Set prices too high and you’ll lose market share, but go too low and you risk leaving revenue on the table and compromising your fledgling brand. Tiered pricing offers a solution by allowing you to segment customers according to the features they want and the price they’re willing to pay. Let’s learn how.
What is tiered pricing?
At a high level, tiered pricing involves selling your business’ product at several different price levels in order to take advantage of differences between various types of customers. Tiered pricing is often confused with volume pricing, and while volume pricing does involve segmenting customers (by the amount of product they require), tiered pricing is all about creating qualitative distinctions that your customers are willing or not willing to pay for.
If that sounds vague, it's because the options for tiered pricing are extensive. There’s no universal approach because segmenting your customer base involves understanding where your customers do and don't see value.
Common Tiered Pricing Strategies
The obvious starting point for a business wanting to segment customers is to offer products of varying quality. Although a furniture manufacturer will aim to meet quality standards across its entire range, it might offer models in pine (regular quality) and walnut (luxury quality). The walnut models will obviously be priced much higher, separating customers who are willing to pay for a luxury product from customers who just want a functional piece of furniture. Costs of production may vary substantially between functionally similar products, although in many cases higher value products can be produced with a minimal increase in cost, such as where a publisher puts out hardcover and paperback copies of the same book. Offering numerous product variants is one of the common factors affecting inventory management; to achieve this type of tiered pricing often means holding some safety stock for each product variety.
Customer segmentation can also involve charging higher prices for customers with unique needs, especially where those needs are not catered to well by competitor products. Restaurants and food manufacturers often charge a surcharge for gluten-free products that outweighs the additional cost of gluten-free ingredients and certification. Segmenting customers according to their appetite for risk is another common pricing strategy. Many customers will happily pay a higher price for a product that is perceived to be more reliable. Similarly, risk averse customers often pay for additional guarantees or warranties – this is effectively a form of tiered pricing.
Although many businesses aim to provide every customer with excellent customer service, service levels can be a good way to segment your customer base. If a customer needs consistently short lead times, they are likely to be willing to pay a higher price than a customer who is happy to receive infrequent shipments when freight is inexpensive. Again, offering speed-based tiered pricing may be one of the factors affecting your inventory management. The products your business makes and the service commitments it provides are not the only ways to create pricing tiers. Many businesses set lower prices for customers who are willing to contractually commit to buying a product for a fixed term while charging casual users a significant premium.