If you have shopped around on websites, you know many types of pricing stores use to sell to customers. Pricing tiers, a model that is fast becoming popular in e-commerce, are one of them.
Statista notes how the subscription model is changing, with pricing tiers growing in popularity at 42% in 2023. It is no wonder that pricing tiers is the new trend in e-commerce merchants, but not many know what pricing tiers are.
So, in this article, let’s learn more about pricing tiers. We will go over pricing tiers and their different types, how they differ from other pricing strategies, the benefits and challenges they pose, and how you can implement them for your e-commerce business! With
What Are Pricing Tiers In E-Commerce?
Pricing tiers are a pricing model that offers a distinct set of goodies at varying prices for products and services. They are structured pricing models that allow businesses to provide different levels of their products or services. This helps to cater to the needs of various customers.
Think of it this way: You walk into a bakery, and you’re greeted with a display of delicious cakes. Each cake has a different size, flavor, and price tag. Not everyone would like a chocolate cake, and not everyone would prefer a large slice, either. That’s essentially what pricing tiers do in e-commerce. They present various options, from basic to premium, to ensure something for everyone.
At its core, pricing tiers are about flexibility and choice. By offering multiple tiers, e-commerce businesses can appeal to a broader audience. Whether budget-conscious shoppers looking for a bargain or those willing to spend more for extra features and benefits, it’s all about finding that sweet spot where value meets affordability.
But pricing tiers aren’t just about placing random price tags. They’re carefully crafted strategies designed to maximize revenue while meeting the diverse needs of customers. Each customer is at a different phase of their buyer’s journey and needs to be handled accordingly. Therefore, the tier options entice customers to explore and ultimately purchase by offering a distinct set of features, benefits, and value propositions we curate.
Pricing Tiers Vs. Volume Pricing Comparison
Another popular pricing model is volume pricing. Used by companies offering bulk orders on their product, they operate on slightly different principles.
Let’s expand on the previous cake example: You are shopping for your cake and notice two options—a single pack and a bulk pack. The single pack comes at a standard price, but the bulk pack offers a discount per unit when you buy in larger quantities. That’s volume pricing in action. It encourages customers to buy more by offering discounts based on the volume of their quantity purchase.
Here is a more in-depth look at the comparison between pricing tiers and volume pricing using a SaaS e-commerce business providing subscriptions for their software product:
Pricing Tiers Vs. Volume Pricing Revenue Comparison Example
Let’s make some assumptions for the scenario:
Pricing Tiers: You offer three tiers: Basic, Standard, and Premium.
- Basic: $10/month
- Standard: $20/month
- Premium: $30/month
Volume Pricing: You offer discounts for customers who purchase multiple subscriptions in bulk.
- Single subscription: $20/month
- Bulk discount: 10% off for purchases of 5 or more subscriptions
Customers:
- Customer A goes for the Standard subscription package at $20/month and buys 5
- Customer B buys 5 subscriptions in bulk
Now let’s see how much revenue it is bringing in with each model:
- For Pricing Tier = 20*5 = $100
- For Volume Pricing = 20*5* – [20*5*0.1] = $90
From this, we can observe:
- The cost of subscription remains the same in the pricing tier at $20/month
- The discounts in volume pricing reduces the cost of each subscription to $18/month
- Total revenue is higher in pricing tiers than in volume pricing
However, Customer A pays more than Customer B. If you offer both pricing models, volume pricing may attract more customers because of discounts, potentially leading to higher sales volume and overall profit in the long run.
However, the pricing tier model provides different features with each tier. This could attract other customers who might buy more subscriptions at lower tiers. It is dependent on the features that the customers would prefer to get. That is how pricing tiers help attract a diverse customer base.
5 Types Of Pricing Tiers Used By E-commerce Businesses
While you can think of pricing tiers as having many different tiers, some are more popular. Here are some types of pricing tiers and why they are used in e-commerce businesses with real-life pricing tier examples:
Type# 1 Two-Tier Pricing
This straightforward pricing model offers two tiers, typically a basic and premium option. Customers can choose between the two based on their requirements and budget. This is rather popular for SaaS e-commerce businesses that offer a ‘freemium’ model.
Canva, the online graphic design tool, is a great example of a two-tier pricing model. They offer two tiers:
- The already available free-to-use tools where customers can use the website’s features for free
- Canva Pro, the paid version, gives customers access to more tools and customization options
Users who don’t need Canva Pro get to use the tool for free. However, if they are looking for advanced features, they must pay the subscription fee. This is great because it showcases what you have against what you could have. The contracting features can entice customers to try the premium version, netting the company profit for their business.
Type#2 Three-Tier Pricing
The most popular pricing tier is the three-tier pricing. Just like two-tier pricing, the three-tier pricing gives customers more options. It offers customers more flexibility and choice, allowing them to select a tier that best suits their needs. The tiers are usually a basic, standard, and premium plan to attract customers.
For instance, MultiVariants – Bulk Order Shopify app for creating product bundles with order minimums provides three-tier pricing. There is a free plan for people to test out the app. Then there is the standard plan, which includes all features from the starter plan plus more features for customers. Lastly, there is a professional plan for businesses using all the app’s features. Tier pricing like this helps customers make their own choices. If they don’t like one plan, they can switch to another one to get the best out of the app.
Type#3 Multiple-Tier Pricing
In this approach, businesses offer multiple tiers beyond just three, providing customers an extensive range of options. Each tier may target different customer segments or provide unique features and benefits. Like with three-tier pricing, the first three tiers have an additional tier to unlock features unavailable for regular users. People usually refer to this tier as the enterprise, unlimited, or custom.
This caters to large businesses looking to access further benefits and custom features from the app to align with their business operations. Inkybay – Product Personalizer on the Shopify app store is an example of multiple-tier pricing. It has a starter tier with basic features, an advanced tier with the best value for customers, and a professional tier for customers looking to upgrade to the advanced tier. Finally, there is the unlimited tier, which gives customers complete access to all features unlimitedly. This is great for businesses that need large volume orders and unlimited storage.
Type#4 Usage-Based Tiers
Usage-based tiers tailor pricing to the customer’s usage or consumption of the product or service. Customers pay based on the quantity or frequency of usage. This is ideal for businesses offering services with variable usage patterns. For example, cloud storage providers often use this model, charging customers based on the amount of storage used.
Google Drive is using this usage-based tier pricing for its cloud storage solution:
- Business Starter: $6/user/month for 30 GB
- Business Standard: $12/user/month for 2 TB
- Business Plus: $18/user/month for 5 TB
- Enterprise: Custom Quote for as much as storage space you need
This is an excellent example of combining multiple-tier pricing with usage-based pricing, as it gives customers the freedom to choose between the tiers, providing the service with a large customer base that varies between individuals and businesses.
Type#5 User Count Tiers
User count tiers base pricing tiers on the number of users or accounts accessing the product or service. Businesses may offer different pricing levels based on the number of users in each tier, catering to individual users and larger organizations.
Salesforce utilizes these user count tiers for their services. They allow 10 users at a specific price per user. For additional users, businesses need to buy the next tier. When your customer segments are based on how many users are using the product, pricing tiers like this help maximize the profits for the business.
Benefits And Challenges Of Pricing Tiers For Your E-commerce Business
As with all pricing strategies, there are both benefits and challenges that you will come across when implementing them:
Benefits Of Pricing Tiers
- Easier customer retention and repurchase with the help of a pricing model, allowing customers to quickly get the value they are looking for (especially in a subscription model)
- Cater to different customer segments with tiered pricing that creates a value perception for the customers.
- Increased revenue with a larger target audience creates a competitive advantage with certain tiers.
- The flexibility of different pricing models to adapt to the market more effectively
- Predictable revenue stream giving your business more financial stability
- Better data insight into which customers are buying and what pricing tier can help your business expand and scale up.
Challenges Executing Pricing Tiers
- Multiple pricing tiers can be challenging to maintain, especially when adjustments are made to pricing and features offered in the tier
- Unclear differentiation creates confusion in the pricing tiers, which customers might feel dissatisfied with
- Poorly designed pricing structures might also hinder people from going for premium tiers as customers don’t necessarily understand the value of the higher tiers, leading to potential loss in revenue.
- Customers enjoying lowered pricing tiers might not want to upgrade to higher tiers, which can result in a loss of revenue and profitability.
- Aligning pricing tiers with business goals is difficult without extensive data analysis, which leads to short-term goals not being met accordingly.
- The more customer segments a business has, the more difficult it is to create value perception for the tiers customers will be inclined to buy.
- Customers’ price sensitivity and willingness to pay may vary across different tiers, requiring businesses to conduct ongoing market research and analysis to optimize pricing strategies.
- Subscription-based pricing tiers may face challenges related to customer churn, including customer retention, renewal rates, and minimizing involuntary churn due to payment failures or customer dissatisfaction.
As you can see, putting out suitable pricing tiers is a more significant challenge. Understanding the features and benefits is the leading cause of difficulty. Customers might not understand the value of the pricing tiers. Combine that with pricing sensitivity, and your business will quickly lose customers. As a result, only the pricing tiers that can communicate and help solve the customers’ needs do well in e-commerce.
6 Tips On How To Make Your Pricing Tiers More Effective
Pricing tiers can be challenging to implement and improve after implementation. So here are some tips on how you can make your pricing tiers more effective for your e-commerce business:
Tip#1 Gather Data With Buyers Persona
If you are pricing tiers for your product or service, getting to know your customers is a valuable asset. You could do this through buyer personas, which give you all the insights to cater to your different types of customers. You must collect data on demographics, preferences, purchasing behavior, and frustrations through market research and analysis.
Tip#2 Create Tiers With Customer Segmentation
After you gather all the necessary buyer personas, you can use information from there to segment them into different customer segments. Using customer segmentation strategies, you can quickly determine which customers will want to buy which product tier. For example, if you have many customers wanting an enterprise-level or unlimited tier, you could price that creates a tier for it and price it accordingly.
Tip#3 Pricing Tiers With Cost Analysis
Speaking of prices, you will want to price your tiers so that customers will be satisfied with the product. Let’s say you created a three-tier pricing model. You have a basic tier, a standard tier, and a premium tier. However, if the starter pack price is $5 and the standard pack is $25 with only 1 or 2 more features, then customers will not be satisfied with how you have tiered your services.
This is where cost analysis will help you assess your pricing strategies and make your pricing tiers more attractive to customers. Conduct a comprehensive cost analysis to determine the expenses of offering your products or services. Factor in production costs, overhead expenses, and any other relevant costs to establish a baseline for pricing. Use this information to set prices for each tier, ensuring they cover your costs while remaining competitive in the market.
Tip#4 Define The Features In Each Tier Clearly
Often, customers might confuse one tier with the other because the features in a tier are not apparent. So instead, you should make the features as clear as possible so that the customers can understand them and be satisfied with their purchases. For instance, differentiate between different tiers based on product features and value offerings so that customers feel more confident selecting a tier.
Tip#5 Marketing To Customers
No matter how well you have priced your tiers, no one will buy them without effective marketing strategies. That is why you should market so that different customer segments know the value proposition you are providing them within your tier. You could also showcase features from higher tiers through marketing. This could generate enough interest in the tier for your customers to buy or upgrade their existing tier.
Tip#6 Performance Analysis
Don’t rest on your laurels once you set up your pricing tiers. Performance analysis is critical to knowing how your tiers are performing. If you notice the higher tiers are underperforming, it might be time to look into why that is the case. Key performance indicators ensure your pricing tiers are performing as intended while providing your customers with the features they want from those tiers.
How You Can Implement Pricing Ties For Your E-commerce Shopify Store With A Bulk Order App
Pricing tiers offer e-commerce stores an advantage. It creates a value perception for customers who can take advantage of the pricing for the type of pricing tier they want. On Shopify, subscription pricing tiers are popular since customers want to keep buying the product on a time basis.
However, creating a subscription box where customers can order the variants they want can be difficult. It requires custom theme editing and other coding knowledge from a Shopify expert to implement appropriately on the product page. Shopify store owners have the advantage of using third-party apps from the Shopify app store to integrate an app that can help implement such a pricing tier.
Here is an example of a Shopify store using a subscription pricing tier on their product page in a mix-and-match bundle creator using a mix-and-match bulk order app:
You can see this store is using the three-tier pricing model for their products. The store offers the customers pricing tiers as variants, allowing them to choose the type of box they want to create for their subscription order. The store prices each subscription tier accordingly to create a value perception for the customers. After selecting the tier they want to buy, the customers can then proceed to personalize their subscription box with the variants of their choosing.
So how does this help with pricing tiers? The store owner can set the tiers they want for their product. The premium pricing tier costs less per product, but customers are buying more for the overall box as a result. This allows the store to maximize its profits, as it encourages customers to choose the premium tier to avail of the lower cost per product.
The app also has a rule restriction on the product page. The customer can select the subscription variant they want and the restriction ensures that the customers are ordering the right amount for the box. Such rule restrictions are not native options on Shopify, meaning you have to code the product page to show them. So an app allowing this helps reduce the need for customized coding to implement it. The customers shop for the variants they want, and the app ensures they are ordering the right amount for the pricing tier. It eliminates wrong orders being placed by customers and ensures a simplified shopping experience.
The mix-and-match bundle strategy also allows customers to make the pricing tier their own. They get to choose the variants they want in the product, which personalizes the shopping experience for them. This increases the chances of customers confirming their orders and reduces cart abandonment in the store.
So you get the benefit of a pricing tier, a subscription model, a mix-and-match bundle creator for customers, and rule restrictions to give customers a personalized and smooth shopping experience all in one app. All of this is from only one app. The app does it for your store while you can focus more on coming up with the pricing tiers and strategies needed to sell your products how you want them to!
Bottom Line
Pricing tiers in e-commerce provide many benefits, but it is not without its challenges. It provides more flexibility with how you can cater to different customer segments and help increase your profit margins. With the right strategy and how you want to sell the tiers in your store, pricing tiers are sure to benefit you.
