Software Growth

Tiered pricing

Tiered pricing offers a few packaged plans at different prices, each with more features or higher limits, so customers pick the one that fits their needs.

Tiered pricing packages your product into a small set of plans, typically three or four, such as Starter, Pro and Business. Each step up adds features, limits or support and costs more. Paddle calls it scaled pricing: it lets subscription companies target customers with different needs and different willingness to pay (source).

The same word is used in a second sense in billing: a unit price that changes with volume (the first 1,000 units cost X, the next 5,000 cost Y). Both are covered below, because founders hit both.

Packaging tiers: good, better, best

The typical structure is one tier for individuals or beginners, one for most businesses, and one for larger or demanding customers. Three things decide whether it works:

  • Tiers follow personas. Each plan should be built for a specific kind of customer, not a random slice of features.
  • The gates are tied to a value metric. Limits on contacts, projects or usage make customers move up as they succeed. Paddle recommends mixing axes (users, features and usage) and warns that too many tiers confuse buyers.
  • The middle plan carries the weight. Patrick McKenzie notes that customers do not calculate feature value; they self-segment by plan names and positioning. He observes that the second-cheapest tier tends to capture a third to a half of signups, while the top tier produces most of the revenue (source). Compare this with your own data before trusting it.

Volume tiers: graduated vs volume pricing

When a price is per unit and tiered by quantity, there are two ways to calculate the bill. Suppose the first 1,000 units cost $0.10 and units above that cost $0.08, and a customer uses 1,500.

Graduated applies each rate only to the units in its band. Volume applies the rate of the band the total lands in to every unit. Volume pricing creates a cliff where a customer pays less after using more, so check that before you publish it.

A cautionary tale

Patrick McKenzie describes Server Density replacing a per-server variable price with fixed plans at $99, $299 and $499, with phone support in the higher tiers. In an A/B test of roughly 2,150 visitors per variant, monthly revenue went from $420 to $876, even though fewer people started trials (source). Tiers gave buyers a clear way to self-select upward.

Mistakes

  • Pricing the bottom tier so low it attracts support-heavy customers you cannot serve profitably. McKenzie advises against $9 to $19 plans unless you have massive distribution.
  • Making tiers differ in features nobody cares about.
  • Having no obvious upgrade trigger, so customers sit at the lowest plan forever.
  • Showing the tiers in an order that undermines price anchoring.

For a bootstrapped product

Start with three tiers and one clear gate that moves a growing customer up. Test the prices on new visitors or an email segment before changing live customers. Expect to revise the tiers after your first 50 to 100 customers, once you see who actually picks what.

Sources

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