Overview of Tiered-based Billing Model In SaaS

Tiered-based Billing Model in SaaS 

In the previous articles of the series SaaS Billing Models, we have discussed the Overview of SaaS Billing Model, Subscription-based Billing Model, Consumption-based Model, and Flat Rate Billing Model. You can click the respective links to read the articles. 

In this article, we will explore the Tiered-based Billing Model with key characteristics, benefits, considerations, and examples. 

Through the subsequent articles on several Billing Models, Service Providers will gain clarity between the different types of SaaS billing models and be better equipped to make informed decisions regarding pricing strategies and revenue management.

SaaS Billing Models - Tiered Based Model

Tiered Based - SaaS Billing Model

Tiered Billing Model involves offering multiple pricing tiers with varying levels of features and services. Each tier corresponds to a different price and offers a different set of features or services, thus allowing customers to choose the tier that best suits their needs and budget. 

This billing model encourages customers to spend more to avail better discounts.

A common Tiered based plan is shown below:

Tiered Based Plan

By offering a Tiered-based model, businesses can effectively segment their customer base and cater to various customer segments with distinct pricing and feature requirements.

Key characteristics and benefits: 

• Tiered pricing allows SaaS providers to cater to diverse customer segments by offering different packages tailored to different user requirements. Customers can choose the package that aligns with their specific needs and budget.

• Tiered pricing is often based on the value proposition of the services included in each tier. Higher-priced tiers offer advanced functionalities and additional benefits and/or discounts, providing customers with a sense of value.

• SaaS providers can utilize Tiered pricing to upsell customers to higher-priced tiers by showcasing the additional discounts and benefits they would receive.

• SaaS providers can utilize Tiered pricing to upsell customers to higher-priced tiers by showcasing the additional discounts and benefits they would receive.

Important to note:

• Service providers must maintain a balance by offering a reasonable number of tiers that are easy for customers to understand and compare.

• Transitioning between Tiers (upgrade/downgrade) can result in proration, which needs to be calculated properly in billing. Also, providers must avoid any service disruption during tier changes.

• Revenue forecasting gets difficult in this model due to the unpredictability in adoption across different tiers and potential migrations between tiers. To address this, providers should study the past tier-based usage patterns and customer preferences analytics to forecast the revenue.

• Tiered pricing requires complex configuration, and the tiers benefits and pricing should be communicated properly to the customers. Advanced notice should be given to customers for any upcoming price changes or promotions. 

• Maintaining different tiers and features associated with each tier can be challenging due to growing customer demands, profitability, competitors’ offerings, etc. Providers must continuously evaluate the effectiveness of tiered pricing structures to ensure they remain aligned with current market trends and personalization needs.

Some of the examples of this model: 

• Club Memberships (E.g. Silver Tier, Gold Tier, Platinum Tier)

• SaaS Services (Tiers based on No. of Users, Features, Usage, etc.)

• Web Hosting (Tiers based on Storage, UI, etc.)

• Streaming Services (Tiers based on No. of channels, HD/UHD/SD Quality, etc.)

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This article is an excerpt from my ebook published on the Synthesis Systems website. In the subsequent articles, I will share an overview of the other SaaS Billing Models. 
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Also Read: 

Overview of Subscription Based SaaS Billing Model

A Deep Dive Into Consumption-based Charging Model

Overview of Flat Rate Billing Model In SaaS

Kindly share this article with your friends and colleagues. Happy Learning!

Glossary: SaaS (Software-as-a-Service), U/S/HD (Ultra/Standard/High Definition)

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