
It’s important that your customers can understand what they will receive with the money they have to spend.
Make it crystal clear what makes each tier different and why someone might want to upgrade. Use simple comparison charts, highlight the most popular tier, and be upfront about what's included and what's not. Don't just list features, explain the actual benefits and results they'll get from each tier. When customers can easily see the value they're getting at each price point, they feel confident in their choice and are more likely to buy.
Test and optimize with numbers
Setting up is just the start, keeping it running is where the work really begins.
Once your tiers are live, pay close attention to the data. Track different metrics such as average order value (AOV), customer lifetime value (CLV), and conversion rate (CVR). Those numbers will tell you what's working and what's not. So, keep tweaking and improving based on what you discover. Pricing isn't a "set it and forget it" thing, it's an ongoing process of adjustment and refinement.
Conclusion
By offering different tiered pricing that fits various budget types and needs, you're opening your doors to a wider audience while creating natural paths for people to spend more as they grow.
However, price tiering isn’t magic. It takes careful planning, a deep understanding of your customers, and ongoing improvement to get it right. You need to make sure each tier offers clear value, avoid overwhelming people with too many options, and keep an eye on the numbers to see what's actually working.
With the right approach, tiered pricing can help you grow your customer base, boost revenue, and build a pricing structure that works for everyone.
FAQs
Harry Nguyen
Digital Marketing Specialist at Qikify
Hi, I’m Harry, your friendly neighborhood marketer at Qikify. I am all about providing E-commerce merchants like you with the best insights and industry tips to help you grow your online stores and drive more sales.
Out of office, I like working out at a gym and learning about all things E-commerce and Marketing.
Feel free to reach out to me on LinkedIn. I’m always up for a coffee chat with other marketing folks and store owners to exchange ideas and explore potential collaborations.
TABLE OF CONTENT
- Definition: What is tiered pricing?
- The difference between tiered pricing and tiered discounts
- Tiered pricing vs variations: Real-world examples
- The benefits: How tiered pricing can help your business
- Disadvantage: Avoiding the tiered pricing potential pitfall
- What to consider before setting your pricing tiers
- Best practices for maximizing profits with tiered pricing
- Conclusion
- FAQs
