Tiered Pricing for Software

What is Tiered Pricing for Software as a Service?

Tiered Pricing is a method used by many companies with subscription models. SaaS companies typically offer tiered pricing plans with different services and benefits at each price point with typically increasing benefits the more a customer pays. Striking a balance between what good rates are and the price can be difficult at times.

Why Does SaaS use Tiered Pricing?

The pricing of your software as a service matters significantly for business vitality. Charging too much for your services could drive too many customers away from an apparent lack of value, and charging too little will result in being unable to maintain the services you are running. Typically, the scaling of benefits offered should be tied directly to the expenses of the plans with some benefits added to higher tiers to give added value. These extra benefits include new features, more supported users, higher capacities, and better performance levels.

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Tiered Pricing Strategies

Three-Tiers Models

People naturally like things that come in batches of three.  This method typically offers models in the form of personal, professional, and business tiered pricing.  The personal plan rates are usually the cheapest with escalating benefits from professional and business plans.  Business will typically come with the most complex tools for users with extensive needs compared to standard.  This model helps to appeal to all three users with a very simple model to understand.

Multi-Tiered Models

Similar to the Three-Tiers Model, this model offers scaling prices with escalating prices and values.  Though it won’t necessarily be as simple as the other model, it does offer a greater range of values and rates the customer can choose from.  If the customer wants more exact rates with less worry over how much they have to pay, this might be the more ideal pricing model to use.  Additionally, if users reach the upper limits of what their pricing plan offers, service providers can more readily encourage customers to pay extra to receive more of the service.

Usage-based Models

Instead of offering distinct plans, pricing is directly tied to the resources the customer uses.  This can be beneficial for customers who not only want to directly forecast what they will be paying for on a monthly basis but also directly visualize how much they are paying for the services they are using.

Feature-based Models

Instead of offering batches of resources, tiers are distinguished by the services they have on offer.  Sometimes, users don’t want all the features typically tied to a given plan and want the option to pick what they need instead.  For service providers, this can even help avoid unnecessary costs by not providing resources that would have gone unused.

User-Count Models

A common model for service providers intending to distribute software to batches of users is a user-count pricing model.  These models will limit the number of people with access to their software. Customers who purchase more expensive plans can provide licensing to more users.  This method can also create the incentive to buy more licenses by making higher tiers more cost-efficient than buying multiple individual licenses.

tiered pricing example

Benefits and Detriments of Tiered Pricing

Pricing in tiers gives customers a sense of choice instead of being forced into a single rate with a set batch of tools, helping the company to better appeal to more customers. Having those rates puts a price point on the resources and services for customers to judge how much they will be spending. With the differences between tiers and prices, customers get a better sense of what services are worth linearly. If customers want to upgrade, they can visibly see how much higher tiers and extra resources are worth.

By a similar vein, providers can also assess how much income they will be receiving and if pricing points need to be adjusted to provide better price performance in the customers’ eyes. Compared to other pricing models, tiered pricing statistically generates more revenue. With the addition of a free trial to test features, customers could more readily be drawn in by the offerings. On a bigger scale, setting tiered pricing helps to better distinguish services from one company and another. Rates, prices, features, and overall performance can give companies a significant competitive advantage by offering the best product for the most justifiable price.

However, it is possible to place price points incorrectly. Tiered pricing can quickly confuse customers, and buyers can lose focus on how services are valued before potentially looking for companies with less esoteric pricing. Because pricing is based on the company’s own perception of what value it carries, it is possible to provide a service that customers want, and in turn doesn’t derive enough revenue to make it sustainable. Both the company’s budget and the pricing models of direct competitors should be carefully considered when determining the number of plans, the price per plan, and the contents of each plan.

The Necessity of Cloud Engineers

SaaS providers should conduct extensive market research as part of their pricing process to best determine customers’ interests. Besides understanding what services to provide, it’s beneficial to know what customers think is reasonably priced. Along with a free tier, companies will typically prioritize specific rates based on the type of customer who usually purchases that rate. This extends to the type of features it comes with. As long as the prices are justified by the features, support, and volumes provided, don’t be afraid of higher price tags.  Most importantly, the competition is usually a good indication of existing demand within a market.  Though it’s not recommended to just outright copy a competitor, they should be considered a benchmark to continuously iterate on top of.

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Dolan Cleary

Dolan Cleary

I am a recent graduate from the University of Wisconsin - Stout and am now working with AllCode as a web technician. Currently working within the marketing department.

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