How to Use Tiered Pricing Method to Boost Your SaaS Revenue

Tiered pricing method is a popular and effective strategy for SaaS businesses that want to offer different plans or packages to their customers based on their needs and budgets. In this article, you will learn what tiered pricing is, how it works, what are its benefits, and how to implement it for your SaaS product.

Key Takeaways

Tiered pricing method is a pricing strategy that scales the price of a product according to different thresholds of a certain metric.

Tiered pricing method has many benefits for SaaS businesses, such as expanding their customer base, enabling upsell opportunities, reducing churn rate, and differentiating their product from competitors.

To implement tiered pricing method for their SaaS product, SaaS businesses need to identify their customer segments, define their value metric, create their tiers, and set their prices.

Tiered pricing method requires testing and optimization based on data collection, analysis, and experimentation.

What is Tiered Pricing Method?

Tiered pricing method is a pricing strategy that scales the price of a product according to different thresholds of a certain metric. For example, a B2B SaaS company may have an entry-level tier that allows one employee to access the system and a higher-end tier that lets unlimited employees use it. In between there will be plans offering in-between ranges.

Tiered pricing method is used by businesses to deliver quantity discounts to customers who spend more. Here’s a simple example:

1 seat: free
Seats 2-10: $150 per license
Seats 11-20: $100 per license
Seats over 20: $50 per license

In this example, you have four tiers. The first is a freemium offering. The second sees you pay $150 for two seats (as the first is free) and up to $1,200 for ten. If you needed 15 seats, you’d land in tier three, giving you a discounted rate on those five seats that fall into the third tier: $1,200 + (5*$100) = $1,700.

By tiering the price based on the number of users, businesses can offer plans that fit their customer needs best and get the most value for their dollar, while also monetizing their products and services effectively.

Why Use Tiered Pricing Method?

Tiered pricing method has many benefits for SaaS businesses, such as:

Expanding your customer base

When you only have one tier, customers who don’t need everything in that tier will be overpaying, sometimes drastically. This means that many of those customers will choose not to purchase the product at all. Rather than having a customer paying a little less than may eventually pay more, you have no customer at all.

Enabling upsell to the next tier

Upselling is a big part of successful SaaS operations. When you have a customer that has very limited needs, and you provide them with a tier that fits those needs, you’ve got them in your ecosystem. As their needs grow, they will naturally want to upgrade to the next tier that offers more features, support, or performance. This way, you can increase your revenue per customer over time.

Reducing churn rate

Churn rate is the percentage of customers who stop using your product or service over a given period of time. It’s one of the most important metrics for SaaS businesses, as it affects your profitability and growth. Tiered pricing method can help you reduce churn rate by providing customers with more options and flexibility to choose the plan that suits them best. If they feel like they are getting value for their money, they are less likely to cancel or switch to a competitor.

Differentiating your product from competitors

Tiered pricing method can also help you stand out from your competitors by highlighting your unique value proposition and features. By offering different tiers with different benefits, you can appeal to different segments of your target market and showcase how your product can solve their specific pain points or goals.

How to Implement Tiered Pricing Method?

Implementing tiered pricing method for your SaaS product requires some research and experimentation. Here are some steps you can follow:

Identify your customer segments

The first step is to understand who your customers are, what they need, what they value, and how much they are willing to pay for your product or service. You can use various methods such as surveys, interviews, analytics, or feedback to segment your customers based on their characteristics, behaviors, or preferences.

Define your value metric

The next step is to decide what metric will be used to differentiate your tiers and scale your price. This metric should reflect the value that your product delivers to your customers and how they use it. For example, some common value metrics for SaaS products are number of users, storage space, features, support level, or performance.

Create your tiers

The third step is to create your tiers based on your value metric and customer segments. You should aim for three to five tiers that cover the range of needs and budgets of your customers. Each tier should have a clear name and description that communicates its benefits and value proposition. You should also consider adding a freemium or free trial option to attract new customers and generate leads.

Set your prices

The final step is to set your prices for each tier based on your costs, value proposition, market demand, and competitive analysis. You should also consider the psychology of pricing and how it affects your customers’ perception and decision-making. For example, you can use anchoring, contrast, or decoy effects to influence your customers’ choices and preferences.

Tiered Pricing Method Examples

Many SaaS companies use tiered pricing method to offer different plans or packages to their customers. Here are some examples:

Paddle

Paddle is a platform that helps SaaS businesses sell their products online. It offers four tiers based on the number of transactions per month: Starter (up to 1,000 transactions), Growth (up to 10,000 transactions), Scale (up to 100,000 transactions), and Enterprise (custom pricing). Each tier also offers different features and support levels.

CloudZero:

CloudZero is a cloud cost intelligence platform that helps SaaS businesses optimize their cloud spend and profitability. It offers three tiers based on the number of AWS accounts: Startup (up to 5 accounts), Growth (up to 25 accounts), and Enterprise (custom pricing). Each tier also offers different features and support levels.

Moesif

Moesif is an API analytics and monitoring platform that helps SaaS businesses understand and improve their API performance and user experience. It offers four tiers based on the number of API calls per month: Free (up to 5,000 calls), Startup (up to 50,000 calls), Scaleup (up to 500,000 calls), and Enterprise (custom pricing). Each tier also offers different features and support levels.

Tips

Tiered pricing method can help you expand your customer base, enable upsell opportunities, reduce churn rate, and differentiate your product from competitors.

To implement tiered pricing method for your SaaS product, you need to identify your customer segments, define your value metric, create your tiers, and set your prices.

You should test and optimize your tiered pricing strategy based on data collection, analysis, and experimentation.

Tiered Pricing Method: A Strategy for SaaS Businesses

Tiered pricing is a pricing strategy that scales the price of a product according to different thresholds of a certain metric. For example, a B2B SaaS company may have an entry-level tier that allows one employee to access the system and a higher-end tier that lets unlimited employees use it. In between there will be plans offering in-between ranges.

Tiered pricing is used by businesses to deliver quantity discounts to customers who spend more. It also helps to expand the customer base, enable upselling, optimize revenue, and align value with price. Tiered pricing is popular among SaaS businesses because it allows them to cater to different customer segments and needs.

How Tiered Pricing Affects Global Demand

The global demand for SaaS products is expected to grow at a compound annual growth rate (CAGR) of 12.5% from 2021 to 2028, reaching $623.3 billion by 2028 . One of the factors driving this growth is the increasing adoption of cloud-based solutions by small and medium-sized enterprises (SMEs) and large enterprises across various industries.

Tiered pricing can help SaaS businesses capture this growing demand by offering flexible and affordable plans that suit different customer needs and budgets. By providing customers with multiple options, tiered pricing can increase customer satisfaction, loyalty, and retention. It can also attract new customers who may not be willing or able to pay for a one-size-fits-all solution.

However, tiered pricing also poses some challenges for SaaS businesses. For instance, they need to carefully design their tiers to avoid cannibalization, confusion, or complexity. They also need to monitor their costs and margins to ensure profitability across different tiers. Moreover, they need to communicate their value proposition clearly and effectively to differentiate themselves from competitors.

How to Implement a Tiered Pricing Strategy

To implement a successful tiered pricing strategy, SaaS businesses need to follow some best practices, such as:

Conducting market research and customer segmentation to understand their target audience and their willingness to pay for different features and benefits.
Choosing a metric that aligns with the value delivered by the product, such as number of users, storage space, data volume, etc.
Creating three to five tiers that cover the low-end, mid-range, and high-end segments of the market, with clear and distinct features and benefits for each tier.
Setting prices that reflect the value of each tier and the cost of delivering it, while also considering the competitive landscape and the customer lifetime value.
Testing and optimizing the tiers and prices based on customer feedback, behavior, and data.

Frequently Asked Questions

Q1: What is the difference between tiered pricing and volume pricing?
A: Tiered pricing and volume pricing are similar in that they both offer discounts based on the quantity or usage of a product or service. However, tiered pricing has fixed price points for each tier, while volume pricing has a variable price per unit that decreases as the quantity or usage increases.

Q2: How many tiers should I have for my SaaS product?
A: There is no definitive answer to this question, as it depends on your product, market, and customers. However, a general rule of thumb is to have three to five tiers that cover the range of needs and budgets of your customers. Having too few tiers may limit your revenue potential and customer satisfaction, while having too many tiers may confuse your customers and increase your operational complexity.

Q3: How do I test and optimize my tiered pricing strategy?
A: Testing and optimizing your tiered pricing strategy is an ongoing process that requires data collection, analysis, and experimentation. You should monitor your key metrics such as conversion rate, revenue per customer, churn rate, customer satisfaction, and feedback. You should also conduct A/B tests or split tests to compare different versions of your tiers, prices, features, or value propositions. You should then use the results to make data-driven decisions and improvements.

References:

http://ncseonline.org/nle/crsreports/05jun/97-905.pdf

https://www.grandviewresearch.com/industry-analysis/software-as-a-service-saas-market
https://www.paddle.com/blog/tiered-pricing
https://www.cloudzero.com/blog/tiered-pricing
https://www.moesif.com/blog/api-monetization/api-strategy/Tiered-Pricing-Strategy-Definition-Examples-and-Benefits/
https://www.togai.com/blog/tiered-pricing-guide/

https://www.paddle.com/blog/tiered-pricing

https://www.cloudzero.com/blog/tiered-pricing

https://www.moesif.com/blog/api-monetization/api-strategy/Tiered-Pricing-Strategy-Definition-Examples-and-Benefits/

https://www.togai.com/blog/tiered-pricing-guide/