Last editedMar 20222 min read
Pricing is one of the trickiest things for a business to get right. Price too high and you risk putting people off, but price too low, and you won’t achieve your desired profit levels. Tiered pricing can help to hit each potential customer’s perfect price.
Tiered pricing is a strategy used by businesses whereby they present customers with multiple service or product options along with corresponding pricing levels. Merchants use tiered pricing to tailor the price of their items to specific markets by offering a wider range of price points.
In this post, we’ll look at the pros and cons of tiered pricing and the difference between tiered pricing vs volume pricing. Let’s get to grips with tiered pricing using an example.
Tiered pricing examples
An example of tiered pricing could be:
Price for buying one item - £200
Price for buying two to four items - £170 per item
Price for buying 5-9 items - £150 per item
Price for buying 10-19 items - £130 per item
Price for buying 20+ units - £110 per item
As the tiers (demand for the items) go up, a greater discount is applied within each subsequent tier. This gives customers an incentive to buy more items to achieve a bigger discount.
Tiered pricing vs volume pricing
There’s sometimes confusion between these two pricing strategies, because both are based on a quantity discount. The chief difference is around unit thresholds, since these mean customers receive a different overall discount.
With tiered pricing, a minimum order quantity is set before moving on to the next tier. The product or service is priced for a range or segment, and the price then decreases once a threshold is met within a tier.
Using the example we put forward earlier, when a customer purchases a quantity of units in the third tier for 5-9 units, the first unit would cost the standard price of £200, the next 2-4 units would be charged at a discounted rate of £170, and any units purchased in the 5–9 unit range would be discounted to £150.
With volume pricing, a business is simply selling items in bulk. The same discount is applied to all units - and the greater the demand, the greater the discount on each unit in a set price range.
Using a tiered pricing strategy
When a customer buys 6 items using the initial tiered pricing model they would pay a total amounting to the following:
£200 + (3 x £170) + (2 x £150) = £1010
Using a volume pricing strategy
When a customer buys 6 items at the discounted rate of £150, sales would total out at 6 x 150 = £900.
Therefore, using a tiered pricing structure, the seller makes a bigger profit.
The pros and cons of tiered pricing
There are many benefits of tiered pricing. Tiered pricing helps companies reach out to a wider audience, by providing a different offer for companies of different sizes and budgets. Since the tiered pricing model is able to meet a wider range of demands conversion rates are likely to increase, too. Companies with a tiered pricing strategy are also in a better position to upsell to customers, with the potential to create customised solutions to personalise the customer experience.
The cons of tiered pricing include having to price items or services in the dark. Businesses have to wait and see how each of the tiered pricing levels perform, and it can take a few attempts to find out what customers are willing to pay. This experimentation can detract from the bottom line at first, but should improve results overall.
Tiered pricing can also give some customers a headache when it comes to deciding which tier they want. It’s important to set out tiers clearly so as not to confuse them.
The bottom line
Customers with a high demand for a product or service can benefit from quantity discounts, while tiered pricing offers businesses a way to encourage customers to boost their orders. Tiered pricing offers sellers a way to receive more profit than with a volume pricing model, since fewer units are offered at a discounted rate in whichever tier is chosen.
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