One essential element of any business plan is its pricing structure, whether it’s value-based, bundle, or dynamic pricing. It’s one of many vital decisions you have to make as a business owner, but it’s hard to think of one more important! Our guide evaluates two of the most common (and basic) pricing models against each other: tiered pricing vs volume pricing.
In this piece, we’ll walk you through their key differences, as well as their pros and cons, so you can decide which model is the perfect fit for your business.
Let’s dive right in!
What Is Tiered Pricing?
Tiered pricing models offer distinct purchase levels with escalating bonuses and benefits. Some features are relegated to premium tiers. A basic tier would only have your platform’s basic features.
Imagine a B2B company offering virtual contact center solutions. A basic package might only enable basic phone and email functionality. Higher tiers enable other integrations like chat clients and social media monitoring. They could even offer higher-tier members access to their platform’s data-driven insights.
Who uses tiered pricing?
Tiered pricing models are predominantly used by SaaS and other subscription-based businesses. A system revolving around repeat payments lends itself well to offering a range of price points.
For example, constant contact pricing exemplifies this model with various tiers designed to accommodate everything from small businesses to large enterprises, adjusting features and support levels accordingly.
Businesses trading in goods don’t generally use a tiered pricing strategy, but there are exceptions. Consider video game developers offering purchase tiers for the preorder of upcoming releases. Each tier comes with its own bonuses, ranging from downloadable in-game content to exclusive physical merchandise.
Unlike traditional tiered or volume pricing models, sellers on platforms like Etsy set their own product prices, often reflecting the unique nature and craftsmanship of their handmade or vintage items. This individualized approach allows sellers to tailor their pricing strategies to the specifics of their products and customer base.
What Is Volume Pricing?
Volume pricing means lowering the total cost of purchase based on the overall quantity. In other words, you get better value for buying more at once. Take a look at the example below:
It’s a common pricing model used by wholesale businesses, as they buy in bulk at a cheaper rate and then quickly shift stock to other businesses.
This pricing model often works hand-in-hand with flexible pricing strategies. For instance, wholesalers might offer extended payment plans or installment options to help bulk buyers manage their cash flow. This creates a win-win scenario for both parties, encouraging repeat orders from volume buyers.
Who uses volume pricing?
Businesses using volume usually offer physical goods such as shoes or electrics. That said, the businesses benefitting the most are those offering goods that get used up. Things like food, paint, or cleaning supplies.
When it comes to tiered pricing vs. volume pricing, you might expect goods sellers on one side and service providers on the other. However, there are always exceptions. For instance, most consumer-focused SaaS businesses offer discounts for buying subscription time in bulk.
The Pros And Cons Of Tiered Pricing Vs. Volume Pricing
If volume-based pricing is about offering more for less, tiered pricing structures mean paying more to make something better. Which approach you’ll use is largely predetermined by your basic type of business.
Even so, companies of every imaginable configuration exist. So, let’s look at the advantages and disadvantages of tiered pricing vs. volume pricing for your business.
The benefits of tiered prices
Tiered pricing offers exclusive extras and greater service levels to higher-paying customer segments. This can benefit your business, despite potential issues to be aware of. Of course, when it comes to tiered pricing vs. volume pricing, the former tends to be more complex than the latter.
1. Multiple price points broaden appeal
Affordability is a major concern for both consumers and B2B clients. Although richer clients can certainly keep you afloat, it’s best to appeal to a broad range of customers.
Subscription-based streaming services like Netflix are a good example. The cheapest tiers allow streaming on two devices and include ads. By comparison, higher tiers offer seamless viewing and the ability to host users in multiple locations.
2. Flexibility and scalability
Offering a range of price tiers means that clients can invest in more advanced features as and when they need them. Without a tier system, those with more limited needs risk overpaying for stuff they don’t need.
Let’s say you offer marketing automation platforms. A small start-up might begin by subscribing to your starter tier, enabling them to run one or two simultaneous ad campaigns with basic data collection.
As the brand grows, they have the resources to tap into other market segments. To enable this, they upgrade to the advanced tier to run more campaigns and get bespoke reports on ad performance.
3. A lower barrier for trust and commitment
Investing in a service isn’t just about needs, but also the limits of client trust. It’s one thing to read sponsored content hyping up whatever SaaS platform as the magic bullet solution to all your needs. It’s another entirely to find a service which actually delivers on those promises.
Offering cheaper tiers with your core features means prospective clients can dip their toes, potentially winning over more hesitant consumers or businesses. However, only offering all your features for full price means fewer people will be willing to take the plunge.
4. Opportunities for creative marketing
If we compare tiered pricing vs volume pricing by opportunities to think and market outside the box, then the tiered approach would probably win. Rather than simply encouraging customers to buy more, you can create a distinctive customer experience.
Besides unlocking more features on your platform, higher price tiers can offer:
- Deals and memberships with collaborative businesses.
- Discounts on other products and services.
- Access to exclusive content.
- Promotional merchandise.
The sheer range of perks tiers can provide makes tiers great for appealing to a wide range of customer segments. They can range from being inventive with tier naming to influencer promotion and full-on ad campaigns.
The difficulties of tiered prices
The tier model presents its share of challenges. They’re largely a matter of how well you implement your system, though. These issues stem from poorly thought-out price tiers, or a lack of effective marketing and support.
1. Vaguely distinguished tiers
Distinctive tier names can be an effective marketing tactic. However, they’re also a double-edged sword. Reading the names at a glance, it might not be obvious what order of significance they should go in.
Failure to properly distinguish pricing tiers can put off customers because they can’t identify the most suitable option. It’s not just a matter of naming, either. Brief ads and punchy landing page feature lists don’t always provide much detail or context.
This can be especially true if your platform is particularly technical, like a call center data analytics service. Someone who isn’t tech-savvy might struggle to differentiate between the different types of analytical tools you offer. If what they need isn’t available on their chosen tier, they’ll feel they’ve been sold a false bill of metaphorical goods.
2. Pricing difficulties
It’s difficult enough setting even a single price point for a service. Throw in multiple tiers, and it gets even more complicated. A poorly managed tier pricing strategy leads to customer churn.
For instance, if the increments of tier pricing don’t make sense. You’ll also struggle with B2B customer retention if your price increases regularly play havoc with their budgets.
3. Choosing the right limits
Consider the specific features going into each tier. You need to carefully evaluate which ones you’ll wall off behind tier restrictions. Obviously, it makes sense to have your fanciest features be exclusive. Especially if they’re a bigger drain on server load or financial resources.
That said, be careful not to cut up the core elements of your platform. Locking important features behind a higher price point puts people off, and prevents economical tiers from adequately representing your brand.
The benefits of a volume pricing strategy
Comparing tiered pricing vs volume pricing, the latter is definitely more straightforward. It’s a great way to shift large amounts of stock very quickly, which is beneficial for wholesale businesses.
Here are the key volume pricing benefits to bear in mind.
1. Spending more means better value
Offering bulk buy deals paradoxically means consumers and B2B customers stand to save money by spending more of it. That means more of your sales are likely to be big ones. Compare that to tiered pricing strategies, where customers will select the lowest tier offering all the features they need.
2. Inventory and shipping become easier
Adopting a wholesale business approach by primarily catering to a few major buyers can be much more straightforward than dealing with a lot of smaller ones. For one thing, it makes inventory management easier because big purchasers are more likely to be consistent. You can group stock in the most effective way to handle periodically consistent orders.
Additionally, the costs associated with warehousing services are an important factor to evaluate, as they directly influence the financial viability of employing volume pricing for businesses with extensive inventory needs.
The same can be said for shipping. Delivering to a few key customers leaves far less room for confusion. Additionally, you stand to save a lot on shipping costs.
3. Good deals boost customer loyalty
Few things reel in customers like good value. When people know they’re getting a good discount, it limits their interest in looking elsewhere. They’re also more likely to promote your brand to others, which means volume pricing enables brand advocacy. Consistent, affordable quality is the best way to ensure high customer lifetime value.
The drawbacks of volume pricing
While we’re mainly interested in the differences of tiered pricing vs. volume pricing, one similarity is that they both have flaws. Here are some potential drawbacks of the volume pricing model.
1. Limits you to bulk-buying customers
Although bulk-buy offers encourage people to buy more, not everyone can. This is the reason wholesale planning usually hinges on selling to other businesses. If you’re simply buying goods for personal use, you probably won’t need that much. Smaller buyers may view the money they could have otherwise saved as money lost.
2. You can only push it so far
Another drawback of volume pricing is its very clear limits. Like any business, even volume-priced wholesalers must watch their profit margins. You’re ultimately capped by initial unit costs.
You have to find the sweet spot where selling more for less nets you more money. Compare that to tiered pricing, where there’s always theoretically a higher level of service.
3. Competitors can easily match you
Bottom-barrel bulk pricing offers an edge on competitors. That’s great, except there’s not much stopping them from doing the same thing right back. When competing against other wholesalers, volume pricing can only be one aspect of your marketing strategy.
Conclusion
When deciding between tiered pricing vs volume pricing, it’s crucial to consider the nature of your business, product types, buyer needs, and overall goals.
For instance, volume pricing is often the go-to pricing model for wholesalers, as it drives larger order volumes and helps move inventory faster. Tiered pricing, on the other hand, is more suitable for SaaS or subscription-based businesses, where different service levels are offered based on customer needs.
In this guide, we walked you through the following sections to help you make the right choice for your business:
Do you have any questions about this article? Let us know in the comments section below!
