Tiered Discounts: A Game-Changer in Modern Sales Strategies

In 2005, Allstate revolutionized its approach to customer engagement and sales with the introduction of the Your Choice Auto program.

This innovative program offered customers a variety of plans beyond the standard options, enabling them to customize their services according to their specific needs.

The success of this initiative was evident, as by 2008, Allstate had sold an impressive four million Your Choice policies.

Reflecting on this achievement, a Harvard Business Review study in 2017 highlighted that a significant 33% of Allstate’s customers were still opting for the higher-tier Value, Gold, or Platinum plans. This sustained preference underscores the effectiveness of the tiered pricing model Allstate employed.

The tiered pricing model, as demonstrated by Allstate’s success, is not just a sales strategy but a customer-centric approach that acknowledges and caters to diverse consumer needs and preferences.

It facilitates customer empowerment by offering choices that align with different value perceptions and budgetary constraints. This model has proven to be a robust tool in driving sales and enhancing customer satisfaction, as it offers flexibility and a sense of control to the buyers.

For businesses looking to replicate Allstate’s success, understanding and implementing a tiered pricing model can be a game changer.

It’s not just about increasing sales; it’s about fostering long-term customer relationships and building a brand that resonates with consumer values and expectations.

By offering tailored solutions, businesses can attract a wider customer base, increase customer loyalty, and achieve sustainable growth. Read on to explore the nuances of this model, how it can be effectively implemented, and the myriad benefits it can bring to your business.

Breakdown of How Tiered Discounts Works

As we already discuss tiered discounts is a pricing strategy used by businesses to encourage customers to buy more by offering greater discounts for purchasing larger quantities.

This strategy is often employed to increase sales volume, move inventory, and reward customers for making larger purchases. Here’s a breakdown of how tiered discounts work:

Basic Concept: The basic idea is that the more a customer buys, the more they save. For instance, a customer might save 10% on purchases over $100, 15% on purchases over $200, and 20% on purchases over $300. This incentivizes customers to spend more to reach higher discount thresholds.

Incremental or Cumulative:

• Incremental Tiered Discounts: In this approach, each tier’s discount applies only to the portion of the purchase that falls within that tier. For example, for a purchase of $250, the first $100 might be at full price, the next $100 might be at a 10% discount, and the last $50 at a 15% discount.
• Cumulative Tiered Discounts: Here, once a customer’s purchase reaches a higher tier, the discount is applied to the entire purchase. So, in the above example, a 15% discount would be applied to the entire $250.

Types of Products or Services: Tiered discounts can be applied to a wide range of products or services. They are common in both retail and B2B (business-to-business) settings.

Marketing and Customer Perception: This strategy is often used as a marketing tool to make customers feel they are getting a better deal, which can enhance customer loyalty and satisfaction. It also creates a sense of urgency, as customers may want to buy more to qualify for a higher discount.

Inventory Management: For businesses, tiered discounts can be an effective way to manage inventory, encouraging the sale of older or excess stock.

Implementation: Businesses need to carefully plan and implement tiered discounts to ensure profitability. This involves calculating the cost of goods sold, understanding customer behavior, and setting appropriate discount levels.

Challenges: One challenge with this approach is ensuring that customers are aware of and understand the tiered discount structure. Misunderstandings can lead to customer dissatisfaction.

Technology and Systems: With the advent of e-commerce, implementing tiered pricing has become easier, as online platforms can automatically apply these discounts based on purchase amounts.

Tiered Discounts Real Life Examples

Pulp & Press

The landing page prominently features a banner showcasing the tiered discount system, designed to encourage customer engagement:

• 10% off on a 3-day pack.
• 15% off on a 5-day pack.
• 25% off on a 7-day pack.

This strategic approach aligns with the Fogg Behavior Model, which posits that Behavior = Motivation x Ability x Prompts. The model is exemplified through the pack options: “The Beginner” (3-day), “Intermediate” (5-day), and “The Total Makeover” (7-day).

Each level is crafted to act as a motivational trigger for customers. The essence of this strategy is to support customers interested in a cleanse journey.

By offering packs that embody a clear path to success, customers can better visualize their goals and build confidence in their ability to achieve them. The gradual progression from beginner to advanced levels serves as a reward system, reinforcing the habit formation process.

Francesca’s

Francesca’s provides an enticing shopping offer: free standard shipping on all orders exceeding a certain amount, currently set at $65.

Additionally, for those participating in the exclusive online-only Party Edition sale, there are substantial discounts available:

40% off on orders of $100 and an even more generous 50% off on orders of $150, with these discounts extending to clearance items as well.

However, there’s a strategic catch: When a shopper selects an item priced at $100, the 40% discount applied means the order falls below the threshold for free shipping. This cleverly encourages shoppers to aim for the higher discount tier by spending more.

As a result, shoppers are motivated to increase their order value, thereby boosting the average sale and simultaneously clearing more inventory with each transaction.

Modcloth

ModCloth effectively employs an extended sales strategy to capture the attention of customers who may have missed previous offers.

A key feature of this approach is the use of a countdown timer displayed prominently on their banner, which amplifies the sense of urgency and time sensitivity.

Notably Effective: The phrase “Buy More, Save More Extended!” stands out significantly. The use of “More” in this context suggests an unlimited scope, and its presentation in uppercase letters draws the reader’s attention, signaling its importance and encouraging engagement.

Jessica London

Jessica London effectively capitalizes on attentional bias through a 3-day tiered discount sale, a strategy designed to boost conversions by focusing customer attention on key elements.

Key Highlight: Attentional Bias plays a crucial role in this strategy. This cognitive bias leads customers to prioritize certain information over others when making a decision.

In the context of sales, customers often focus on a single appealing factor – like a discount – while overlooking other aspects. Jessica London’s sale leverages this by drawing customer focus primarily to the discounts.

Strategic Takeaways:

• Hero Text: Enhance cognitive ease by using a font size between 16-20 for the main message. The discount offer should be the ‘hero text’, immediately catching the customer’s eye and becoming the focal point of their attention.
• Loyalty Program Communication: Clearly communicate the benefits of the loyalty program. Highlight the advantages such as Member vs. Non-member pricing, free shipping, early access to sales, and other exclusive perks. This differentiation not only rewards loyalty but also encourages non-members to consider joining.

H&M

H&M is a leading fast-fashion brand, employs a strategic tiered discount approach to boost sales, starting with an enticing offer of up to 20% off on select styles across their website.

This targeted discount tactic is particularly effective for increasing sales of products that are not moving as quickly as desired. Following the initial discount, H&M introduces additional tiers based on order value.

The structure is as follows: 15% off on orders of $60, escalating to 20% off on orders of $80, and culminating in a 25% off discount for orders totaling $100 or more. Moreover, all these discount levels come with the added benefit of free shipping.

This tiered pricing strategy not only encourages higher spending per transaction but also strategically moves slower-selling items, creating a win-win scenario for both the retailer and the consumers.

Tiered Pricing Strategy

A company offers different price points for various levels of its products or services. This approach is used to cater to different segments of the market, each with varying willingness or ability to pay. Here’s an overview of how tiered pricing works and some key elements to consider:

• Segmentation Based on Features or Usage: In a tiered pricing model, products or services are divided into different categories or tiers. Each tier offers a different combination of features, services, or usage limits. For example, a software company might offer basic, professional, and enterprise tiers, with each level offering more features or higher usage limits.
• Attracting a Broader Customer Base: By offering multiple tiers, a business can appeal to a wider range of customers. Lower tiers can attract more price-sensitive customers or those with minimal needs, while higher tiers can appeal to customers who require more advanced features or higher usage limits.
• Clear Value Proposition at Each Level: Each tier should have a clear and distinct value proposition. Customers should be able to easily understand what they gain by choosing a higher-priced tier.
• Upselling Opportunities: Tiered pricing can facilitate upselling. Customers might start with a lower tier and, as their needs grow, move to a higher tier. This progression can be a natural part of the customer’s growth or usage increase.
• Setting the Right Price Points: Pricing each tier correctly is crucial. The price should reflect the value offered at each level and be set at a point that maximizes overall revenue. Market research, competitor analysis, and cost-based pricing are common methods used to determine the right price.
• Psychological Pricing: The pricing structure can also be designed to psychologically encourage customers to choose a higher tier. For instance, the highest tier might be priced just slightly higher than the middle tier, making it appear as a more valuable deal.
• Flexibility and Customization: Some tiered pricing models allow for additional customization within each tier. This can include add-ons or extra features for an additional fee.
• Monitoring and Adjustment: Regularly monitor the performance of each tier in terms of sales and customer feedback. Adjustments may be necessary to ensure that each tier remains competitive and attractive to its target segment.
• Communication and Marketing: Effective communication and marketing are key to educating potential customers about the different tiers and helping them find the one that best suits their needs.
• Legal and Ethical Considerations: Ensure that the tiered pricing strategy complies with all legal requirements and is ethically sound. Avoid practices that could be perceived as discriminatory or unfair.

Simple Tiered Pricing Template

Creating a tiered pricing template involves structuring different pricing levels based on features, usage, or customer types. Here’s a simple example of what a tiered pricing template might look like. You can adjust the features, pricing, and descriptions according to your specific product or service:

Basic Tiered Pricing Template

Tier 1: Basic

• Price: $10/month.
• Features:
  • Access to basic features.
  • Email support.
  • Up to 10 users.
• Best for: Individuals or small teams just starting out.

Tier 2: Standard

• Price: $30/month.
• Features:
  • Access to all basic features.
  • Priority email support.
  • Up to 50 users.
  • Advanced reporting tools.
• Best for: Small to medium-sized businesses needing more functionality.

Tier 3: Premium

• Price: $60/month.
• Features:
  • All Standard features.
  • Phone support.
  • Unlimited users.
  • Access to premium features.
  • Custom integrations.
• Best for: Large businesses or enterprises requiring extensive support and features.

Tier 4: Enterprise

• Price: Custom Pricing.
• Features:
  • All Premium features.
  • Dedicated account manager.
  • Custom development options.
  • Enterprise-level security.
  • 24/7 support.
• Best for: Very large organizations or those with specific, high-level needs.

Notes for Customization

• Adjust the Pricing: Depending on your costs, target market, and profit margins.
• Tailor the Features: Include features that are most valuable to each customer segment.
• Flexibility: Consider offering add-ons or customizable options for each tier.
• Market Research: Look into what competitors are offering and their pricing to position your tiers competitively.

Remember, the key to successful tiered pricing is to clearly differentiate between each level, providing increasing value as the price increases. This encourages customers to select higher tiers for more benefits.

Difference Between Tiered Pricing And Volume Pricing

Criteria	Tiered Pricing	Volume Pricing
Definition	Pricing strategy where different prices are set for specific ranges or tiers of product quantities.	Pricing strategy where the price per unit decreases as the quantity purchased increases.
Pricing Structure	Prices decrease with each tier, but only for the units within that specific tier.	A single price is applied to all units based on the total volume purchased.
Complexity	Moderately complex as each tier has its own price.	Simpler, with a single rate applied to the entire volume.
Best Suited For	Businesses that want to incentivize purchasing in larger quantities without drastically reducing margins.	Businesses that want to encourage very large purchases by offering significant discounts for higher volumes.
Billing Predictability	Less predictable as different tiers have different rates.	More predictable as the rate is constant for all units once a volume threshold is reached.
Consumer Understanding	Can be confusing for consumers as prices change at different tier levels.	Easier for consumers to understand as the discount is uniform across the volume.
Example	1-100 units: $10/unit, 101-200 units: $9/unit, 201-300 units: $8/unit.	1-100 units: $10/unit, 101-500 units: $9/unit, 501+ units: $8/unit.
Advantage	Provides flexibility and can maximize revenue on lower tiers.	Encourages larger orders, potentially leading to higher overall sales.
Disadvantage	Can lead to customer dissatisfaction if not clearly communicated.	May lead to lower revenue per unit for large orders.

Conclusion

Tiered discounts represent a strategic approach to pricing that benefits both businesses and consumers. By incentivizing larger purchases through increased discounts, businesses can boost sales volume, improve inventory turnover, and enhance customer loyalty.

Customers, on the other hand, receive greater value for their money, encouraging them to buy more and fostering a positive buying experience.

This strategy not only drives revenue growth but also strengthens the market position of a business by creating a win-win scenario for both parties.

Ultimately, the implementation of tiered discounts is a testament to a company’s commitment to customer satisfaction and innovative pricing strategies, ensuring a competitive edge in today’s dynamic market landscape.