Tiered Pricing Method: What It Is, Types and Best Practices

Want To Learn About Tiered Pricing Methods?

Choosing the right pricing plan for your SaaS business can be complex and daunting. With several options available, each with pros and cons, it’s easy to feel overwhelmed. However, tiered pricing plans often excel at offering flexibility and scalability that can align with various customer segments.

At Boathouse, we specialize in helping SaaS businesses navigate these challenges. In this article, we’ll share our expertise on tiered pricing methods and best practices to implement them effectively.

But first…

What is a Tiered Pricing Method?

Tiered pricing is a strategic approach where businesses offer multiple pricing levels or packages, tailored to meet the varying needs of their customers. These tiers are typically based on factors like usage volume, feature availability, or service frequency.

A prime example of this is DocuSign, which uses tiered pricing to cater to both individual users and large enterprises, offering flexible options based on the specific needs of each group.

Let’s break down their pricing model:

• Personal Plan: $10 per month (billed annually) for basic eSignature capabilities, ideal for individuals seeking a straightforward, no-frills solution.
• Standard Plan: $25 per user per month (billed annually), designed for small businesses, including features like personalized branding and advanced integrations.
• Business Pro Plan: $40 per user per month (billed annually), perfect for businesses that need enhanced features like bulk sending and signer attachments.
• Enhanced Plans: Custom pricing for large organizations requiring advanced solutions such as API access, dedicated support, and more.

Each tier is carefully designed to deliver increasing value, making the service accessible to a wide range of customers while encouraging upgrades as their needs evolve.

Understanding the Different Types of Tiered Pricing Models

Tiered pricing typically falls into three categories: feature-based, volume-based, and subscription-based models. Each of these models serves a distinct purpose and targets various aspects of customer behavior.

1. Feature-Based Pricing Model

In a feature-based model, customers pay more to unlock advanced or premium features. For instance, users of online graphic design software may start with a basic plan that offers limited functionality. However, by opting for a higher-priced plan, they could gain access to exclusive tools like watermark removal, thereby fully owning their designs.

And even more with premium plans which might include other benefits such as unlimited templates, millions of royalty-free images and videos, and priority customer support. This model is especially effective for software companies offering tiered plans that cater to both entry-level users and professionals needing more robust tools.

2. Volume-Based Pricing Model

The volume-based model incentivizes customers to buy in bulk by offering discounts for larger purchases. For example, a business selling premium mockup designs at $10 per unit might reduce the price to $5 or $7 per unit for a customer purchasing 200 designs.

This model works well for businesses that sell physical products in bulk but can also be highly effective for SaaS companies. Offering discounts on software licenses for large teams can boost overall sales while providing cost savings for customers who commit to larger purchases.

3. Subscription-Based Pricing Model

The subscription-based model rewards customers who commit to longer-term plans with lower rates. This encourages users to subscribe for extended periods, often resulting in substantial savings compared to monthly plans.

Take Grammarly, for example; a monthly subscription costs $30, but users can save significantly by choosing the quarterly plan at $60 or the annual plan at $144. Those who opt for the annual plan effectively pay $12 per month, a significant discount compared to the $30 monthly option. This model is common across a variety of industries, from SaaS to media streaming services, where longer commitments often come with better value.

Benefits of Tiered Pricing

Tiered pricing promises a bunch of benefits for businesses willing to implement it. These include:

• Wider Reach: A business can reach a broader audience with the tiered pricing model, which helps to segment customers according to their purchasing power. Instead of attending to high-paying clients and customers alone, a business can incorporate every buyer with different price points into its audience.
• Increased Revenue: Reaching a wider audience translates to more sales and income for a business. Customers will also be more willing to purchase a good or service when they see various options and price points. It gives them the liberty of choice as they enjoy more worth for their money.
• Improved Customer Retention: A business is more likely to retain customers when it offers varied discounts according to the tiered pricing models. Knowing that a brand appreciates your patronage by offering discounts when you purchase more is a recipe for repeat deals.

Best Practices for Successfully Implementing a Tiered Pricing Model

A well-executed tiered pricing model can drive significant growth in both sales and revenue, positioning your business for long-term success. However, the key to unlocking this potential lies in thoughtful and strategic implementation. Here are five best practices to help you effectively deploy a tiered pricing strategy and maximize its benefits.

Understand Your Target Audience

Before implementing a tiered pricing model, it’s important to fully understand your audience. Consider their purchasing habits, spending power, and the frequency of their purchases.

For example, if you have a segment of customers consistently requesting lower prices, a tier that caters to their budget can help retain them. On the other hand, if you have loyal, repeat customers who gravitate toward premium features, you can incentivize them to opt for higher tiers by offering exclusive perks.

Account for All Costs

When setting up a tiered pricing model, it’s essential to account for the full scope of your costs. This includes not only the cost of producing your goods or services but also advertising expenses, employee salaries, and the ongoing maintenance of your IT infrastructure.

Carefully calculating these expenses will ensure that each pricing tier remains profitable. If you find that offering discounts at certain tiers would erode profits, it may be time to revisit your pricing structure and make adjustments without compromising your overall revenue goals.

Leverage Pricing Tables

For businesses in service-based industries, especially SaaS, embedding pricing tables on your website can be a game changer. These tables provide customers with a clear, side-by-side comparison of your different products or service tiers, making it easier for them to make informed purchasing decisions. Pricing tables should list features, prices, and any available discounts, including pricing for international customers if applicable.

For example, at Boathouse, we offer customizable pricing tables that make it easy to showcase different plans, highlight the benefits of each tier, and automatically adjust prices based on a customer’s local currency. This not only streamlines the decision-making process but also boosts customer confidence by offering complete transparency.

Implement Automated Billing Emails

An automated billing email system is an essential component of any successful tiered pricing model. These emails keep customers informed about billing cycles, upcoming renewals, and any pricing changes.

By providing timely notifications, you ensure that customers have the information they need to manage their subscriptions, reducing the risk of churn.

Collect Feedback After Cancellations

Once your tiered pricing model is live, tracking cancellations and collecting feedback is essential to refining your approach. Understanding why customers cancel can help you identify areas for improvement—whether it’s adjusting prices, enhancing features, or offering more flexible plans.

Boathouse’s Cancellation Flow system allows businesses to gather detailed feedback through customizable questions, helping you address concerns proactively. You can also offer alternatives, such as pausing the subscription or switching to a lower-priced tier, rather than letting the customer leave altogether.

Focus on What Matters - Let Boathouse Handle Your Tiered Pricing

Managing tiered pricing can be complex, but the rewards are well worth it. Don’t let the challenge hold you back. With Boathouse, you can simplify the entire process. We take care of your billing and tiered pricing with a seamless, self-service system that’s built to optimize customer experience through Paddle.

Our secure, easy-to-integrate API is designed for SaaS businesses, supports 20 languages, and comes with embedded pricing tables that make billing effortless.

Want to boost your sales with a high-performing billing system? You’re just 60 seconds away from getting started - reach out to us today