Tiered Pricing: Is it Better Than Volume Pricing? (Pros and Cons of Both)
Are you pricing your product correctly?
When it comes to pricing your products, you have many different options for pricing strategies.
Today, we’ll focus on two of them: tiered pricing and volume pricing. Particularly, we’ll define both of them, dissecting their differences, and offer some pros and cons for both of them. By the end of this article, you’ll be able to determine which is best for you and your business.
So, what exactly is tiered pricing? And how does it differ from volume pricing?
Let’s break it down.
Tiered Pricing Vs. Volume Pricing: What’s the Difference?
Volume pricing and tiered pricing often get confused for one another. However, they are incredibly different from one another.
Tiered pricing involves setting up your products in numerical groups (Ex: 0-10 widgets, 10-20 widgets, 20-40 widgets, etc), where each grouping has its own set price. Once you fill up one group — or ‘tier’ — you move on to the next.
For example, let’s say that you’re selling packs of dog food and your tiered pricing strategy is outlined as so:
Tier 1: 1-5 packs — $20
Tier 2: 5-15 packs — $10
Tier 3: 20-30 packs — $5
One of your customers orders 25 packs from you. When calculating how much that will cost, you work your way through each tier. First, you’ll go through tier 1, which maxes out at 5 packs.
5*$20 = $100
Then, move on to tier 2 until that one is filled (15 max).
15*$10 = $150
At this point, the total number of packs that we’ve calculated for is 20, which means we still have 5 more packs to account for as we move into tier 3.
So, 5*$5 = $25
Now, add everything up ($100+$150+$25 = $275).
The grand total for 25 packs through a tiered pricing model is $275.
Okay, simple enough. But how would that total look if we used volume pricing? Before we work out that calculation, let’s break down what volume pricing is.
Volume pricing is as simple as the price of all the units you’re selling is within a set price range.
So, using the previous example, volume pricing looks like this:
Instead of going through each tier until you fill it up, you simply look at what the pricing is for the 25 packs of dog food the customer purchased.
So, our groups are once again laid out like so:
Group 1: 1-5 packs — $20
Group 2: 6-15 packs — $10
Group 3: 20-30 packs — $5
25 packs fall into group 3, which means each pack will cost $5.
Taking 25*$5, we get $125.
Pros and Cons of Each Pricing Method
The calculations for both are straight forward — especially volume pricing. But, as you may have noticed, the final prices for each have a large variance.
With tiered pricing, you can make much more money, which is an obvious pro.
However, if this was always the case, then every single business would take this pricing approach when it comes to selling their products.
The key to tiered pricing is that it has to work for your customer base and your product offering.
So, with the example of dog food packs, that may not be the best option because people typically don’t need to buy that in bulk unless they have a lot (and we mean a lot) of dogs. So, one of the limitations of tiered pricing is that it doesn’t work well for every product offering.
So what would be a better product that makes sense for tiered pricing?
Let’s consider paper. A paper supplier may want to sell using the tiered pricing method because that is something that their customers often buy in bulk.
Another limitation of tiered pricing is that it can be difficult to relay your pricing strategy to customers. It’s not exactly a user-friendly pricing method, so it’s important that you use this pricing structure with products that are in high demand or are considered “needs,” not “wants.”
Moving on to volume pricing, its key benefit is that it may entice customers to purchase more units of a given product that they normally wouldn through tiered pricing.
So, the dog food example may be a better option because it is more likely to incentivize someone to maybe upgrade to purchasing more units because once they reach groups two or three, each dog food pack’s individual price decreases.
The definitive con of volume pricing is, as stated earlier, that you’ll make fewer profits on your products.
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When it comes to pricing your products, no matter which strategy you go with, you need to make sure that you can fulfill all your orders.
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- Print detailed product and bin barcodes
- Manage any volume of orders efficiently using workflows and triggers
- Detailed reporting functions including lot recall, asset summaries, and cycle counts
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