Tiered vs volume pricing, with worked examples
How each model prices the same usage, where volume pricing creates cliffs, and what minimums and caps do to the bill.
Tiered and volume pricing both charge less per unit as usage grows. They differ in which units get the lower price, and that difference changes invoices, incentives and how customers feel about the bill. Every example below uses the same rate card.
| Tier | Units | Price per unit |
|---|---|---|
| 1 | 1 to 1,000 | $0.10 |
| 2 | 1,001 to 10,000 | $0.08 |
| 3 | 10,001 and above | $0.05 |
Tiered pricing
Also called graduated pricing. Each unit is priced at the rate of the tier it falls in: the first 1,000 units always cost $0.10, the next 9,000 cost $0.08, and only the units beyond 10,000 cost $0.05. For 12,000 units:
- 1,000 × $0.10 = $100.00
- 9,000 × $0.08 = $720.00
- 2,000 × $0.05 = $100.00
The total is $920.00, an average of about $0.077 a unit.
Volume pricing
Every unit is priced at the rate of the tier the total falls in. At 12,000 units the total is in the third tier, so all 12,000 cost $0.05: $600.00.
The cliff
Volume pricing has a cliff at every tier boundary:
- 10,000 units: 10,000 × $0.08 = $800.00
- 10,001 units: 10,001 × $0.05 = $500.05
One more unit makes the bill $299.95 smaller. A customer just below a boundary has a reason to use more simply to pay less, and invoices swing from one month to the next. Tiered pricing has no cliff: one more unit never costs more than one unit’s price, and never makes the bill smaller.
Side by side
| Units | Tiered | Volume |
|---|---|---|
| 500 | $50.00 | $50.00 |
| 1,000 | $100.00 | $100.00 |
| 5,000 | $420.00 | $400.00 |
| 10,000 | $820.00 | $800.00 |
| 10,001 | $820.05 | $500.05 |
| 50,000 | $2,820.00 | $2,500.00 |
Minimums and caps
A minimum, often called a commitment, sets the least a customer pays for the period. A cap sets the most. With a $250 monthly minimum, a customer who uses 1,500 units pays $250, even though their usage comes to $140.00 on tiered pricing and $120.00 on volume pricing. With a $2,000 cap, a customer who uses 50,000 units pays $2,000 under either model, instead of $2,820.00 or $2,500.00.
Minimums protect revenue on small accounts; caps make large, unpredictable usage easier for a customer to approve. Put both the usage charge and the adjustment on the invoice, so the customer can see why the total differs from their usage.
Which to choose
- Tiered when you want the bill to grow smoothly, usage swings from month to month, or customers compare invoices over time.
- Volume when you want to reward commitment to a level of use and deals are negotiated around that level. To remove the cliff, give each tier a floor at what the tier below charges at its top: in the example, at least $800.00 from 10,001 units, so crossing a boundary never makes the bill smaller.
In Qasha, tiered and volume rates, percentages, minimums and caps can be combined in one set of terms, and each period’s usage is priced from the terms the customer accepted. See usage-based billing.