What Is Tiered Pricing and Why Should You Care?
- Tiered pricing allows businesses to offer a personalized experience by providing different service levels at different price points, catering to customers' individual needs and preferences.
- Productized services, which are packaged and priced in a way that makes it easy for clients to understand and purchase, can benefit from tiered pricing by standardizing pricing, simplifying the purchase process, and increasing profit margins.
- The benefits of tiered pricing include increased flexibility for customers, easier upselling opportunities for businesses, encouragement of customer loyalty, simplified purchase process, higher profit margins, increased customer lifetime value.
Is a personalized experience more appealing than a generic service? If you answered yes, you’re on the same page as the vast majority of users. In today’s world, customers crave unique experiences that are catered to their individual needs.
Tiered pricing is one of many that allows businesses to provide this type of service. By offering service levels at different price points, companies can give their customers the freedom to choose the option that’s right for them.
In this article, I’ll be breaking down this agency pricing model, so you can decide if it’s right for your business.
What is tiered pricing?
Tiered pricing is a popular model for selling services and products within multiple price ranges. Each price offers a different set of services or features. Those who need more features have to opt for one of the higher-priced tiers.
Take SPP, for example.
We offer three pricing tiers: Basic, Pro, and Enterprise.
If you decide to pay more to move up a tier you gain access to more features, user licenses, and benefits. Each tier is designed to appeal to a specific kind of customer that we’ve identified as high-value through experience and market research.
Tiered pricing is incredibly common in the world of software-as-a-service (SaaS) and other, primarily subscription-based industries, including:
online courses and education
However, this pricing structure can also apply to agencies and organizations in B2B and B2C service industries. This kind of pricing model usually goes hand in hand with a productized business model.
A productized service is a type of service that’s been packaged and priced in a way that makes it easy for clients to understand and purchase. To put it more literally, it’s a collection of services, deliverables, and timeframes that get packaged and sold as a product—typically at different tiers. Here’s an example by 50 Pound Social, which offers tiered social media services at different price points.
With productized services, businesses create packages with specific deliverables, timelines, and price points to allow clients to tailor their experience.
So, to summarize, productized services are:
Self-Service: Clients are able to choose the service tier that works for them. That means fewer consulting calls and info gathering sessions for you!
Repeatable: The service can be performed again and again with little to no variation. That means less guesswork when it comes to predicting things like workload and revenue.
Scalable: The service can be delivered to tons of clients because it doesn’t require too much of your time to maintain.
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Productized services help businesses to standardize their pricing and simplify the purchase process for customers. As a result, productized services often have higher profit margins than hourly services. But more on the benefits in a moment—there are plenty to cover!
The benefits of tiered pricing
1) It offers more flexibility
It offer businesses much more flexibility than flat-rate pricing. Enterprise-level businesses are incentivized to pay more for extra services and benefits, while smaller businesses aren’t forced to pay rates that are beyond their means.
That means a wider range of clients are able to get the services they need at a price point they can afford.
2) It’s easier to upsell
It make it easier for businesses to upsell their products and services. By offering a set of tiered service levels, agencies can encourage customers to supplement their orders with add-ons and upsells.
When you’re setting up your SPP checkout, you have the option to create custom add-ons and extras that clients can choose to include with their orders. This makes it easy for customers to customize their experience through targeted upsells.
3) It encourages customer loyalty
It encourage customers to remain loyal to your business by offering them rewards for continued patronage. For example, you could offer loyalty discounts or give customers access to exclusive content or deals.
4) It simplifies the purchase process
It simplify the purchase process for customers. By offering different levels of service at different price points, businesses can make it easy for customers to find the option that’s right for them.
5) It maximizes profit margins
Tiered pricing often have higher profit margins than flat-rate pricing models. This comes backs to our earlier point about flexibility. When you offer clients a variety of price points, you allow yourself to capitalize on a larger section of the demand curve. As a result, your agency can generate more revenue through a greater volume of orders.
6) It increases customer lifetime value
It also tend to increase customer lifetime value. By offering different levels of service, businesses can encourage customers to keep coming back. In turn, this leads to repeat business and increased profits over time.
7) It helps you identify your high-value customers
Tiered pricing models can also help businesses to identify their high-value customers. By analyzing which customers are willing to pay more for your higher-priced options, you can get a better understanding of who your most valuable customers are.
Keep in mind that for tiered pricing to work, the pricing should be aligned to the value of that tier. For more information, read up on pricing based on value in our blog post.
8) It’s scalable
Tiered pricing is also scalable. As your business grows, you can add additional tiers of service to accommodate additional client segments. This allows you to expand your business without having to increase your costs.
9) It’s easy to implement and maintain
As we’ll see in the next section, these pricing options are easy to implement—and are much easier to maintain than project-by-project pricing.
With some basic client analysis, you can easily create segments to target through tiered pricing. From there, all that’s left to do is work out what services these segments are most likely to purchase and how much they’re willing to pay for them.
If you’re a bit confused, keep reading.
How to develop a tiered pricing model
Now that you know the benefits of the tiered pricing structure, it’s time to set one up. Follow these three steps so to develop the best pricing strategy for your agency.
Step one: think about your target clients
The first step is to think about what kinds of clients your pricing tiers will be built around. This will help you to determine which services you should offer at each price point later on in the process.
To do this, you can segment your customer base by average order value, revenue, location—whatever factors are relevant to your business model. While the specifics will vary from business to business, segmenting ideal customers based on the size of their organization is extremely popular with productized B2B agencies.
Bigger organizations tend to need services in greater quantities than smaller organizations. That makes it easy to create a pricing strategy model that focuses on attracting a wide range of businesses (e.g., solopreneurs, SMEs, enterprise-level companies).
Step two: look for purchase patterns
The second step is to look for purchase patterns among your segmented client tiers. This will help you to identify which services are most popular with the different segments and how much your clients are willing to pay for them.
To do this, you can analyze your customer data to see which services are most commonly purchased. You can also look at the average order value of your customers to see how much they’re willing to spend.
For example, you might find that the majority of SMEs you work with are only interested in your core service. If that’s the case, you could create a basic tier that’s limited to your core service and additional tiers that include secondary services that will appeal to larger businesses.
Tip: If you don’t have much customer data to sift through, research the competition! Look at the pricing options of a few well-established agencies in your industry for insight into service offerings that work.
Step three: create your pricing tiers
The third and final step is to create multiple pricing tiers. This step should be pretty simple thanks to the groundwork you’ve already done.
The number of tiers you create should be the same as the customer segments you created in step one. The services you include in each of those tiers will be the services that those segments are most likely to order (i.e., refer to step two).
The only thing left to do is determine an attractive (and sustainable) price for each tier you’ve created. There are a few ways to do this:
Average Order Value: As we mentioned earlier, you can use your customer’s average order value as a guide for how much to charge for each tier. Calculate the average order value of all the clients in a given tier and use the number to come up with a price.
Profit Margin: For a more basic approach, work backwards from the profit margin you’d like each tier to generate. Calculate the total cost of providing the services in a tier (e.g., $100) and determine an ideal profit margin (e.g., 20%). Finally, divide the total cost by one minus the decimal form of your profit margin (e.g., $100 ÷ [1 – 0.2] = $125). The number you get is the price you should charge in order to hit your profit margin goal!
Competitive Analysis: If you’re still not sure how to price your services, take a look at what your competitors are charging. Use their prices as a baseline and adjust accordingly.
Tiered pricing examples
Now that you know more about the tiered pricing structure, let’s look at an example so you can get a better feel for it. Let’s assume you’re a design agency offering recurring services for design tasks. Right now you just have a single plan, but you’ve discovered that it doesn’t satisfy every client. Some need a bit more flexibility and they are happy to pay more for it, while for others it’s too expensive.
You could opt for the classic three-tiered pricing strategy as follows:
|10 design task/month
|20 design tasks/month
|1 task at a time
|2 tasks at a time
|3 tasks at a time
|dedicated account manager
|dedicated account manager
Usually with tiered pricing, the price anchor is the middle package, which looks like it’s the best deal between the three options. You could highlight it slightly by focusing the design on this one tier.
Tiered price FAQ
How is tiered pricing calculated?
The average order value is a good reference point to calculate what customers should pay. You can also use your desired profit margin to price every single tier.
What is an example of tiered pricing?
Most companies use a three-tiered model with a lower, middle and high-priced tier. Three tiers make it easy for users to choose while also giving your company enough variety to serve a wide range of clients.
What is tiered pricing vs flat pricing?
Flat pricing always has the same price for a service/product. For instance, a website will cost the same regardless of how much time needs to be invested into the project delivery.
What are the disadvantages of using tiered pricing?
This method requires you to know how much time you spend delivering services and how to package them into the most popular options. You’ll need to be in business for a while in order to have the data necessary to come up with your tiered pricing strategy.
What is the purpose of tiered pricing?
The purpose of different tiers is to differentiate between your services or product offering while catering to different groups of users. Not everyone needs the full feature set, and some users simply have a lower budget.
The bottom line
Tiered pricing models offer a number of benefits for businesses. By offering different levels of service at different price points, businesses can encourage customers to purchase the higher-priced options that offer more value.
With SPP, it’s easy to create and advertise your pricing tiers to leads and customers alike. Our fully customizable client portal and billing system makes it easy for your clients to browse your service offerings and add-ons to tailor their experience to their needs.