When was the last time you upgraded a subscription plan because you needed just a bit more?

Maybe it was extra storage in a cloud service or a higher-tier gym membership with better perks (more classes, free towels, a sauna, you get it).

A tiered pricing strategy is designed to meet your needs, no matter where you land on the spectrum of usage.

But what makes tiered pricing so effective?

Why do businesses — especially in the SaaS (software-as-a-service) and B2B (business-to-business) spaces — lean on it to drive growth?

Let’s dive into the concept, compare it with similar pricing models like volume pricing, and explore how its functionality works in B2B settings.

What is tiered pricing?

Tiered pricing is a model where the price of a product or service is broken into levels or “tiers.”

Each tier corresponds to a range of usage or quantity, and the cost per unit or service adjusts depending on the customer’s needs and preferences.

This way, you can have different price points and levels of functionality for a wider customer base.

Here’s the beauty of it: tiered pricing rewards higher consumption while making entry points accessible.

It’s like walking into a buffet where the cost per plate decreases as your appetite grows. Let’s get into how to optimize it.

How tiered pricing works

Say you’re buying cloud storage:

• 1-100 GB: $10 per GB
• 101-200 GB: $8 per GB
• 201+ GB: $6 per GB

If you use 250 GB, you’ll pay:

• $1,000 for the first 100 GB (100 × $10)
• $800 for the next 100 GB (100 × $8)
• $300 for the remaining 50 GB (50 × $6)

Total Cost: $2,100

Each tier only applies to the units within its range. This tier-by-tier breakdown ensures a fair and granular tiered pricing structure.

These different levels incentivize customers based on what they’re looking for. They can opt for the basic tier for a set price, or look at different pricing tiers if their needs change.

Tiered pricing vs. volume pricing

Tiered pricing often gets confused with volume pricing. Both reward customers for buying more, but the difference lies in how those rewards are calculated.

Tiered pricing

As described above, pricing changes within specific ranges.

Customers pay progressively lower rates for units within higher tiers, but lower prices don’t retroactively apply to previous units.

Volume pricing

In volume pricing, the lowest applicable rate applies to all units once a threshold is crossed.

For example, with the same storage plan:

If you hit 201 GB, you’d pay $6 per GB for the entire volume.

Total cost: $1,506 (201 × $6)

Volume pricing feels simpler but offers less granularity. For businesses, tiered pricing often provides better control over margins while allowing customers to scale comfortably.

What is tiered pricing in B2B?

Now, let’s zero in on tiered pricing in B2B settings. Why do so many businesses selling to other businesses rely on this model?

Pricing offers for new customers or pricing plans with additional features can offer a wider range of options and close more sales.

Driving bulk purchases and long-term relationships

Tiered pricing incentivizes companies to buy in larger quantities, as higher usage often results in lower per-unit costs.

Imagine a company paying for API requests or customer seats in a CRM platform. The more they use, the cheaper it gets per unit, and this scalability strengthens loyalty.

Take a SaaS company offering marketing tools. A small business might start on a basic plan (e.g., $50/month for 5 users), but as they grow, they’ll need the next tier (e.g., $500/month for 50 users).

Tiered pricing enables seamless scaling without shocking customers with steep price hikes.

Examples of tiered pricing in B2B

• Cloud storage providers: Businesses purchasing terabytes of storage enjoy discounts on higher consumption levels.
• Telecommunications companies: Tiered pricing for bandwidth ensures enterprises with massive data needs get better rates.
• SaaS platforms: Think of Slack, which charges based on user count and feature access.

The contract advantage

In B2B contracts, tiered pricing adds clarity and flexibility. Vendors often specify pricing adjustments based on agreed-upon thresholds, like additional licenses or usage limits.

For example, a software contract might outline that per-user costs drop from $15 to $10 once the client exceeds 100 active users as a possible pricing option.

Tiered pricing vs. flat pricing

Flat pricing keeps things simple: one consistent rate regardless of quantity. While this can work for products with fixed costs (like a subscription service), it doesn’t incentivize growth the way tiered pricing does.

Flat pricing is like a one-size-fits-all T-shirt — it works for some, but others may outgrow it or find it unappealing compared to a more flexible option.

If someone is looking for basic features, flat pricing could appeal to them. If someone is looking at different features, tiered pricing adapts to different customers’ needs.

It all depends on the different customer segments, and the level of service they’re looking for. You can hone in on this by conducting some market research and analyzing metrics for perceived value of products and services similar to yours.

Challenges of tiered pricing

No pricing model is perfect, and tiered pricing has its pitfalls:

• Complexity: Calculating costs across multiple tiers can be confusing, especially for businesses managing diverse offerings.
• Customer confusion: Without clear communication, customers might misunderstand the model or feel misled about what they’re paying.
• Price perception: Customers sometimes fixate on the lowest rate in your pricing table, ignoring the tiered structure entirely.

For example, if the lowest tier is $5/unit, a customer might assume all 200 units will cost $5 each, not realizing higher rates apply to the first tiers.

Tiered pricing models

Tiered pricing isn’t a one-size-fits-all model. Businesses can tailor it to fit their offerings, such as:

• Feature-based tiers: Customers pay more for advanced features. Example: A project management tool offers a “Basic” plan with limited features and a “Premium” plan with integrations and analytics.
• Subscription-based tiers: Costs scale based on service level. Example: A gym charges $30/month for standard memberships and $100/month for VIP access.
• Usage-based tiers: Pricing adjusts based on consumption. Example: Cloud platforms charge for gigabytes used, with lower rates for higher usage tiers.

When should you use tiered pricing?

Tiered pricing isn’t right for every business, but it’s a great fit if:

• Your product scales with usage: SaaS platforms, cloud services, and utilities thrive on tiered models because consumption grows with customer needs.
• You serve diverse customers: Small businesses and enterprises can coexist under one pricing model if tiers cater to their unique scales.
• You want to encourage growth: Customers have a clear incentive to scale up when they see cost benefits in higher tiers.

Industries that use tiered pricing

Tiered pricing is a go-to strategy across various industries:

• SaaS: Slack, HubSpot, and Zoom offer tiered plans based on user count, features, or usage.
• Telecommunications: Internet providers charge by data usage, rewarding heavy users with lower rates.
• Cloud computing: Amazon Web Services (AWS) and Microsoft Azure decrease costs as storage or computing needs increase.

Success stories

Look at Slack, whose tiered pricing approach has helped it capture both small teams and enterprise clients.

By offering incremental upgrades, some with premium features, Slack ensures users can scale at their own pace without outgrowing the platform.

This is a great example of how a SaaS business utilizes different pricing levels to appeal to their target market.

How to set tiered pricing

Rolling out a tiered pricing model takes some legwork, but it’s worth it. Here’s how to get started:

• Understand your audience: Segment your customers based on usage patterns, needs, and budget constraints.
• Crunch the numbers: Ensure your tiers are profitable and sustainable by analyzing costs.
• Test and adjust: Launch with initial pricing tiers, then iterate based on customer feedback.
• Keep it clear: Communicate your pricing structure in simple terms to avoid confusion.

With PandaDoc CPQ, your sales teams can easily draft proposals and quotes for complex products and services. This ability to customize allows you to offer various tiered pricing models, in a way that works best for you.

This means more customization for your customers, and more time saved for your team. HAAS Alert saves an average of 120 hours a month with PandaDoc CPQ for HubSpot.

The takeaway

Tiered pricing is a win-win strategy for businesses and customers alike.

By offering flexibility, scalability, and incentives for growth, this model enables businesses to cater to a wide range of customers while driving higher revenue.

Whether you’re in SaaS, cloud computing, or telecommunications, tiered pricing allows you to grow with your customers — meeting them where they are today while paving the way for future expansion.

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