Tiered Pricing Model: Great to Maximize SaaS Revenue
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Choosing the right pricing model for your SaaS product is crucial, and there are many, many models to consider.
Tiered pricing is a common billing strategy used by many companies. This approach involves offering different levels of service or products based on predefined tiers.
It is not limited to just software as a service (SaaS), and can be applied to various industries. By using tiered pricing, businesses can attract different types of customers and also have the opportunity to upsell to them as their loyalty increases.
The tiered pricing model offers flexibility and focuses on customer needs. To effectively implement this model, your team should segment customers into personas and create tiered options to cater to each group. The key to success lies in aligning the price points with the value provided by each tier.
Tiered pricing is a strategy that offers different service packages with specific features. Users can begin with a basic tier and progress to higher tiers with more features, increasing in price accordingly.
This pricing model aims to build customer loyalty for a SaaS company through monthly or yearly subscriptions. It also offers tiered discount structures in long-term plans, benefiting both the SaaS business and the customer.
SaaS companies who offer different pricing plans or packages to their prospects often use a tiered pricing model. With this model, customers can choose from a range of prices that are based on specific features, benefits, or services. These tiers allow customers to select the option that suits their needs and encourage them to upgrade to higher tiers as time goes on.
The benefits of using a tiered pricing model…
Let's explore how the tiered pricing model not only attracts new customers but also goes beyond that in achieving its goal.
Grow your customer base
Having only one tier can lead to customers overpaying for features they don't need. This often results in customers deciding not to purchase the product altogether. Instead of a customer paying slightly less but potentially more in the long run, you end up with no customers at all.
Allows for upselling to the next level
Upselling is crucial for successful SaaS operations. When you initially offer a tier that perfectly matches your customer's limited needs, you gain their loyalty. As their needs expand, it becomes effortless to convince them to upgrade to a higher-priced tier. If you fail to provide a suitable option and they choose another provider, you miss out on potential revenue.
A tiered pricing structure offers plans to suit every budget and need. You can keep customers from going to competitors by providing what they need. They can choose the best tier for them and easily switch as their needs change. Whether they upgrade or downgrade, we ensure their money stays with us.
New features become more valuable
Having a single pricing tier doesn't significantly increase your revenue when new features are introduced. The only way new features can attract new customers is if they actually need them. However, by placing features in a suitable tier, it becomes more appealing as an upsell, while still allowing you to attract users who are not willing to pay for that particular feature.
…and the drawbacks
The tiered pricing model has drawbacks that are worth considering. Let's explore some potential pitfalls.
Room for misunderstandings
Customers often lack awareness of the specific features included in different product tiers. As a result, potential leads may need to invest time in watching videos or reading blog posts to gain clarity.
Customers pick the wrong tiers
Customers having the freedom to choose can sometimes make the wrong choice, leading to misunderstandings and dissatisfaction. For instance, they may believe the "Starter" tier is suitable for them when in fact the "Startup" tier would be a better fit. This can result in high churn rates and negatively impact your company's value.
Pricing is not optimal
Determining the price for each tier is a difficult task for SaaS companies. They must be able to distinguish between the tiers, determine the appropriate features for each, and set the appropriate price. Making a wrong decision could result in losing potential value and potential profit.
Who should implement a tiered pricing model?
You should consider a tiered pricing for your SaaS if:
Attracting both startups and enterprises is your goal
Offering tiered pricing plans and packages is essential if your product caters to a diverse audience with varying budgets. Whether your customers have massive SaaS budgets and use numerous tools or are currently on a tight shoestring budget, catering to their needs through different pricing tiers can help you capture a wider customer base.
API or server-side costs are not a concern for you
If you're spending a lot on server-side costs, it's not a good idea to offer tiered pricing. Tiered pricing should be set up in a way that maximizes revenue from high-value customers, not to decrease it.
You aim to achieve steady income
Encourage users to choose monthly or annual plans to ensure consistent revenue and meet your goals. This approach provides a clear understanding of your monthly earnings.
The 3 different tiered pricing Models
Setting up tiered pricing for your business allows for a lot of flexibility. While many businesses offer three tiers, the choice ultimately depends on what works best for you and your customers. Whether you sell subscriptions, services, or products, this straightforward model will guide you in configuring your price tiers. When considering your pricing tiers, keep in mind these three levels or packages.
Essential tiered pricing
The basic level of benefits is provided in this introductory tier. It serves as an incentive for new customers to engage with your business.
Additionally, it can meet the ongoing needs of some customers without feeling like they are overspending on non-essential purchases.
Standard tiered pricing
The medium-level tier is designed to appeal to the average customer, making it the most popular choice. It builds upon the offerings of the lower tier and provides additional benefits.
By choosing this tier, customers can easily understand the clear benefits that your business has to offer.
The upgraded tier provides the ultimate "VIP experience" for your business. It includes a higher number of units, personalized service, special discounts, and other privileges - along with everything in the lower tiers. This is the ultimate offering you can provide to customers at the highest price.
The 3 different tiered pricing strategies
Here are three commonly used strategies for pricing tiers.
Organizing tiers based on features acknowledges that not all customers require advanced options.
By offering basic features in affordable plans and more advanced features in higher-priced plans, you can cater to the needs of all customers.
The cost for customers of services such as cloud computing or mailing list providers is determined by how much time they use computer resources or the number of recipients in their mailing list.
User count tiers
This is primarily designed for B2B applications, where it is common for multiple users to require access to the product.
By categorizing the tiers based on the number of users granted access, we can accommodate both small businesses in their early stages and large enterprises.
Tiered pricing templates
When structuring your business' tiered pricing, it can be challenging to determine the best approach. To simplify the process, start by creating a comprehensive list of all the products or services your business provides.
Next, evaluate the value of each offering, from least to most, and consider the resources required for each. Finally, group them into logical categories or tiers that will resonate with your customers.
For a clearer understanding, take a look at the template provided below.
Examples of successful SaaS tiered pricing models
Price tiering models typically consist of three tiers, which can vary from a "basic" to a "plus" version. In some cases, these tiers may cater to different target audiences, such as "personal" vs. "business" packages.
While commonly used for memberships, event tickets, and services, tiered pricing models can be applied to various industries.
DocuSign provides four tiers, allowing customers to choose between monthly or annual pricing. These tiers are designed to cater to both personal and business use, with more features available for the latter. The "Standard" option is labeled as the "Best Value" tier, making it the ideal choice for undecided prospects.
Docusign offers various pricing options to choose from:
→ Personal: $10 per agent per month (billed annually)
Zendesk uses two different methods to categorize their tiers. These tiers are based on specific features and the price is determined per agent. This means that Zendesk combines both feature-based and user-count strategies. It is common for companies to mix tiers in this way, as we will see with other examples.
Zendesk's non-enterprise tiers encompass the following options:
→ Team level: $49 per agent per month (billed annually)
Crazy Egg provides different pricing options to optimize your website:
-> Basic: $29/month
-> Standard: $49/month
-> Plus: $99/month
-> Pro: $249/month
Crazyegg's enterprise plan is designed to meet the demands of customers who require more than what the pre-built options offer. This tier enables them to customize pricing and provide personalized support to larger accounts, leading to stronger customer relationships.
Tiered pricing best practices
Unlock the secrets to successful tiered pricing. Dive into the best practices and expert tips you need to ensure your plans and packages are flawless.
Use simple names for your plans
Captivate your target audience with a straightforward approach - give your plans a catchy name. Look no further than Loom for inspiration, as they use "starter," "business," and "enterprise" to clearly define their plans. Not only that, but they also include attention-grabbing subheaders that showcase the standout features of each plan.
Stick to 3-4 tiers
Simplify your service offerings by finding the perfect balance. Most companies find that three or four tiers of service work best. Stick to the classic "small," "medium," and "large" pricing model, or consider adding a free or premium plan.
The goal is to avoid overwhelming customers with too many choices. Remember, less is more.
Get creative with how you display your prices, like ClickUp does. Their pricing page offers a simple binary choice that expands into more options. It's a smart way to gauge interest from paid users without overwhelming them with information.
Highlight a “preferred” plan
Capture the bandwagon effect and effortlessly guide your customers with our "recommended" or "most popular" plans. Don't overwhelm them, just lead them towards the best choice. See how Sparktoro does it:
Use anchoring to push your top-tier plans
Grabbing attention and driving traffic to your pricing page can be a challenge. But wasting valuable page space on repetitive features is not the solution.
Enter the game changer: anchoring. By positioning your first plan as the foundation, you can showcase the impressive value of your higher-tier options. This strategy solidifies the incredible deals your customers are receiving.
When it comes to changing plans, most users dread the thought of it. The time and effort it takes to figure out what new plan to switch to can feel overwhelming, not to mention the potential for added costs and headaches. But what if changing plans was quick and painless? That's exactly what you should offer your customers.
Avoid pricing or feature overlaps between tiers
Don't forget to clearly differentiate between each tier.
As we mentioned before, be cautious about unintentionally giving more value to higher-tier customers. It may require some adjustments, but make sure there is a noticeable difference between each plan so that customers don't automatically choose the cheapest option.
Take a look at how Sleeknote effectively distinguishes their plans:
Tiered pricing and volume pricing, what’s the difference?
Let's clarify the difference between tiered pricing and volume pricing. While these strategies may appear similar, there is a key distinction between them. With volume pricing, customers pay a consistent price for each unit purchased, but the cost per unit decreases as more units are bought. For example, businesses may offer cheaper prices for bulk purchases.Tiered pricing allows for different price ranges based on quantity. In the example mentioned earlier, if a company needs 101 users, they would pay $1008. This is calculated by multiplying $10 by 100 for the first 100 users, and then adding an additional $8 for the 101st user.Overall, tiered pricing is more advantageous for businesses when customers require a larger quantity of units, especially when considering SaaS companies where these units are typically users.
Tiered pricing model and a tiered pricing strategy, what’s the difference?
Tiered pricing sets a specific price for each individual unit within a specific range. On the other hand, volume pricing offers a single price for all units within that range.
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Consider the per active user pricing as an alternative to the per user pricing model. With this approach, customers pay for the individuals who actively use the product. This resolves the concern of your customers about purchasing
Feature-based pricing, a popular SaaS pricing model, allows companies to set prices based on the level of functionality provided. This approach is often used alongside tiered pricing, where more features come at a higher cost.