Tag Archives: tiered pricing

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Tiered Pricing Model Guide

Tiered pricing is a method where you will sell items and provide quantity discounts to your customers. While it sounds like volume pricing, it operates differently from that format.

Tiered pricing entails a product or service being priced within a segment or range it supports. The price per unit will drop when each quantity in a tier is sold.

The process also works for services. You can offer multiple tiers of something and charge more for tiers that provide more functions for people to use.

Tiered pricing is popular among manufacturers, wholesalers, and others that sell bulk quantities of different items for sale. Software-as-a-service providers also use this model to help them sell what they are providing to clients.

An Example of How Tiered Pricing Works For Product Sales

Here’s an example of how a tiered pricing platform works when selling products:

  1. You can charge $100 for the first unit of an item you sell and then $90 for the second to fifth units of that item. The price drops to $80 from the sixth unit onward.
  2. A customer wants to buy ten units of that item.
  3. You’ll charge $100 for the first item, $360 total for the next four, and $400 for the remaining five. You’re charging $90 each for the second to fifth items and $80 for the ones after that fifth unit.
  4. The customer will pay $860 for the ten items.

The customer is paying $86 per item for the ten units. Meanwhile, if the customer only needed three items, that person would spend $280 on the entire purchase. It would cost about $93 per unit in this case. The customer is saving money by buying more items at a time.

Get a Greater Profit on Product Sales

You will enjoy a more substantial profit through a tiered pricing platform than if you offered a volume discount. While you could cut the price per item for something when a customer orders more units, you’re risking a substantial drop-off in how much you earn in a transaction. A customer could buy the bare minimum number of items to reach one pricing tier, for instance. Your business won’t receive as much money on a volume discount as if you offered a tiered pricing system.

How Tiered Pricing Works For Services

Tiered pricing is good for more than offering multiple products for sale. You can also use tiered pricing when selling services to people. You could sell monthly or annual access to something like a subscription-based club, an online service, or anything of value. But the features your customers will access will vary over how much they spend each month or year.

For example, a hosting company can offer a package for $20 a month where a customer will get access to a website and a specific amount of disk space or bandwidth. But that person can also pay $40 a month to handle three websites and an unlimited amount of disk space and bandwidth.

The customers will spend more money to get access to more features and services. You can plan your tiered pricing plan surrounding the values you wish to highlight for whatever you provide.

What Makes Tiered Pricing Useful?

Tiered pricing is beneficial for how it is flexible and affordable. Customers can switch between different tiers as necessary, or they can plan their purchases surrounding what tiers work. Businesses can also adjust the values of each tier based on what is profitable and what will help cover their operations.

Tiered pricing also targets more audiences. A business can produce tiers for high-value clients or for those who don’t want to spend as much money on things.

You can also use tiered pricing to upsell things to people. You can promote better deals for buying more items or for subscribing to high-value tiers that offer more things of use.

Planning Your Tiered Pricing the Right Way

You can establish a better tiered pricing platform by using a few steps:

  • Create some differentiation between whatever tiers you offer. The customers should recognize a difference between each tier.
  • Look at the possible customers for each tier. Plan your tiers over what customers are more likely to use them.
  • Provide a sensible pricing alignment plan for each tier you produce. A tier that offers twice the benefits of a lower one if it costs twice as much, for example.
  • Review the profit margins you’ll get for whatever items you will sell through a tiered pricing platform. The reduced prices for each tier should be useful to the customer while still being affordable.
  • Every tier you provide must have a reasonable explanation that highlights everything it has to provide to the customer. The potential buyer should see some benefit with whatever tier one wants.
  • You can create names for each tier, but the names should be reasonable and descriptive. They can include points surrounding what makes a product or service useful, or if the value of something is reasonable enough.

Is This Better Than Volume Pricing?

The potential profits and simplicity of tiered pricing make it an ideal choice versus volume pricing. But it may not always be the right choice. Volume pricing is best if you have a significant amount of product you’re trying to unload soon. It could also work if you need to sell items that are in low demand due to seasonal or economic concerns. Customers might be more interested in these products if they know they can spend less on them.

In other cases, tiered pricing is the way to go. Tiered pricing gives you a greater opportunity to make money from people and to encourage them to spend extra with you. You can plan whatever tiers you want when selling things to people. But be certain whatever tiers you prepare are reasonable enough and that you have a plan for making them work well, especially when running a suitable solution that can attract more people.

Interchange Plus vs Tiered Pricing

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Interchange Plus vs Tiered Pricing

Interchange Plus vs Tiered Pricing

No one wants to pay more than necessary for credit card processing, which can already eat into profits. When comparing merchant services, it’s important to understand how different pricing systems work. Many merchant account providers advertise very low fees as a teaser, even though most transactions do not qualify for these rates.

There are two common pricing models used for payment processing: tiered pricing and interchange plus pricing. Here’s how they compare.

Tiered Pricing
Tiered pricing is probably the most common pricing model for merchant services. While it’s advertised as an easy pricing method that makes statements simpler, the truth is it merely lumps hundreds of interchange rates into just three tiers or buckets. The processor may advertise the rate of the lowest tier, but most transactions will fall into tiers with a much higher rate. A debit card, which usually has the lowest interchange rate, can be billed using the same high rate as a rewards credit card, for example.

There are no set guidelines that determine which cards go in which category which leads to massive overcharging to merchants. Some payment processors have an incentive to downgrade transactions into a lower tier to boost profits. Transactions can be downgraded for any number of reasons, including using terminal software that isn’t updated, tips and tax that aren’t entered separately, or batches that aren’t settled within 48 hours. Not all of these factors are in your control.

As a merchant, you will have no way to predict which rate you will pay for transactions or how much you are being charged above the set interchange rate. You can’t even effectively compare tiered pricing quotes between payment processors because you don’t know what the mid- or non-qualified rates are — just the lowest available rate — and you won’t know the criteria the processor uses to categorize transactions.

Interchange Plus Pricing
Rather than using tiers, the interchange plus pricing model passes the set interchange rates directly to the merchant “plus” a small markup. Because the interchange rates are not changed or lumped into arbitrary categories, you can predict your payment processing costs and know what you are paying above interchange.

The only downside of interchange plus pricing is it does take time to understand the different rates you will pay for different types of transactions and credit cards. Your statements will be longer, but with greater clarity and transparency.

In the not so distant past, interchange plus pricing was only available to merchants with high credit card volume of $25,000 or more. Today, interchange plus credit card processing can be available to small and even new businesses. Interchange plus pricing is a smart choice with only two rates to consider: the transaction fee and the interchange markup fee. This pricing model is the safe and transparent choice with no arbitrary criteria you must meet.

More Durbin Amendment Follow Up [2023 Update]

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The Official Merchant Services Blog continues its in-depth look at an interesting opinion article we found on Practical E-Commerce. We recently did a 2-part series on the differences between Tiered Pricing plans and Interchange Plus pricing plans. And in it we heralded Interchange Plus and explained why Host Merchant Services uses what we feel is the superior pricing plan to benefit its merchants. Phil Hinke’s article went beyond just the pricing plans, however, so we split our analysis up into two separate entries. This one will focus on the Durbin Amendment.

Durbin Amendment Can Bring Added Fees

Hinke’s article goes on to discuss some of the effects of the Durbin Amendment in relation to MSPs and their offerings: “No merchant should make a decision solely based on the savings analysis done by a merchant account provider, even if it is a well-known provider or financial institution. I am seeing biased and flawed savings analyses presented to merchants. The most common flaw is identifying savings that take the merchant’s existing debit and credit card volume, then showing a projected savings based on the entire volume being at the lower Durbin Amendment regulated debit card rates. Make sure all savings analyses show an accurate breakdown of credit and debit card volume for your business. Also, remember that the Durbin-Amendment-regulated rates will probably only affect 60-70 percent of your debit transactions, since it applies only to financial institutions with more than $10 billion in assets. The remaining transactions will still be at the previous unregulated rate.”

Hinke again makes a compelling point. Much of the Durbin Amendment analysis that was presented in the media solely focused on consumers and the banks. Rarely did traditional media sources delve into what would happen with the transaction processing side of things after October 1, 2011. Host Merchant Services addressed this in their Durbin Amendment analysis, however, citing the very issue that MSPs could indeed soak up savings from the Durbin Amendment: “There is also speculation that the merchant won’t see much of the savings in the first place. And this speculation is tied directly to the payment processing industry. The basics of the industry are that merchants do not deal directly with large credit card issuers like Visa and MasterCard. Rather, they deal with acquirers, or middle men, who offer payment processing of credit cards and debit cards to merchants through their acquirer company’s own goods and services. The rampant speculation is that the acquirers will reap the large savings from the Durbin Amendment, since they are in line between the credit company and the merchant, and will shift high fees right back onto the merchant. This wiggle room in the middle, if it takes place as predicted, could see a large short term spike in profits for acquirers.”

Knowing is More Than Half the Battle

Hinke also suggests Merchants really get involved in a discussion with an MSP that gives them an analysis and an offer: “However, I believe merchants should ask these companies tough questions before using them. This includes asking how the third party makes money, and who is paying that company.”

Host Merchant Services is proactive in this area. The company provides articles on its web site covering specific and helpful topics. Host Merchant Services provides The Official Merchant Services Blog to keep its customers up to date on the latest news affecting their business and the processing industry. The company guarantees savings, transparency on statements, and 24x7x365 customer support. The goal is to keep its merchants happy and informed. Interchange Plus in the hands of Host Merchant Services is the perfect tool. Because it’s goals take advantage of the strengths of the pricing plan.

In Conclusion

Mr. Hinke’s article is insightful. It demonstrates some of the problems that can still occur with an Interchange Plus pricing plan and strives to get merchants to be vigilant with their statements and processing fees that are on their statements.

Interchange Plus Follow-Up

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The Official Merchant Services Blog looks at an interesting opinion article we found on Practical E-Commerce. We recently did a 2-part series on the differences between Tiered Pricing plans and Interchange Plus pricing plans. And in it we heralded Interchange Plus and explained why Host Merchant Services uses what we feel is the superior pricing plan to benefit its merchants.

The article begins by introducing the author: “Contributor Phil Hinke is a credit-card veteran who now consults with merchants on lowering their processing costs. Hinke believes the credit card processing industry is often unfair to merchants. He believes the Durbin Amendment — which lowers debit card interchange rates — is fostering deceptive pricing practices by some merchant account providers. He explains his views in the article below.”

This bring together the topic of Merchant Account pricing plans with the Durbin Amendment, something The Official Merchant Services Blog has also been covering in detail. Deceptive pricing practices are something Host Merchant Services strives to overcome in the industry. And one of the key factors the company chose Interchange Plus pricing is because of the transparency which lets merchants see fees on their statements much better than tiered pricing plans.

But Mr. Hinke’s article is an eye-opener because it details ways in which even Interchange Plus pricing can be manipulated to hide fees from merchants: “I am a strong proponent of interchange-plus pricing and, to date, I have never recommend tiered pricing for merchants. (I addressed the differences between interchange-plus and tiered pricing at“Notable Views: Credit Card Veteran on ‘Onerous’ Processing Rates,” a previous article.) However, merchants on interchange-plus pricing can still be grossly overpaying for their card processing. In fact, of the hundreds of merchant statements I have analyzed, the majority of merchants that were overpaying were already on interchange plus, which gives merchants only the potential for fair prices — nothing more.

I recently showed a merchant who was already on interchange plus pricing that he could save money by changing to a provider with a higher processing rate. How could that be? The processing rate is just one of many costs the merchant pays. In this case, the merchant account provider had given the merchant what seemed to be an enticing rate. However, it also hit the merchant with copious monthly and annual fees. Those fees more than offset the rate savings.”

This is a compelling point. And one of the areas where Host Merchant Services is able to stay competitive. Interchange Plus is a tool that a Merchant Services Provider can use to give its customers fair prices. But it’s only a tool. MSPs can still do their best to mark up fees and manipulate the process for profit maximization. As Mr. Hinke points out Interchange Plus only gives merchants potential for fair pricing. It still needs a motivated, hungry MSP in place looking to save merchants money by taking advantage of the tool.

An MSP like Host Merchant Services utilizes that tool along with its overall philosophy to guarantee its merchants savings, transparency and customer service. In that way, Interchange Plus works for the merchant, because it is part of the overall plan to have merchants stick with the company because they are getting value for the services. As Chief Operations Officer Dan Honick often says to clients, “You stay with us because you’re happy.”