What is Tiered Pricing? How Does It Work?

Tiered Pricing is the concept that an organization can make more overall profit by charging different rates to different categories of people.  Essentially pricing an item for individuals based on the maximum they would be willing to pay results in a higher overall return then utilizing the average amount.  We see this across the board in the implementation of coupons, discount codes, and even deal negotiation.  But why does it work and what does it mean for you?

The Optimal Price: Where Supply Equals Demand

If you recall a few years ago we wrote a post about Supply and Demand.  In that post, we discussed that ultimately pricing and aggregate sales are a factor of the crossing point between supply and demand.    Everything is a trade-off since for most products the more supplied the higher the cost per unit and the lower the price the higher the demand.    Put another way the optimal point is when you can maximize the quantity sold multiplied by the difference between price and cost.  That point exists where the last unit sold can no longer achieve a gap between price and cost.

Aggregate Versus Individual Price Sensitivity

The thing is, supply and demand is a concept around aggregates.  IE. the concept of demand is as it relates to the population.  But within that population, there can be vastly different demand.  One person might be willing to spend 20 dollars for something.   Another person might be willing to spend $200

Tiered Pricing as a Way to Segmentize Markets 

The reality is a business can capture more money if they can somehow compartmentalize or segmentize the market.  IE if the people on the outliers of $200 can only purchase the product at this price then more profit will be achieved.  Meanwhile, it must be priced at $20 to capture the other person.  Enter Tiered pricing.

What is Tiered Pricing Exactly?

Tiered pricing is simply creating hurdles to segmentize the market into different supply and demand curves based on your targets demand.    

The Coupon

The most simple example?  A coupon.   Those that are willing to pay $200 are less slightly likely to go searching for a coupon that will save them money than those at the $20 point.  As such utilizing a coupon puts an admittedly low-level hurdle.  Some people from the $200 category will just walk over this hurdle.  As such this is the least effective solution for the company, but also the easiest to put in place.  

I would recommend no matter how much you want something you always look for a basic coupon.    A simple google search or a site like retail me not should do it.   Especially for higher-priced items.  But this is a balancing act, as searching for coupons can also end up costing more time than the discount is worth.  Life is all about balance.

Rebates

Moving to the more difficult we have rebates.  The reality is many people buy the item with the rebate and then forget to send it in.    The companies are counting on this.    The person willing to pay $200 is more likely to forget, while the person at $20 is probably more passionate about getting the rebate   Still this is a moderate hurdle, but it moves companies closer to maximizing revenues.  Always, and I mean always, take the few seconds to send in a rebate.

The Subscription

Finally, we get to the grand-daddy of this type of tiered hurdle.  The hardest one to get over that’s still legal.  That is the subscription or auto-renewal.  Essentially set something to auto-renew at a higher rate once a trial period ends.  Then make a larger hurdle to cancel or negotiate a lower rate.  Note it is illegal for them to hide their cancellation process, but it’s not illegal to put in hurdles like you must call to have the discussion.

There are multiple variations to this last one.  

The Yearly Call To The Internet Company

The first is the famous yearly call to your phone, satellite music, cable, internet, or even Insurance company.  There is a reason the new customers always get the best rate and they jack those rates up after the first year or 2.  The simple reason is most people won’t shop for alternatives or negotiate cheaper prices.  You should be setting a reminder on your calendar for each year to negotiate or switch these things. 

In some cases a switch might be to another provider.  In other cases it can be as simple as switching to a new account with the same provider under your spouse.    But in any case a lot can be saved by switching or canceling.  Even if you don’t want to switch you can likely negotiate a better rate.

The Forgotten Subscription

The second are subscriptions you no longer desire.    They auto-renew because you are more likely to forget them.   Often times they hide the cancellation means via a phone call.  Although as I noted hiding the ability to cancel beyond a certain extent is illegal.  Some of the worst companies even make it so there are no refunds after they “renew”.   Basically, once it hits your credit card there is no way to get your money back. 

A Reminder Or Withholding Your Business is the Best Response to Overly Aggressive Auto Renewal

Again a reminder is your best option as well as always reading the subscription terms.   I also refuse to do business with any company known to not give refunds if I forget to cancel before the bill auto pays.  Remember I strongly recommend keeping things simple and setting up a bunch of subscriptions is not simple.

If I absolutely must set up a subscription I tend to pay via means that don’t lend themselves to auto-renew.  For example a check, cash, or a credit card I don’t plan to have at the time of auto-renewal.  This limits my exposure.

My Own Experience with Cancelling Subscriptions

I will be honest, I haven’t had 100% luck with canceling subscriptions.  I once signed up for an airline club for a discount on baggage.   Anyway, they auto-renew and if you don’t catch it in time they don’t refund the charge (most companies will at least refund or prorate the amount if caught quickly).  They do send you an email prior to the auto-renew but it’s easy to miss in the wall of junk mail we get regularly.      So I ended up with a charge for an airline I swear I will never fly again.

Thankfully I didn’t give up.  I first canceled the subscription on their site, about a day after the charge.  Unfortunately, their site clearly states you don’t get a refund.  Then I called Amex and reported the charge as fraudulent since I never authorized the recharge.  In my case Amex sided with me and I got out of it.  Reading other’s experiences many were not so lucky.  Your mileage may vary, but a potential path forward for those that get stuck with a subscription payment and catch it quickly after placement. 

A word of warning to this approach.  It is theoretically possible the subscription company could come after you with a debt collector.   As such this approach should be a last resort.    It worked for me 4-5 years ago when it occurred, but I wouldn’t guarantee it.

Tiered Pricing Wrapup

Anyway, those are the basics of tiered pricing and also how to get around it. From coupons, to rebates, and finally subscriptions, understanding them can save you money.  Any other examples I may have missed?