Core Concepts: Tiered Pricing Architecture
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Definition: Tiered Pricing Architecture
A packaging and pricing design in which there are two or more packages with the value and pricing of packages increasing in a structured way.
What is a tiered pricing architecture?
Tiered packaging and pricing architectures are among the most common packaging and pricing models. They are sometimes referred to as Good-Better-Best designs or Bronze-Silver-Gold designs. In Japanese restaurants one can often choose between the bamboo (cheapest), plum (middle) and pine (most expensive) menus.
Tiered is the general term, as these architectures can have anywhere from two tiers (say Standard and Premium) to as many as seven. More than seven tiers are almost never seen as this is too much choice and there are better strategies to organize this many alternatives.
Why are tiered pricing architectures popular?
Tiered pricing is used for several reasons:
To frame value and price (and establish an anchor to which any price is compared)
To simplify the buying process
To match buyer needs and willingness to pay
To provide upsell paths
It is especially important for product led growth models where there needs to be an easily adopted entry-level package and then upsell paths. Online sales models very often use tiered architectures as there is no sales person available to help frame alternatives and to guide the buyer. Tied architectures provide a lot of context.
Properly designed, a tiered architecture helps position value. Each tier (package) is tied to specific value messages and the value builds from tier-to-tier. The pricing page needs to communicate this value clearly.
If the packages are targeted at fundamentally different value segments it is better to offer a menu of packages and not to organize them into a tiered architecture.
Tiered Pricing Architectures and Anchoring Effects
One common use of tiered pricing architectures is to anchor value. One could also call this the Goldilocks strategy of this one’s too cheap, this one’s too expensive and this one’s just right. This is often signalled on the pricing page with an arrow or banner saying ‘best value’ for the Goldilocks tier.
The Upsell Strategy versus the Matching Strategy
One of the most important design decisions for a tiered architecture is whether to have an upsell strategy or a matching strategy.
With an upsell strategy, one one expects to bring buyers in to a lower tier and then move them up to higher tiers as they come to understand the value and their needs grow. In a really well designed product the use of the lower tiers sets up the value of the higher tiers driving users up the value chain. This is a key tactic for a product led growth strategy.
A matching design is quite different. Here the intention is to match a package to a value-based market segment. The subscriber is not expected to change packages until their situation changes or new value is added to the package.
Concave and Convex Price Curves
One subtlety in tiered pricing design is how fast the prices rise relative to the other tiers. There are three possibilities. The increases can be linear, concave or convex.
Setting these price levels depends on a combination of the design goal (upsell or matching), the pricing strategy (how the packages are positioned) and assumptions about the structure of demand in the market (at what level in the market is there most demand).
Testing Assumptions for Tiered Pricing Architectures
Markets evolve and tiered pricing designs need to evolve with the market. When you design your tiered pricing you need to make your assumptions explicit:
Volume for each tier (number of units)
Value for each tier (dollars)
Transitions (conversions, upsell and cross-sell)
It is not enough to just state assumptions. You need to track performance and see if packaging or pricing needs to be adjusted.
More Reading For You
Core Concepts for Pricing and Customer Value Management
Tiered Pricing Models (this post)
Coming soon …
Community Value Driver
Connecting Value and Pricing Models
Cross Price Elasticity
Customer Value Journey
Customer Value Management
Economic Value Driver
Interactions of Cross Price Elasticity and Price Elasticity of Demand
Package Design
Pocket Price Waterfall
Price Elasticity of Demand
Pricing Design
Pricing Model
Value Based Market Segmentation
Value Ratio
Value to Customer (V2C)