Pricing can be complicated, and pricing that works for one customer segment won’t always work for others. Small customers with low usage often receive value differently than large customers with the most usage. When crafting a pricing model, it is essential to consider how value scales with usage, how competitors are pricing, and what customers of different sizes expect today.
One common pricing adjustment for different segments is volume discounting. Generally, a customer who buys 1 million units of something will often pay far less per unit than someone who buys 50. Units, in this case, can be anything that you charge separately for. In software, that might, for example, be user licenses, API calls, number of instances, etc. Where possible, this pricing metric should be directly related to the value the customer receives from the product. Learn more about value-based pricing.
There are several ways to scale pricing with volume, and depending on your customers’ and business’s needs, some may be more suitable than others. Four typical schemes for pricing across different volume bands exist, each with pros and cons.
Bulk Discounting
For purchases above a specific volume, the unit price is reduced for the entire purchase.
Example: “$3 for a bag of chips, or $2.50 each if you buy 3”
While common in grocery stores, bulk discounting can be risky in the software world and lead to pricing inefficiencies that risk losing value. If a customer can pay less by increasing their usage (See chart above), there is a risk of lowering the product’s perceived value, especially in B2B SaaS. This pricing usually only makes sense in competitive markets with lower-value, commoditized products, where investment / long-term commitment is not required. For example, this type of discounting is frequently seen in grocery stores.
In software, especially with a sales-led strategy, salespeople generally either discount the product or artificially move customers to a higher volume to get a smoother pricing curve. This can be an effective workaround, but it is often better to standardize this behavior. If you’re considering using bulk discounting but don’t want these extreme pricing cliffs, consider hybrid pricing instead (described below).
Volume Tiers
Volume is purchased in pre-defined increments.
Example: Up to 10 users for $500/year. Up to 25 users for $800/year.
Tiered volume pricing tends to be more common than bulk discounting in the software space. While it can still have pricing cliffs (see the massive jump in price from 5,000 units to 5,001 units in the chart above), these are generally easier to work around by adding more tiers. With tiered volume pricing, customers can always expect to get more if they pay more. However, customers close to a pricing cliff can still be challenging to price, and there may still be some need for discretionary discounting to cover the gaps. For this reason, tiered pricing is often a good fit when usage does not fluctuate significantly over time.
This is for two reasons: If usage is relatively constant, there is less risk of:
A: Customers frequently using less volume than their tier allows.
B: Customers frequently bouncing between different tiers.
Ideally, customers shouldn’t be using far less than their limit. Customers who don’t use the product to the full extent can often have a lower willingness to pay, as they will usually feel like they are not getting their money’s worth from the product. Similarly, bouncing between different tiers (or getting assigned to a high-volume tier long-term due to a one-time usage spike) can cause friction and lead to potential dissatisfaction.
These concerns are significant in high-volume enterprise deals. Enterprise customers especially don’t like paying for volume they aren’t using, so ensure that enterprise plans have large numbers of tiers. For example, don’t have a tier for “up to 2,000 users” and another for “up to 5,000 users”. Instead, have tiers for 2,000 users, 2,500 users, etc. A customer who uses less than half of their allowed volume will often feel like they are overpaying. This is less likely when they use 80% of their volume instead.
Hybrid (Tiered pricing with overages)
Volume is purchased in pre-defined increments, but customers can pay for extra usage beyond that.
Example: Up to 10,000 messages per month for $500. $.06/message above $10,000.
Tiered pricing can still work when volume is more likely to vary, but it becomes necessary to ensure smooth transitions across different price points. There are several ways to accomplish this, but a simple method is to introduce “overage” fees into a tiered pricing model. Instead of moving someone from the 5,000 unit tier to the 6,000 unit tier, if they have 5,001 units, they can pay the price for the 5,000 unit tier and buy only a single additional unit.
In most cases, overages should not be framed as a “punishment” for using too much but instead as a “bridge” between different volume tiers. By reducing massive price cliffs as usage increases, overage prices can help reduce barriers to expansion and encourage increased usage over time.
Banded Volume Discounting
Price decreases as volume increases, but only for the additional volume.
Example: Up to 100,000 API calls for $.001 each. Additional API calls for $.008 each.
Banded discounting is the most suitable in cases where usage is highly variable and offers the smoothest transition from low-volume pricing to high-volume pricing. As volume increases, the marginal volume of an additional unit will decrease, but all units bought up to that point cost the same. The cost of the 101st unit is reduced compared to the 1st, but the 1st unit always costs the same amount. For example, APIs are often priced with this pricing model, as usage can fluctuate significantly month-to-month. However, it is not without its pitfalls. Banded discounting makes it easy for a customer to tell how much it would cost to increase their usage. Still, the more complex pricing calculation can make determining their total price slightly more difficult, especially for an initial purchase. Therefore, if volume does not vary significantly over time, using a simpler pricing model may still make sense.
Conclusion
With multiple forms of volume pricing, evaluating which is best for your business is essential. Consider all the factors where possible and optimize for reduced pricing complexity. See the table below for an overview of the pros and cons of each type of volume pricing.
| Pricing Type | Example | Advantages | Disadvantages | Common Uses |
| Bulk Discounting | $500 per unit20% discount if you have 51+ units35% discount if you have 251+ units | Simple and easy to understand“Rewards” additional usage | Pricing cliffs can lead to wildly different prices for similar usages. | Physical Goods |
| Tier Pricing | Up to 10 units for $5,000Up to 50 units for $20,000Up to 250 units for $80,000 | Simple and easy to understandEncourages growth within tiers | Large number of tiers needed to avoid major pricing cliffs | Software (SMB/Product-Led)Enterprise Software (with large numbers of tiers) |
| Hybrid (Tiered/Bulk) | $500 per unit$20,000 for 50 units$500 for each unit over 50$80,000 for 250 units$400 for each unit over 250 | Avoids pricing cliffsFairly simple to understand and communicate. | Sometimes adding volume costs money, but sometimes it does not – inconsistent. | Mid-Market SoftwareEnterprise SoftwareVariable / Growing Usage |
| Banded Discounting | $500 per unit up to 50 unitsThen $400 per unit up to 250 unitsThen $300 per unit up to 500 units | Smoothest price scalingEasy to calculate how much it costs to add volume. | Difficult to know the total price without a calculator. | APIsCloud ComputingHighly variable / fluctuating usage |
