Pricing Differently: Tiered and Volume Pricing

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Most small businesses are focussed on growing their revenue, market share and, in the long run, their profitability. A wide range of factors can affect a business’ growth, but one of the most important is the business’ pricing strategy. A smart pricing strategy involves working out the price point that maximises revenue growth, increases market share or helps you realise your current growth target.

Tiered Pricing versus Volume Pricing

Tiered pricing essentially means leveraging varying needs and budgets between different groups of consumers in order to sell each product as close as possible to the maximum price that each group is willing to pay. In other words, this strategy is about creating qualitative distinctions between products that allow you to vary ordering costs for certain groups of customers. For example, a business may cater to both businesses and end users. Many businesses offer enterprise or professional grade products in addition to their standard retail offering; B2B customers typically have a higher budget than B2C consumers, so offering a professional tier of products allows your business to charge a higher price for the B2B product while leaving B2C pricing at a level individual consumers can afford.

Volume pricing also involves segmenting customers based on their needs, but in a very specific way. Volume pricing strategies essentially involve splitting customers into groups depending on the amount of your product they require. This allows you to charge lower prices to very high volume customers (who need to control ordering costs and can demand low prices from your competitors) while still maintaining higher prices for low volume customers.

Which Pricing Strategy is Right for Your Business?

Deciding whether to use tiered pricing, volume pricing or both strategies will depend largely on your product mix as well as your target markets. For example, if your business sells fairly homogenous products (such as machinery parts) to individual consumers, small businesses and enterprise customers, then you are likely to charge different prices for each volume tier. Using volume pricing allows you to offer the most competitive price for each customer group without offering that same low price to smaller customers, which helps to prevent competitors from capturing an entire customer group.

On the other hand, many businesses can sell a number of variations on their products to meet different customer needs. As an example, a bakery could produce low carb bread for the health conscious, gluten free bread for coeliac sufferers and fruit bread for customers who have a preference for sweet bread over savoury. Realising that each of these groups is, on average, willing to pay slightly more money for their loaf of choice than for plain bread, the bakery might set prices higher even though production and ordering costs remain fairly similar. Equally, the bakery might offer a very basic plain wholemeal loaf to capture customers who are unable or unwilling to buy its regular bread.

Production and ordering costs and competitor pricing will both help you set an acceptable price range, but there’s still ample scope to use pricing in that range to meet different strategic goals.

Volume pricing and tiered pricing are both pricing strategies that leverage price and product distinctions to leave no revenue on the table.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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