Last editedApr 20233 min read
Choosing the right pricing strategy can be tricky. You need to charge enough to maximize revenue, while keeping prices attractive for potential customers. Could a tiered pricing model be right for you? With this type of strategy, you provide products and services in a tiered system of different price points and packages. What is tiered pricing and how does it work? In this guide, we’ll cover the potential benefits of tiered pricing and give some tips to help you get started.
What does tiered pricing mean?
The tiered pricing method involves grouping products or services into a series of product plans. Each offers its own benefits or features at different price points. For SaaS business pricing, a common strategy is to offer a choice of Basic, Advanced, and Enterprise plans. At the basic level, the plan’s features are more limited. Advanced adds in some customer service and usage features, while Enterprise packages provide full access to the company’s services.
Although frequently used by SaaS businesses, tiered pricing applies to any company selling services, licenses, or products. Each tier attracts a different customer base, allowing the business to broaden its reach. It also facilitates easier upselling to the next plan or “tier” as brand loyalty grows.
Tiered pricing examples and strategies
There are several tiered pricing models to choose from. The most familiar is a basic SaaS pricing strategy. As a business grows from small to medium, it would jump up to the next price tier to access more services.
Here are a few additional tiered pricing examples:
Feature-based tiered pricing allows customers to pick and choose from a selection of services. For example, Microsoft 365 and Microsoft Office provide different features within a tiered pricing framework.
Usage-based tiered pricing models are commonly seen with telecommunications providers. You choose a broadband or phone package based on your data needs and expected usage. Any usage over the data limit is charged accordingly.
Preferred options tiered pricing is a strategy that highlights a recommended option for customers. This is best for companies that want to target a specific type of customer. One example is the Xbox Game Pass subscription service, which offers a “best value” preferred option for frequent gamers.
What are the benefits of tiered pricing?
No matter the strategy you choose, there are clear benefits of tiered pricing.
Fine-tune your services with tailored packages for each customer and demographic
Appeal to a broader audience with different price points and services
Take advantage of upselling opportunities as customers upgrade their packages over time
Increase conversion rates with highly focused marketing and outreach specific to each tier
Gives you the freedom to offer free trials to prospective customers or try a pay what you want model
Provide a better customer experience with more flexibility and choice
Challenges of the tiered pricing model
As with any pricing model, there are challenges to overcome with a tiered strategy.
Too many tiers can confuse new customers who are unfamiliar with a company’s products
If a user picks the wrong plan or package, they are more likely to cancel the subscription
Without keeping buyer personas in mind for each tier, businesses will have high churn rates
Starting with overly high pricing using price skimming can be a turn-off
How to successfully use a tiered pricing model
To reap the benefits of tiered pricing while avoiding its pitfalls, it’s important to approach this type of strategy with preliminary research. This starts with knowing your customer base, their needs, and their motivations. With appropriate market research, you’ll be better placed to provide value to customers by matching them with the right product plan and price point.
Clearly spell out a breakdown of each package on your pricing page. This should show prospective customers exactly what they’ll receive for their money at each level of service. It’s best to aim for three to five tiers to avoid confusion. You should also avoid tactics like predatory pricing that can be considered unethical and be aware of the rules behind transfer pricing.
Finally, don’t forget the importance of a convenient payment process when setting up customer plans. GoCardless is ideal for collecting recurring payments using bank-to-bank methods. Rather than costly card payments, we use ACH direct debit and open banking to pull payments directly from your customers’ bank account on the day they’re due. Our Success+ tool uses automated intelligence to prevent failed payments and reduce involuntary churn. Automate the process whether you’re collecting one-off invoice payments or recurring subscriptions, ensuring a better customer experience at every tier.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.