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What is Tiered Pricing?
Tiered pricing is a strategy employed to define a price per unit within a range. Tiered pricing works so that the price per unit decreases once each quantity within a “tier” has been sold. To illustrate, imagine that you have just sold 60 units of a particular product.
With tiered pricing, the first 1-20 units would cost, say, $10 each. The next 21-30 units would cost $8.50 each, and the next 31-40 units would cost $7 each. Once these tiers have been filled, in the final “tier”, anything above 41 units would cost $5.50 each.
This pricing strategy is useful because you are offering different pricing versions for your product, so consumers have the option to pay for what they can afford. The lower price “tiers” will draw customers who may eventually move to higher priced packages. Tiered pricing also allows for creative options such as grouping products by quality, quantity and service.
What is Volume Pricing?
By contrast, volume pricing defines a price for all units within the range. To illustrate, we can use the previous example: imagine again that you have sold 60 units of a particular product. While tiered pricing reduces as you “fill” each tier, with volume pricing as soon as you hit a particular number, all units will cost the lower price.
For example, if someone only buys 20 widgets, each widget will cost $10; but once they get over 20 widgets, the price of all the widgets in their purchase drops to $9 each; then to $8. By using volume pricing, you would have made $330 for your 60 widgets, but by using tiered pricing you would make $465, and this difference is based on the cost of each widget.
Which is the best strategy for inventory control?
Each pricing strategy clearly has its pros and cons. Managers should assess their needs in terms of stock levels and sales, and use each method in accordance with these concerns. Each strategy can help increase sales and move products out; though they achieve this in slightly different ways.
Tiered pricing strategies are useful because they can attract a wider audience of consumers in that customers can pick products according to what they can afford. This can help boost sales by encouraging the purchase of multiple products, helping with the management of inventory control processes. Customers who begin with the lower priced packages may also eventually be willing to pay more.
Volume pricing is useful because it offers larger quantities of the product to the consumer for a lower price. Volume pricing can be useful in terms of moving products out quickly; particularly useful in the case of excess stock, and therefore also useful for inventory control processes.