Use a tiered pricing model to increase profits

Tiered pricing model model icon
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Tiered and Volume Pricing models are often used interchangeably and look deceptively similar. However, both apply where customers buy quantities of the same items. 

While the former is aimed at generating higher revenue, the latter focuses on acquiring more customers:

  • Tiered pricing: The marginal price per unit reduces as you go up the tiers. Once you fill up one tier, you move to the next.
  • Volume Pricing: A single price applies to all the units in a transaction, depending on the number

Here’s a simple example. Suppose you’re a business that is selling widgets. Here is a comparison of the sales value you would achieve under tiered and volume pricing models:

Tiered pricing Cost per widget Volume pricing Cost per widget
0-10 widgets £20 0-10 widgets £20
10-20 widgets £10 10-20 widgets £10
30-100 widgets £5 30-100 widgets £5
Total for 60 widgets £550 Total for 60 widgets £300
60 widgets sold to your customer

Tiered Pricing Calculations

Note how the price bands and unit price in each band are the same, but in the tiered pricing model, you calculate your total sale price like this:

[(£20×10) + (£10×20) + (£5 x 30)] = £550

You move onto the next tier once the previous one has been filled. Effectively, the customer is rewarded for buying a certain quantity at one price with the opportunity to buy additional units at a lower price.

In a volume pricing model, the total is simply:

£5×60 = £300 since the total number of widgets bought falls within the 30-100 widgets price range. You are discounting the whole order using this method, and making a lot less profit.

Using Price Tiering as a Strategy

The main idea behind a tiered pricing strategy is that your prices and features are tailored according to your customers’ various needs and uses of your products.

As a result, you are effectively rewarding customers who buy in higher volumes without sacrificing profit margin.

The number of tiers should allow you to capture sales by targeting different market segments – e.g. retail, trade, wholesale – without losing revenue.

The main goal of your pricing strategy should be to maximise customer lifetime value.

Don’t overwhelm customers with too many pricing options or, worse, confuse them, so set pricing tiers to appeal to everyone and meet each customer group’s needs.

You’ll need to scribble down some ideas and test them first, and you probably need to be prepared to fine-tune the prices before you settle on a final version.

But give it a try and see if you can make it work for your business.

Want to implement tiered pricing to your business?

If you’d like some help with this, our business improvement services team will be happy to assist you.

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Pricing strategies such as this are exactly what our Business Improvement Masterclasses cover on the lowest tier of our business improvement packages.

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