Tiered pricing is a subscription billing model which offers several plans at a fixed price. Here's how tiered pricing works and how to use it for your SaaS business.
What is tiered pricing?
A tiered pricing structure is a subscription billing model which offers several different price points. 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 that potential customers will subscribe. From there, you can focus your efforts on upselling your customer base over time.
The tiered pricing model also acts as a competitive alternative to both fixed and value-based pricing models. A set price is easy to understand and appeals to customers looking for a plug-and-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.
Benefits of tiered pricing in SaaS
Many SaaS companies use a tiered pricing model, and with good reason. Creating different pricing tiers offers several lucrative benefits that help companies grow and scale. Here are 4 of the biggest advantages this strategy provides.
1. It attracts a wider customer base
Honing in on specific customer needs across various user types is one of the most essential elements of building a successful business. Different levels of pricing properly cater to various customer personas and their needs. A one-man startup needs fewer bells and whistles, while a full-blown team needs more advanced functionality. Offering a range of prices to meet each customer where they’re at is a great strategy for appealing to potential new customers.
2. Encourages upsells to higher tiers
Multiple pricing options give the users room to grow over time. While a customer may opt for a lower tier in the beginning, they may require different features as their business grows. When they’re ready, tiered pricing allows users to easily upgrade to the second-tier or higher level options to access the functionality their business needs.
3. Maximizes customer retention and revenue potential
Should times get tight for your users and business owners feel the need to start cutting costs, subscription services are often easier to cut down on than personnel or utility costs. In this instance, offering different tiers gives users the option to downgrade based on their needs without needing to look elsewhere for a new solution. These choices decrease the odds of customers having to create a new solution, or worse, moving to a competitor.
On the other hand, when business is good, tiered pricing motivates users to upgrade to the next tier to save money. For example, volume discounts available on a higher tier give more users access and typically offer a wider variety of different features.
4. Eases revenue and cashflow predictions
Once a SaaS company starts building its customer base, it can more accurately forecast its revenue. Since customers don’t have to leave if they grow rapidly (because they can move up a tier) or hit an obstacle that temporarily sets them back (because they can go down a tier), financial predictions become more accurate.
How is tiered pricing calculated?
There’s not much differentiation between the pricing of each individual tier and any other product or service.
First, you must calculate how much a product takes to develop and maintain. Second, add a small percentage markup to determine your price range. Third, 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 planning for changing market conditions.
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, functionality, and customer support, such as 1:1 onboarding assistance, etc.
Once the most expensive plan has been calculated, 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 per unit.
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. If you purchase more than that, you pay 12 cents for all GB, including the first 50 TB of GB.
Common variations in tiered pricing models
Tiered pricing includes at least two tiers. The most common tiered pricing models are three-tier pricing and multiple-tier pricing to ensure each customer can access the best pricing plan for them. These models may be based on product usage, features needed, or how many user seats the company needs.
Three-tier pricing offers three levels, such as Basic, Standard, and Premium
Multiple-tier pricing contains more than three tiers and is used to meet the needs of a large customer base, typically ranging from small businesses to enterprise accounts
Usage-based tiers are based on a company’s per-unit output like the number of emails or space available
Feature-based tiers give customers everything they need and nothing they don’t. The more basic, low-priced tiers provide some features, while tiers with a higher price include a more robust feature list
User count tiers work well when more than one user needs access to the service, and tiers are determined by the user count
Tiered pricing examples from well-known businesses
Sometimes it’s easier to understand a concept by looking at real-world examples of it. So let’s put the spotlight on some popular businesses that use different types of tiered pricing.
Zendesk uses a three-tiered pricing model that centers on product features. 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
Website optimization tool Crazy Egg uses a multiple-tier pricing model.
A Basic level for $29 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 their pricing and foster stronger customer relationships with larger accounts that require 1:1 support.
Email marketing automation company Mailchimp sets their tiers up based on usage.
A Free level that gives a user 1000 email sends per month
An Essentials level for $13 per month (which includes 5,000 email sends)
A Standard level for $20 per month (including 6,000 email sends)
An Enterprise level that starts at $350 per month and includes up to 150,000 monthly email sends
Canva is a design website that helps everyone create professional-looking marketing material. Its pricing tier structure is both user-count and feature-based.
Canva Free provides users with a short list of great features that help them design all types of professional marketing collateral
Canva Pro, at 12.99 per month for one person, adds more features to a user’s disposal, such as more access to Pro templates and storage.
Canva for Teams, at $14.99 per month and including up to five users, is the highest tier and adds features to help businesses scale like brand controls, design approval workflows, and more AI-powered design tools
Microsoft 365 Business
Companies of all sizes across all industries use Microsoft 365 to improve organization and productivity. Its tiered pricing is user-based, but also provides several additional features as the tiers climb higher.
Microsoft 365 Business Basic costs $6 per user, per month
Microsoft 365 Business Standard costs $12.50 per user, per month
Microsoft 365 Business Premium costs $22 per user, per month
Microsoft 365 Apps for Business costs $8.25 per user, per month
How to set your tiered pricing strategy
While there are many exciting advantages of using tiered pricing, it can be challenging to implement. Add to that how critical it is to use the right one, and it becomes a hugely important decision.
This decision can be made easier by gathering three essential elements that provide insight into how to structure your pricing for optimal performance.
Develop tiers with customer personas in mind
Organizations can’t arbitrarily build pricing tiers without taking their customers into account. They should think about their ideal customer profile (ICP) and pinpoint:
The industries they’re in
What size they are
What their priorities are
What their pain points are
Who makes the final decision
How much their budgets will support
Taking the time to pull this data together gives companies a deeper understanding of their customers and what they will look at as reasonable pricing. Having this information on hand makes it easier to implement pricing that will make the company a profit and that customers will find palatable.
Clearly distinguish differences between tiers
While it’s smart to have consistency in every tier, make sure you’re clearly differentiating one tier from the next, again with your ICP in mind. You need to have a solution that meets the needs and price point of as many potential customers as possible. When browsing your pricing tiers, customers should be able to quickly see what they will receive with each level (and what lower levels don’t include).
Price your tiers carefully
Like anything else, be sure to consider the normal elements when pricing your subscription tiers, like the cost of goods sold. Be sure to also consider what your competitors are pricing their tiers at, as your potential users will likely be looking at competitors rates while considering yours. Finally, take what you know about your customer and figure out how valuable they will consider your product to be.
The stakes are high in figuring out a workable pricing structure. Set the price even a bit too high, and the company may lose out on conversions that would have helped it grow. Further, future coupons or price reductions may be seen as devaluing the brand. Set the price too low, and you lose out on valuable revenue per customer and will have an uphill battle in slowly raising prices so as not to upset existing customers. The moral of this story: Be sure to very carefully consider all aspects surrounding your pricing strategy, possibly testing them out with test users, before launching.
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, which focuses on 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.
Build your perfect pricing model with Maxio
Maxio lets you customize your billing to find that perfect balance between what you and your customer need. Deploy a range of billing models—including both tiered and volume-based pricing—and mix-and-match as you need to create the pricing model for your business. Request a demo to see how you can turn your billing into a competitive advantage.