When I talk to people about pricing models, tiered and volume pricing are often confused as one and the same thing.
This short post should help to clarify the differences. I’m also including a Microsoft Excel template that you can use to build, and calculate your own tiered pricing plans – something that can be notoriously hard to do (unless you happen to be a dab-hand at array formulas in Excel).
First, let’s break it down to understand the differences.
Volume pricing: Once your customer hits a certain threshold of “units” (user licenses for example), then every unit they buy is priced at that rate. Volume pricing is simple for the customer to understand, but you quickly risk the “sell more / earn less” paradox, with customers buying more “units” than they need to achieve a better price. Of course, this might be desired strategy, but beware of the impact on service adoption if that’s a key KPI.
Tiered pricing: Pricing is staggered per “tier” of units. Once you pass that tier, the next batch are priced at a different rate, and so on. While this model isn’t as simple for the customer to understand (it may also be difficult to express a “marketing friendly” price on promotional materials), you won’t suffer the “sell more / earn less” paradox.
Which one do I choose?
For most SaaS businesses, the default will be tiered pricing. Volume pricing simply offers too many revenue disadvantages (for example, using the volume pricing model above – the price paid by the customer would be the same regardless of whether they purchased 10, or 20 user licenses).
However, experience has shown me that if your sales process requires your team to quickly fire out quotes or respond to pricing enquiries on the phone or in webchat, tiered pricing is all too easy to miscalculate.
For my own team, it’s vital that they have access to a simple pricing calculator. Something that they can drop a single number into (units required), and receive back an accurate quote. Unfortunately, building a tiered pricing calculator in Excel can be complex and is not for the feint-hearted!
So, here’s an Excel template to get you – and your team – started!
Notes on using the template:
- In the template, the first price break comes at 51 users, then again at 101 users etc. Adjust your price breaks in the price breaks column.
- If you need to add more price break rows, make sure you update the formulas in cells D12 & D13
- Set the unit price at each of these price breaks.
- Cells D12 & D13 are Array Formulas. If you make a change to these cells, you must press Ctrl + Shift + Enter to complete the formula.