Key Takeaways
- Tiered pricing vs volume pricing depends on your products or services, customer segments, and how customers buy.
- Tiered pricing works well for different customer needs, features, service levels, and willingness to pay.
- Volume pricing suits relatively homogeneous products or services where customers receive better prices as they purchase larger quantities.
- Costs, margins, and customer value should guide your choice before implementing either pricing strategy.
Tiered pricing vs volume pricing: Which one is the best option for your business?
Many businesses focus on protecting their margins and profitability through cost reductions, improved efficiency and productivity, better procurement, and effective inventory management.
However, businesses can also use pricing as a growth lever to improve margins and profitability. The quality of your pricing strategy and execution can directly affect profitability, particularly when discounts reduce the margin earned on each sale.
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Tiered Pricing vs Volume Pricing: Which Is Better?
The right choice between tiered pricing and volume pricing depends mainly on your products or services, customer groups, and how customers buy from you.
- Choose tiered pricing when you sell products or services to different customer groups, offer different features and benefits, or do custom work such as consultations. Tiered pricing lets you create different packages and price bands based on customer needs, value, and willingness to pay.
- Choose volume pricing when you sell relatively homogeneous products or services where customers buy different quantities. It can make more sense when you want to offer lower prices to high-volume customers while charging higher prices to customers who purchase smaller quantities.
- Consider both approaches when your product portfolio and market segments require different pricing structures. Your decision should take into account your costs, product line, target markets, and how customers purchase from you.
The key difference is that tiered pricing can distinguish products through features, benefits, or service levels, while volume pricing primarily uses quantity to determine the price customers pay.
| Tiered Pricing | Volume Pricing | |
| Main differentiator | Features, benefits, service or usage | Quantity purchased |
| Best suited to | Different customer needs | Larger purchase quantities |
| Common examples | SaaS, consulting, mobile plans | Wholesale, bulk products, commodities |
| Main benefit | Captures different levels of willingness to pay and customer value | Encourages larger orders |
| Main risk | Too many tiers can create complexity | Discounts can erode margins |
| Key decision factor | Customer value and differentiation | Volume economics and cost-to-serve |
The examples below show how these two approaches work in practice.
See whether your pricing is under controlTiered Pricing vs Volume Pricing
So, what are tiered pricing and volume pricing? What’s the difference between the two?
Often, the terms are used interchangeably, but there is an important difference between these two pricing approaches.
Tiered pricing offers different product or service packages at different price points, with each tier providing a different combination of features, benefits, usage levels, or service. Mobile plans, SaaS subscriptions, and consulting packages are common examples of tiered pricing.
Volume pricing sets the price according to the quantity a customer purchases, with lower unit prices typically available at higher purchase volumes. Depending on the structure, the lower price may apply to all units purchased or only to units within a particular quantity range.
Comparing Tiered Pricing vs Volume Pricing with Examples
Tiered pricing can also apply to products based on the features and benefits customers value, such as different mobile phone data packages.
One of the main benefits of tiered pricing is that it adapts well to different customers’ needs and budgets. It can also be applied across distinct customer groups, allowing businesses to set price bands based on customer value and willingness to pay. A characteristic of tiered pricing is the qualitative variation between products or services, with differences in features, benefits, service levels, usage, or customer value helping to justify different price points.
Tiered Pricing Example: Dropbox
Dropbox wisely bundles its storage solutions using the tiered pricing method.
Dropbox differentiates its business plans through differences in storage, features, administrative controls, security, and support.
Standard: A lower-tier plan can appeal to businesses that need core storage and collaboration features at a lower price point.
Advanced: A higher-tier plan can appeal to businesses that need greater capacity and more advanced features.
Enterprise: An enterprise tier can provide customised features and support for larger organisations.
On the other hand, volume pricing sets prices according to the quantity a customer purchases. Typically, customers who purchase larger quantities receive a lower unit price.
Volume Pricing Example: Shutterstock
Shutterstock sells licensed digital photo downloads and provides different purchase options based on expected usage and the number of downloads customers require. Customers can purchase image packs or subscriptions with defined download allowances. These options allow customers to select a pricing structure based on their expected usage and volume requirements.
Building a Pricing Ecosystem Podcast Ep. 103!CASE STUDY: Dow Corning
At the time, the silicone industry was experiencing diminishing margins because of increased competition, commoditisation, and changes in legislation.
As a consequence, the company assessed its customer segments and identified a significant group of price-sensitive customers putting pressure on prices. However, instead of yielding to price pressure, the company launched a separate offering called Xiameter, with different customer experiences, service levels, and price points.
Using customer segmentation, differentiated service levels, and a separate pricing model enabled Dow Corning to target a much wider part of the market while protecting the margins of its existing product offering. The Xiameter model also helped the company make better use of its existing capabilities, respond to price-sensitive customers, and expand its market reach.
Advantages and Disadvantages of Tiered Pricing and Volume Pricing
As with other pricing strategies, these two pricing methods also have their pros and cons. Let’s discuss the challenges and benefits of each pricing strategy.
Tiered Pricing Advantages
- Attracts a wider range of customers by offering different packages and price points.
- Creates opportunities to upgrade customers as their requirements expand.
- Helps align the value provided with the prices customers pay.
- Lower-priced entry tiers can reduce the commitment required for customers to try a product or service.
Tiered Pricing Disadvantages
- More tiers can increase choice complexity and make it harder for customers to identify the right option.
- Poorly differentiated tiers can make it difficult for customers to see enough value in upgrading.
Volume Pricing Advantages
- Simple to create and easy for customers to understand.
- Easier to calculate the total purchase price.
- Can encourage larger orders by giving customers a clear financial incentive to buy more.
Volume Pricing Disadvantages
- Can reduce unit margins if the discount is greater than the cost savings or additional value generated by the larger order
- Although volume pricing can be simple to implement, poorly designed discounts can create margin and profitability problems for both products and services.
- For businesses selling physical products, volume discounts can reduce margins while production and shipping costs may stay the same or even increase. This can reduce overall profitability if the additional volume does not offset the lower unit margin.
- For some services, volume discounts can reduce revenue per unit of work without generating equivalent reductions in delivery costs. They can also weaken the perceived value of a service if customers come to expect lower prices for larger engagements.
So Which Pricing Strategy is Ideal for Your Business?
The right choice depends on your business model, customer needs, and purchasing behaviour.
Choose tiered pricing when customers have different needs, features, service requirements, or willingness to pay. Choose volume pricing when quantity purchased is the main factor that determines the economics or value of the transaction. Just remember to consider your costs and, most importantly, understand how your customers buy from you.
Your choice should also reflect your product line, target markets, costs, and customer purchasing behaviour.
For instance, if you sell relatively homogeneous products, such as cement or steel, to individual consumers, retailers, and wholesalers, you will likely want to set different prices for each volume tier. Implementing volume pricing can help businesses offer different effective unit prices based on purchase quantities without extending the lowest price to smaller customers. This can help businesses remain competitive across different customer segments and purchasing volumes.
Competitor pricing, customer value, willingness to pay, production costs, and ordering costs can help establish an appropriate price range. However, there’s still enough scope to utilise pricing in that range to meet various strategic goals.
Implications
- Tiered pricing may be a better option when customers have different needs, service requirements, or willingness to pay. Volume pricing may be more suitable when purchase quantity is a key driver of customer value, cost-to-serve, or transaction economics.
- If customers gain different levels of value from additional features, usage, or service levels, tiered pricing can help capture that value through differentiated packages. Businesses can also use upsells to encourage customers to move towards higher-value products or services.
- Each tier should provide a meaningful increase in features, benefits, usage, or service that supports its price.
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Bottom Line
Tiered pricing and volume pricing are pricing approaches that use different factors to determine what customers pay. Both approaches can help businesses serve different customer needs and purchasing behaviours, although they do so in different ways.
Volume pricing can be relatively easy to implement; however, discounts on physical products can reduce unit margins. Production and shipping costs may stay the same or increase, so businesses need to ensure that additional volume offsets the lower margin.
For services, tiered pricing can work well when customers have different requirements, service levels, features, or willingness to pay. Many SaaS and technology companies use tiered pricing to offer different combinations of features, usage levels, or service options.
Therefore, before choosing a pricing approach, analyse your costs, margins, customer value, willingness to pay, purchasing behaviour, and overall pricing objectives.
For a comprehensive view on maximising growth in your company, download a complimentary whitepaper on How To Drive Pricing Strategy To Maximise EBIT Growth.
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