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Tiered pricing is a SaaS pricing model in which customers choose from bundled service plans, each priced incrementally by the features and usage limits it includes. It suits products with a diverse budget audience, and three or four tiers is the sweet spot for most companies.
Sometimes it pays to keep things simple. Like, literally.
Perhaps this is why tiered pricing is so popular for SaaS companies.
That’s because the concept of picking a service plan is tried-and-tested.
Plus, the average consumer wants the freedom to choose their preferred “size” of service.
Small, medium, large. Tall, grande, venti. You get the idea.
Stuck on picking a pricing model for your product? Tiered pricing is probably your safest bet.
And In this guide, we’ll break down everything you need to know about packaging your service into tiers, why it makes sense and the best practices for doing so.
What is tiered pricing?
Tiered pricing is a SaaS pricing model where cost depends on the service tier a customer chooses. Each tier's price rises incrementally with the features and usage limits included, and customers are tied to their plan monthly or annually.
Definition time!
Tiered pricing is a SaaS pricing model in which cost is based on the service tier chosen by your customer. The cost of each tier (think: a plan and package) is incremental, determined by factors such as features and usage limits included in any given plan.
Simply put, tiered pricing involves bundling your services into separate plans. Customers are then tied to their plan monthly or annually, often receiving a discount (~10%) for picking a longer-term plan.
Below is an example from Formstack, where customers can choose between four pricing tiers, ranging from “Bronze” to “Platinum.”
Pricing tiers are typically presented on a spectrum. Free or “starter” plans have fewer or limited features, whereas more expensive plans offer premium functions, unlimited usage, and so on.
Below is another example from Zendesk:
Tiered pricing centers around the concepts of choice and flexibility, which represents a win-win situation for companies and consumers.
For businesses, you can appeal to more customers regardless of their budget(s) and put more responsibility on them to make the “right” choice.
Meanwhile, buyers don’t feel pressured or locked into a one-size-fits-all plan.
What are the benefits of tiered pricing?
Beyond the upsides we’ve already discussed, let’s look at some of the key benefits of tiered pricing.
1. Can tiered pricing reach a wider range of customers?
Tiered pricing lets you serve several budgets at once instead of positioning yourself as purely a discount or premium provider, with separate plans tailored to individuals, small teams, startups and enterprise customers.
This is the big one.
Pop quiz. Would you rather have an army of small-ticket customers paying $5/mo or a couple of heavy hitters paying enterprise fees for your service?
According to our Twitter followers, it’s the latter.
Luckily, with tiered pricing, you can do both and then some.
Rather than pigeonhole yourself into being a “discount” or “premium” service provider, you can offer plans that appeal to various budgets. For example, you might offer a range of plans tailored toward:
- Individuals (or solo businesses)
- Small teams (2-5 employees)
- Startups
- Enterprise customers
See how that works?
2. Why is tiered pricing so easy for buyers to understand?
Tiered pricing is easy for businesses and buyers to understand because people already know packages from phone and internet plans, and the less confusion there is around your pricing, the higher your chances of converting leads into customers.
Again, tiered pricing is easy to understand for businesses and buyers alike.
From your smartphone plan to your Internet package, people “get” packages. They’re not rocket science. Before anyone even lands on your pricing page, they’ll likely assume you offer multiple service plans anyway.
The less confusion there is around your pricing, the higher your chances of converting leads into customers.
3. How does tiered pricing make upselling easier?
Tiered pricing creates a natural upgrade path: as customers' businesses grow and your product saves them more time or money, they are more likely to move up, which only works if a bigger plan exists to sell them.
Much like the SaaS business model, tiered pricing creates a natural progression for your users to upsell your service as their business grows.
The more value your product provides (think: saved time or money), the more likely users are to upgrade. You obviously can’t upsell customers if there’s no bigger plan for them to sell to ‘em.
Read: How to Improve Your MRR Growth Rate (without new customers)
How Baremetrics tracks upgrades and downgrades between tiers
Baremetrics classifies every plan change it reads from your billing system. An upgrade is a move from one paid plan to a more expensive paid plan, and a downgrade is a move to a less expensive paid plan. A move from a free plan or trial to a paid tier counts as a new customer, and a drop to a free plan counts as a cancellation. Moving a customer to an annual plan with free months included is recorded as a downgrade, because it reduces MRR. Upgrades add to MRR and downgrades reduce it, and Compare Plans on the Upgrades and Downgrades charts shows which tiers drive each movement.
Screenshot shows sample demo data. Source: Baremetrics Help Center (New Customers and Upgrades, Cancellations and Downgrades, Monthly Recurring Revenue).
What are the downsides of tiered pricing?
Tiered pricing is popular and straightforward, but it’s not perfect. Let’s look at some of the potential pitfalls of tiered plans and packages.
1. Why do tiers require more product awareness from leads?
Tiers work best with product-aware leads. Prospects who don't understand what each plan includes must research it themselves, which adds lag time and may send them to a competitor; tooltips or feature descriptions on each plan help.
If your leads aren’t product-aware, they might see your pricing copy as gibberish.
“Do I really need an ‘unlimited’ plan? I could probably get by with 50GB/mo. Right? What the heck is ‘white-labeling,’ and why does it cost so much?”
Without a keen understanding of their needs and what each plan offers, your leads will have to do their homework to figure it out.
Although they may be able to do so by reaching out to your sales department, watching a demo, or reading a blog post, you’re putting extra work on your prospects. This lag-time could lead them to research a competitor if you aren’t quick to clear up their confusion.
You can combat this by adding tooltips or descriptions of the different features you get for each plan, like DocuSign does here:
2. What happens when users pick the wrong tier?
Freedom of choice means some users pick the wrong tier: a new user on a starter plan may decide your tool is bare-bones, while a smaller company may see bigger plans as bloated or expensive for the features it uses.
Piggybacking on the issue above, the freedom of choice presents a distinct problem: users making the wrong choice.
That is, let’s say a new user is disappointed by their “starter” plan when they should have opted for the “startup” option. This could lead them to think that your tool is bare-bones.
On the flip side, a smaller company could feel that your bigger plans are bloated or otherwise expensive for the features that they actually use.
3. How can poorly priced tiers lose you revenue?
Unlike usage-based pricing, where customers get exactly what they pay for, poor pricing could mean that your customers are getting enterprise-level features at small business prices.
There’s plenty to consider when pricing your plans (think about how much to charge, the sort of feature cutoff point between tiers, etc.). Rushing your pricing structure could result in a ton of money on the table if you aren’t careful.
What are the best practices for tiered pricing?
Let’s say you’re confident about offering tiered pricing but want to double-check that you’re getting it right. Below are some best practices and tips for implementing your plans and packages.
How should you name your pricing tiers?
Name each plan simply and plainly so prospects can see who it is for, as Loom does with its starter, business and enterprise plans, and use subheaders to highlight each plan's key features and intended customer.
The best way to highlight who your plans are intended for is as simple as naming them.
For example, Loom’s “starter,” “business,” and “enterprise” plans are clearly labeled and likewise have subheaders that highlight their key features.
In fact, your subheaders can do much of the legwork of telling your prospects, “Hey, this is for you.” Here’s another good example from Zoom (“great for small teams”).
Now, compare this to HostGator, which uses terms like “hatchling” and "baby” to describe its packages, which are based on its gator-based branding.
Although bigger companies might be able to get away with this, up-and-coming businesses should plainly spell out their plans.
How many pricing tiers should you offer?
Offer three or four tiers. Three fits the small, medium and large approach, while four often adds a free or premium plan; offering more choices than that risks analysis paralysis, so when in doubt, less is more.
For the sake of simplicity, try to find a sweet spot in terms of how many tiers of service you offer.
Three or four seems to be the sweet spot for most companies. The former sticks to the sort of “small,” “medium,” “large” pricing methodology discussed earlier, while the latter often includes some sort of free or premium plan.
The key here is that you don’t want to cause analysis paralysis by giving people too many choices. When in doubt, think “less is more.”
You can also get creative with how you present your prices as ClickUp does. For example, their pricing page presents a binary choice which then expands their offerings.
This is a brilliant way to gauge the interest of paid users without hitting them over the head with information.
Should you highlight a preferred plan?
Highlight one plan as recommended or most popular. This bandwagon effect nudges customers toward a choice without overwhelming them, and placement and colour, as in the Sendlane and Flock examples, draw more eyes to it.
Notice that many companies create a sort of bandwagon effect by highlighting a particular plan as being “recommended” or “most popular.”
Doing so naturally nudges your customer to make a choice and likewise avoids overwhelming them. Below is an example from OptinMonster:
Here’s another example from Sendlane whose recommended plan is actually their most expensive one (typically this isn’t the case). The fact that this plan isn’t presented last actually helps draw more eyes to it (and the hot pink certainly helps, too)
Similarly, Flock puts their preferred plan first and likewise draws visitors in with their color scheme.
How does anchoring highlight higher-tier features?
Getting people to your pricing page is a tall order. You obviously don’t want to waste any precious above-the-fold real estate on the page by repeating the same features repeatedly.
Through the technique of anchoring, you essentially present your first plan as the “starting point” for the rest of your others. This allows you to highlight more specifics of your higher-tier plans to cement how good of a deal your customers are getting.
Here’s an example of anchoring from Fomo…
…and another from Heap…
Why should switching between tiers be easy?
State clearly that changing plans is quick and painless. Easy upgrades and downgrades help customer retention because customers can stay with you long-term on whichever plan fits them, rather than bouncing when their needs change.
If you’ve ever had to switch health insurance or cell phone plans unexpectedly, you know that doing so can be an absolute nightmare.
That’s why you should state that changing plans is quick and painless for your customers. Easy upgrades help with customer retention as you encourage your customers to stick with you long-term regardless of plan rather than bounce.
Check out below how JotForm emphasizes flexibility when it comes to making a switch.
How different should each pricing tier be?
Create clear distinctions between tiers in both price and features, so customers don't simply default to whatever is cheaper and bigger-tier customers don't end up with enterprise-level features at small business prices.
Finally, make a point to create clear distinctions from one tier to the next.
Remember what we said earlier about accidentally giving bigger-tier customers a steal? It may take some fine-tuning, but make sure there’s enough of a difference between any given plan that your customers don’t just default to whatever is cheaper.
Check out how Sleeknote creates separation between their plans:
Related Read: How a tiny pricing change (not a growth hack) tripled revenues
Who is tiered pricing best for and does it make sense for your company?
Plans and packages go hand in hand with SaaS.
Again, tiered pricing is the default structure for most companies because it’s straightforward and offers customers some much-needed flexibility.
To wrap things up, we’ll quickly recap who tiered pricing is best for.
Does tiered pricing suit B2B SaaS companies selling to startups and enterprises?
Tiered pricing suits B2B SaaS companies whose audience ranges from startups on a shoestring budget to companies with massive SaaS budgets, because separate plans and packages can attract all of those customers.
Some companies have massive SaaS budgets and are juggling tons of tools.
Others might be stuck on a shoestring budget for the time being.
Tiered pricing could potentially attract all of the above customers. If you have a product with a diverse budget audience, you should definitely offer tiered plans and packages.
Does tiered pricing work if you carry heavy API or server-side costs?
This might be a no-brainer, but you shouldn’t offer tiered pricing if you’re eating a ton of server-side costs. Tiered pricing should ensure that you make more money off of bigger-ticket users, not less.
Does tiered pricing help companies that want consistent revenue?
Monthly or annual tiered plans support consistent revenue: you are less likely to second-guess your revenue goals or miss them, and you get a better pulse on how much money you're making month-to-month.
By encouraging users to adopt monthly or annual plans, you’ll be less likely to second-guess your revenue goals or be inconsistent in meeting them.
The benefits of doing so are well-documented as you have a better pulse on how much money you’re making month-to-month.
Coupled with tools like Baremetrics, you can also get an idea of which plans are the most popular, how much you’re growing and how often your users downgrade or drop out.
Should you use tiered pricing?
Tiered pricing is a safe, proven choice for SaaS companies: it appeals to a wider array of customers and gives buyers flexibility, so it is worth exploring if you are on the fence about how to price your services.
Listen: you can’t start seriously selling until you’ve priced out your products properly.
Through tiered pricing, you can appeal to a wider array of customers and offer flexibility to your buyers. Doing so is safe and proven for SaaS companies, so you should definitely explore putting together tiers if you’re on the fence about how to price your services.
To dig into more pricing strategies, check out our Top 10 Pricing Strategy Examples for SaaS.
Either way, just know that Baremetrics can help you track your revenue targets and customer numbers regardless of your pricing structure.
