How tiered pricing works
You define ranges of units, each with its own price per unit. When the period's quantity is known, the units fill the tiers in order: the first range at the first price, the next range at the next price, and so on. The bill is the sum of each tier's subtotal.
Tiers can get cheaper as usage grows, which rewards heavy users, or dearer, which discourages overuse of something scarce. A tier can also carry a flat fee on top of its per unit rate.
Tiered pricing is often confused with volume pricing. Under volume pricing the total quantity picks one rate and every unit is charged at it, and the two can produce very different bills for the same usage.
bill = sum over the tiers of (units in the tier × that tier's price)
Worked example
Units 1 to 100 cost $10 each, units 101 to 500 cost $8 each, and every unit above 500 costs $6. A customer uses 650 units.
- First 100 units × $10
- $1,000
- Next 400 units (101 to 500) × $8
- $3,200
- Last 150 units (501 to 650) × $6
- $900
- Tiered total
- $5,100
Under volume pricing the same 650 units would all be charged at $6, for $3,900.
Why tiered pricing matters
Tiered pricing draws a smooth curve: each extra unit costs a little less, but no single unit makes the bill jump or drop. That makes it fair and predictable for customers whose usage grows gradually.
It also protects your revenue at the low end. The first units, often the most expensive for you to serve, carry the highest price.
Common mistakes
- Mixing it up with volume pricing Quote a customer a volume price while your system bills tiered, or the other way round, and the invoice will not match the promise.
- Gaps and overlaps at the edges Decide whether unit 100 belongs to the first tier or the second, write the ranges without gaps or overlaps, and test the boundaries.
- Too many tiers Customers need to estimate their bill. Three or four tiers are easier to reason about than ten.