June 5, 2019 | Sean Foo
When it comes to selling your products or services, selecting the right pricing strategy is critical.
After all, it makes the difference between becoming very profitable or even losing money with each sale!
Two of the most popular pricing strategies are tiered and volume pricing, but which exactly is the better option for your business?
Let’s end the debate for you!
This is volume pricing by the way!
Let’s quickly define what these two pricing strategies actually are.
Tiered pricing is simply – selling your products or services in tiers that have to be filled before moving up to the next tier.
The pricing in that tier ONLY applies to the units bought in that tier.
Volume pricing is simply – selling your products or services in bulk.
As soon as the number of units hit a certain number, ALL units will be priced at the new lower rate.
Let’s say you are a consultant selling 100 consultation hours to a company, and you decide to price your service using the tiered and volume pricing strategy.
Which will help you earn more assuming the company decides to hire you for all 100 hours?
Well, let’s take a look at our table and chart!
It is quite obvious that using tiered pricing will help you earn more, an additional $1,600 in fact!
Tier pricing here only starts giving a discount once your customer finishes paying the full price for the first 20 hours.
And once they finish paying $80/hr for the next 40 hours in the second tier, then they can enjoy the final tier’s discount of $60/hr for the last 40 hours.
It’s just the smarter way to price!
Volume pricing just throws out a bulk discount to the customer.
Looking to buy just 20 hours of my time? All 20 hours will cost $100 each.
Buying 100 hours? All 100 hours cost $60 each.
Beginning to see the issue here?
Not only will you be earning less, but you will also encounter issues especially if you are pricing your physical products this way.
While volume pricing is rather simple to implement, it brings about various problems for both products and services.
If you are selling a physical product, your margins will decrease while the cost of production & shipping might either stay the same or even increase.
That means you earn less profit!
If you are selling a service such as creative work, volume pricing not only will lower your earnings for the same amount of work, but it will also devalue the image of your service.
There must be a better way!
Tiered pricing is all about giving your customers options while protecting the overall value of your products and services.
Tiered pricing allows you to:
The most attractive advantage of tiered pricing, however, is the ability for you to creatively package your products or services beyond just quantity.
Cornerstone, a men’s grooming subscription service, uses tiered pricing options to provide a wider selection of choices to choose from.
Customers who just want the basics can go for the starter set, while the others who prefer a more premium experience can go for the higher priced option.
Those that just want to try their shaver out will opt for the starter set without committing too much money up-front.
Instead of throwing in more shavers or blades, they creatively package together a second and third option with different products bundled in.
This encourages the purchase of multiple products, increases overall profit and clears a wide range of inventory without relying on selling a single item in bulk!
When it comes to services, tiered pricing is fantastic and it’s no wonder most Saas and technology companies use the three-tier pricing method to sell.
Tiered pricing allows you to group up different features together into ‘tiers’ that can range from basic all the way to premium.
Wix, the world’s biggest website builder, offers tiered pricing when it comes to their services.
Their four tiers allow them to target different groups of customers, from the newbie learning to build their first website to serious entrepreneurs looking to establish their web presence.
Wix’s distinct tiers come with increasingly better features beyond storage space, to appeal to the different customer personas they are trying to target.
The customer sees more value while the company rakes in more revenue!
When it comes to selling digital storage space, there is a limit to how much of a discount you can give without going into a volume price war.
Dropbox understands this and cleverly bundles their storage solutions with the tiered pricing method.
Storage space is expensive but features that are built-in cost next to nothing for customers to use them.
And that is exactly how they differentiate their highest tier, by increasing the product (storage space) slightly and throwing in a whole bunch of powerful features!
But does that mean tiered pricing is the ultimate solution for everything?
Not exactly, tiered pricing not only involves considerable planning and strategy to get it done right, but it also doesn’t work in all situations.
The beauty of volume pricing is its simplicity – simple for you to create, simple for the customer to understand.
That means less indecision – buy more and you get a better price. What’s so hard about that!
Barkbox uses volume pricing beautifully in their subscription-based business.
By standardizing the quality of all the products in box (dog toys and treats), they can go for volume pricing – giving a cheaper price per box for a longer subscription period.
Dog lovers who buy from Barkbox opt for a subscription box to save time, making their lives easier.
It is a product that is supposed to be fun to get, fun to use and most importantly, fun to purchase.
Adding tiers is quite counterproductive and would make the shopping experience rather exhausting!
Another great example of volume pricing that works is how Shutterstock prices their stock photo products.
They are selling essentially licensed digital photo downloads – whether you download 10 image or 100 images, the cost to Shutterstock doesn’t really change (if at all!).
Volume pricing here, in this case, is a fantastic option.
They can concentrate on earning through volume without having any of their fixed cost increasing – the beauty of digital products!
Instead of creating complicated tiers bundled together with value-added features, they decided to give it to everyone who is a customer – drawing entry-level customers who might eventually purchase higher volumes of images.
That really depends on your business, to be frank.
If you are selling a service or product that speaks to different customer personas or you are doing custom work such as consultations – tiered pricing would be a better option.
However, if your offering is more of a commodity, there is no value in making your solution so complicated – volume pricing makes better sense. (just remember to take note of your costs!)
But before we go, if you have decided on tiered pricing and want to fully maximize its benefits, we have an awesome guide for you!
Learn to use the 3 Tier Pricing Method To Triple Your Revenue!