What Is Tiered Pricing?
Tiered pricing is a subscription billing model which offers several plans at a fixed monthly price. These plans, or “tiers,” are typically separated by features, number of users, or product usage. The first or most basic tier is usually offered at a lower price point and only includes basic features and functionality. In a tiered pricing model, by offering your product/service at a scaling rate, you increase the likelihood of customer acquisition and can focus your efforts on upselling customers over time.
The tiered pricing model also acts as a competitive alternative to both fixed and value-based pricing models. Fixed pricing is easy to understand and appeals to customers looking for a plug n’ play solution—this model works best with software that isn’t overly complex. On the other hand, value-based pricing charges customers for specific product and feature usage, leading to highly complex pricing scenarios.
On a sliding scale from simple to complicated, the tiered pricing model sits right in the middle.
How is Tiered Pricing Calculated?
The pricing of each individual tier is not too different from the pricing of any other product or service.
First, you must calculate how much a product takes to develop and maintain, then add a small percentage mark-up to determine what you’ll charge. Then, you should also account for pricing changes that will occur as your company scales and overhead increases. Conducting regular pricing experiments and reiterating your pricing strategy once every 1-2 years ensures that you’re capturing the full value of your SaaS while accounting for changing market conditions.
You should adjust each pricing tier for the features and functionality they offer. To start, calculate the pricing of your most advanced tier—typically, this plan will include the greatest access to product features and functionality, customer support, 1:1 onboarding assistance, etc.
Once the most expensive plan has been calculated, you can work backward until you reach the “basic” plan. This tier is also commonly referred to as “entry-level” pricing because it’s where most customers will start with your product.
Tiered Pricing vs. Volume-Based Pricing
Tiered pricing and volume-based pricing don’t share much in common. With volume-based pricing, when specific unit volume thresholds are reached, the price per unit goes down. In other words, the more you buy, the less you pay.
For example, let’s say a SaaS provider is selling cloud storage space. In a tiered pricing model, for the first 50 TB a month, space costs 15 cents per GB, but after 50 TB, the price for each additional GB drops to 12 cents. In contrast, with a volume pricing model, if you purchase up to 50 TB a month, you pay 15 cents per GB, but if you purchase more than that, you pay 12 cents for all GB, including the first 50 TB of GB.
What Are Some Tiered Pricing Examples?
Tiered pricing by definition includes at least two tiers. The most common tiered pricing examples are three-tier pricing and multiple-tier pricing.
A common three-tier pricing model uses Basic, Standard, and Premium tiers. An example of a SaaS product using this model is Zendesk. Zendesk’s non-enterprise tiers for smaller businesses currently include:
- A Team level for $49 per agent per month billed annually
- A Growth level for $79 per agent per month
- A Professional level for $99 per agent per month
Multiple-tier pricing contains more than three tiers and is used to meet the needs of a large customer base—this typically includes small businesses all the way to enterprise accounts. This is how Crazyegg, a website optimization tool, uses multiple-tier pricing.
- A Basic level for $24 per month
- A Standard level for $49 per month
- A Plus level for $99 per month
- A Pro level for $249 per month
- An Enterprise level with pricing based on customer needs
It’s important to note that Crazyegg’s enterprise plan is specifically built to cater to customers whose needs far exceed the functionality and support of a pre-built tier. Offering an enterprise tier allows them to negotiate pricing and foster stronger customer relationships with larger accounts that require 1:1 support.
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Metrics for SaaS Tiered Pricing
Like any other pricing model, tiered pricing needs to be tracked and analyzed to ensure it’s profitable and meets your customers’ needs. For tiered pricing, expansion and upgrade MRR should be your performance benchmark.
Why? Because they align with the strategy behind a tiered pricing model: getting users to pay more overtime via upgrades, add-ons, and upselling. In other words, it’s all about monetization.
Measuring the additional MRR generated through feature add-ons and pricing plan upgrades gives SaaS companies a quick snapshot of how well their pricing tiers are performing. For example, if you see a positive correlation between revenue and acquisition but not between revenue and monetization, this is a clear sign that one of two things are happening:
- Users are receiving too much value from your basic plan and don’t need to upgrade
- Users aren’t receiving enough value from your basic plan and don’t want to upgrade
Both of these problems are easy to identify within a tiered pricing model if you’re tracking revenue increases via expansions and pricing plan upgrades.
What Are the Benefits of a Tiered Pricing Model?
Tiered pricing allows SaaS companies to capture larger market shares by offering their product/service at multiple pricing points. Instead of forcing prospects to pay a fixed fee or sign up for an annual contract, tiered pricing allows potential users to evaluate their pricing options and choose the plan that best meets their needs.
A tiered pricing model also creates many opportunities to upsell your users through pricing plan upgrades. Because it’s unlikely that users will downgrade to a less expensive plan, revenue tracking is often easier than in a value-based pricing model where revenue fluctuates based on customer behavior.
Build Your Perfect Pricing Model with Chargify
While tiered pricing is a popular and effective pricing method for SaaS businesses, it’s not the only option available. Chargify lets you deploy a range of pricing models so you can use the one best suited to your business. Sign up for a guided 30-day trial to see how you can turn your billing into a competitive advantage.