Tiered Pricing Model: Examples, tools & implementation tips

Let’s clear up a bit of confusion on the concept of tiered pricing.

Tiered pricing is not the conventional three-tiered SaaS pricing plan (e.g. Free, Growth, and Enterprise).

Instead, tiered pricing is about gradually reducing prices as customers add more users or purchase additional features. Offering tiered pricing means giving customers enticing discounts to encourage more spending. 

Sure, it's a bit more complex, but tiered pricing positions you to grow product usage and create stickier accounts.

If you're wondering whether tiered pricing might be a fit for your SaaS product, read on as we guide you through what adopting this pricing strategy really means. Plus we’ll share some handy tips to get you started.

What is tiered pricing?

Tiered pricing is a usage-based pricing strategy that adjusts rates in graduated steps. 

Pricing is split into usage tiers—typically by the number of users or volume of product consumption (e.g. number of API calls). As customers move from one tier to the next, they pay a different price for that tier.

In most tiered pricing models, pricing decreases with increased usage. For example, the first 5 users will cost one price, the next 5 users will cost less, etc. 

Tiered pricing example

This pricing approach is often a win-win for companies and their customers:

• Customers pocket savings when they make high-quantity purchases, and they have the freedom to scale up or down as needed.
• Suppliers, on the other hand, get more chances to upsell and boost their average revenue per user. 

Tiered pricing vs. volume pricing

Tiered pricing and volume-based pricing are both usage-based models, but they are not synonymous.

Volume pricing sets a single price per unit, depending on the total quantity purchased. When customers buy more, they save the same price per unit for all units.

Tiered pricing, in contrast, sets a unique price per unit for each range. Customers pay the designated price per unit for each range their purchase moves through.

Let’s clarify this with an example: suppose you're a project management software company bringing on board a customer with 13 users, and this is what your pricing looks like.

Volume vs. tiered pricing example

With volume pricing...

The customer pays a per-user price based on the total number of users. 

• In this case, they have 13 users, so they pay the price for the 11-20 Users bucket, which costs $8 per user monthly. 
• So, the customer pays 13 users x $8 = $104 a month. 

With tiered pricing...

The customer pays a different price for each usage tier.

• The first 5 users are in the 1-5 Users tier, so they pay $10 each, totaling $50.
• The next 5 users fall in the 6-10 Users tier, costing $9 each, totaling $45.
• The remaining 3 users belong to the 11-20 Users tier, costing $8 each, totaling $24.

In total, this customer pays $50 + $45 + $24, amounting to $119 a month.

To sum this up:

• Under tiered pricing, once you fill up a ‘tier’, you move to the next tier, each with a different price point. The first 5 users cost $10 each, the next 5 cost $9 each, and so on.
• Under volume pricing, once you reach a certain number of users, all units are priced at a lower rate, not just those exceeding a specific threshold. If a customer onboards 10 users, they pay $90 monthly, and if they bring in 22 users, it's $154 monthly.

When does tiered pricing make sense?

Wondering if tiered pricing is the right move for your business? We got Vladislav Podolyako, the founder of Folderly, to share his insights.

Tiered pricing comes into its own when you have a wide spectrum of customers. As Vladislav puts it, "it allows for tailored pricing offerings that meet the specific needs and budgets of various user groups." This tailored approach captures more value, from budget-conscious freelancers to resource-rich enterprises. 

Vladislav's experience at Folderly is a prime example, where they've successfully implemented tiered pricing. He notes, "Freelancers loved our affordable 'Basic' plan for 1-9 mailboxes, while enterprises found great value in our comprehensive packages for hundreds of mailboxes because they pay almost 3 times less per mailbox." 

However, the art of tiered pricing isn’t just about numbers; it’s also about target market psychology.

You need a deep understanding of your customer base to identify and monetize your business's different customer personas. It also helps to have the data and insights to predict customer behavior accurately. With these insights, you can strategically position your product features and pricing tiers to influence purchasing decisions.

Vladislav also underlines that tiered pricing is a great choice for SaaS companies with evolving service offerings. Its flexibility allows business owners to introduce new features as premium options, enabling them to test customer demand and incentivize upgrades.

Moreover, Vladislav strongly recommends tiered pricing for companies that offer custom-built integrations like Hotjar. He explains, "Custom integrations can capture more value from customers willing to pay extra for specialized features, ultimately enhancing both customer satisfaction and the company's revenue stream."

Finally, when your SaaS business generates unique data that can be the backbone for building custom apps, tiered pricing again becomes a potent choice. Vladislav points to Ahrefs as an example, "the platform's API access is exclusive to its expensive Enterprise plan, serving the needs of customers who want to integrate valuable SEO metrics into custom dashboards or apps." 

How to implement tiered pricing

Think tiered pricing is indeed the right fit for your business? Awesome, now let's discuss how you can put it into action.

Step 1: Set profitable pricing tiers

The first thing you need to do is figure out how to set prices for your product offerings. Consider what your customers really think your product or service is worth. It's the first rule of pricing: make sure it matches what your customers expect. 

Once you have a grasp of your product's value proposition, it's time to dive into the nitty-gritty of your business expenses. 

Calculate the cost of product development and maintenance, including your direct costs (e.g., labor) and indirect costs (e.g., overhead) Then, add a reasonable markup. This way, your pricing isn't just covering the bills; it's also profitable.

Next, adjust each pricing tier based on the offered features and functionality. Each pricing tier should represent different levels of value, whether it's in terms of features, access, or support.

To start, calculate the pricing for your most advanced tier. This top-tier offering typically comes with the highest level of product features, functionality, and customer support, and therefore, a higher price. Think of it as the 'premium' level of service, complete with perks like 1:1 onboarding assistance.

Once you've set the top-tier pricing, work your way backward to create the Entry-Level or Basic tier. This is often where customers begin their journey with your product, so make sure it's an appealing starting point.

You should also assess how pricing may need to change as your company grows and overhead costs increase. Regularly revisit your pricing strategy, conduct pricing experiments, and make adjustments as needed, ideally every 1-2 years. 

This approach allows you to capture the full value of your product or service while staying responsive to changing market conditions.

Last but not least, keep an eye on the competition. See what the other players in your industry are charging for similar products or services. Make sure your prices are attractive enough to lure in customers, while still highlighting what makes your product special.

Step 2: Use a subscription/billing tool that supports tiered pricing

You can't make tiered pricing work without a dependable subscription billing tool. It's the financial backbone of your strategy, allowing you to charge your customers correctly and efficiently. 

With the right tool, you can automate billing cycles, manage subscriptions, handle prorations, and deal with complex pricing structures without a hassle.

For instance, it's super easy to create tiered pricing structures on Stripe. You can define custom tiers, specifying unit ranges and their corresponding costs for each tier. Stripe even offers choices between "volume" and "graduated" modes, giving you control over how pricing calculations are handled.

Another great choice is Chargebee, where your products and services are represented as 'Plans.' These 'Plans' can be adapted to different pricing tiers, each with its unique unit cost based on quantity or usage. You can set up your tiers to match your specific needs.

Step 3: Create a transparent, clear pricing page

We've all been there, clicking on a website's pricing page only to find ourselves lost in a sea of confusing options. You definitely don't want your customers to experience that frustration.

Breaking your pricing into tiers gives your customers the power to tailor their spending based on their needs and expectations. However, here's the thing: customization is fantastic, but without proper guidance, it can lead to bewildering complexity.

To ensure a smooth buying experience and foster trust, your pricing page should be straightforward and transparent. Lay out each pricing tier with meticulous detail, including a breakdown of its contents, the associated costs, and any additional benefits it offers.

And if you can swing it, consider providing a risk-free entry point for your customers, such as money-back guarantees or free trials. This way, customers are reassured and can explore your product or service confidently.

Step 4: Get a CPQ software tool that supports tiered pricing

Traditionally, before sharing pricing information with potential customers, sales reps had to seek it internally. This resulted in a lot of back-and-forth emails and baffling spreadsheets, which also delayed the selling process.

A CPQ (Configure, Price, Quote) system makes this process a lot smoother.

Let's take Dock as an example. It lets your admins create pricing tiers in the backend of your website. When a sales rep needs to send a quote within the Dock workspace, they can create a quote and incorporate the pre-set pricing tiers from the admins.

Dock also offers user-friendly order forms to further simplify the pricing proposal process. Your reps can select products, determine billing frequencies, and specify contract terms.

Moreover, real-time updates and collaborative workspaces with the platform enhance communication with customers, ensuring everyone has access to the most up-to-date pricing information.

No more complex calculations—your reps can easily leverage Dock to provide product pricing information. This accelerates the quote turnaround, ensuring customers can easily understand your pricing structure. In contrast, traditional sales proposal and sales quote tools don't offer transparent support for tiered pricing, putting your sales team under more pressure when closing deals.

If you want to delve deeper into building quotes for your tiered pricing strategy on Dock, our founder, Alex Krakov, has a helpful video to guide you through the process.

Make tiered pricing effortless with Dock

In today's economy, the goal is to create a pricing structure that works for diverse customer segments while encouraging them to opt for higher tiers. That's exactly where a tiered pricing model comes in handy, but if you're stuck crunching numbers and fiddling with complex spreadsheets, you’re doing it wrong.  

Dock lets you take the easy way out. Use our order forms to get more accurate quotes, deliver a better user experience, and enjoy additional capabilities that make it easier to close deals and foster customer trust. 

Create your first 5 customer workspaces for free here.