How you sell a product or service is as important as the quality of that product or service.
The two most popular pricing models in modern business are tiered pricing and volume pricing. Every merchant needs to understand these two strategies to determine which one is a better option for them.
In this article, we compare tiered pricing vs. volume pricing and explain both pricing models to help merchants make their choice.
Tiered Pricing vs. Volume Pricing Differences
In a tiered pricing model, each tier provides a set number of features or services for a certain price. If a customer wants more than what is offered by a tier, they move on to the next tier and pay a different price per product/service.
In a volume pricing model, the pricing is structured so that discounts are provided for bulk purchases. The more products bought, the larger the discount. Customers pay the same price per product depending on the discount range their purchase falls into.
Let’s look at an example to see how these pricing models differ. Say that you’re selling a software product and you have set the following prices per user:
|Number of Products||Price per User|
|0 - 10 Products||$15|
|31 - 50 Products||$5|
Your revenue depends on the pricing model you choose, as shown below.
Tiered Pricing Example
You’ve sold 45 products in one month. Here’s how the revenue is calculated:
First 10 products: 10 x $15 = $150
Next 19 products: 19 x $10 = $190
Next 14 products: 14 x $5 = $60
Total revenue: $400
Volume Pricing Example
You’ve sold 45 products in one month. This number is between 31 and 50, and in that range one item costs $5. Therefore:
45 x $5
Total revenue: $225
In this example, the tiered pricing model generates more revenue.
Tiered Pricing Model
Each tier within a tiered pricing model contains various features offered at a certain price. Customers choose the tier that best meets their needs.
Pricing tiers need to be highlighted on the website homepage so that visitors can easily spot them.
Each tier should contain the price and all the features that a customer gets in it.
Pros and Cons of Tiered Pricing Model
The main pros of the tiered pricing model are as follows:
- Scalability. Customers can upgrade or downgrade to different tiers, in line with their needs.
- Better targeting potential. Merchants can expand their customer base by targeting different customer groups with various tiers.
- Competitiveness. Offering several tiers may attract some customers who have left other businesses because of high costs.
- Improved conversion. Some buyers are more likely to become customers if they can choose from several tiers.
Adjustability. Merchants can adjust the profit margin to suit market changes and their business goals.
These are the main drawbacks of the tiered pricing model:
More complicated. Merchants offer a combination of features and prices for each tier rather than offering a single package or volume pricing.
Less clear. Customers might not buy a product or service if they don’t understand the billing system behind the tiers.
- Paying more than expected. Some customers might choose a higher level of services than they need and pay more than they wanted. To prevent this, make it clear that they can change tiers.
Note: Offer a free trial so that customers try different features and tiers and choose the one that best fits their needs.
Who Is Tiered Pricing Model Best for?
Companies that target different customer segments can use tiered pricing, as well.
Examples of Tiered Pricing Model
For instance, Dropbox offers four different tiers for cloud-based storage. Dropbox customers pay either monthly or annual subscriptions. Paying a yearly subscription is more affordable.
They’ve highlighted the most popular tier.
SpiderOak is another cloud-storage provider that uses tiers. They also have four different tiers, but their offer is simplified and doesn’t contain too many details on features.
Volume Pricing Model
Volume pricing is a model in which the price of one product or service drops as the number of items purchased increases.
Merchants who want to sell larger quantities of products and make bulk sales usually choose volume pricing. Buyers that get higher discounts when they buy larger volumes often become repeat customers and return for more products. Repeat customers increase recurring revenue.
Pros and Cons of Volume Pricing Model
The key advantages of volume pricing are as follows:
- Straightforward calculation. Merchants can easily set prices and calculate the total purchase revenue.
- Easy to understand. Customers multiply the number of purchased items by the price per item, and they know how much they need to pay.
- Bulk purchases. Getting discounts for purchasing larger quantities encourages customers to buy more.
The disadvantages of volume pricing are:
Lower profits. As customers buy more items, merchants make less money on a single item.
- Decreased brand value. Discounts on bulk sales can attract customers, but they can affect the brand value, as well. Evaluate the level of discount you want to offer via volume pricing to avoid sending the message that your products aren’t valuable or competitive.
Who Is Volume Pricing Model Best for?
Many global brands offer volume pricing.
For instance, eBay reduces the price per item as customers increase the number of products they buy.
Dropshipping suppliers regularly provide discounts for bulk purchases.
Tiered pricing vs. Volume Pricing: What's Good for Your Business?
Tiered pricing is better for SaaS and subscription businesses because it increases profit and ensures recurring revenue. In addition, having several tiers attracts more customers.
Volume pricing is more suitable for merchants who want to increase the repeat purchase rate via bulk sales and ecommerce stores in general.
Identifying and implementing the right pricing model will help generate more profit from day one.
Use the information in this guide to decide whether tiered pricing or volume pricing is the best option for your business and kickstart your business.