What is Graduated Pricing?

Graduated pricing is a pricing strategy where the cost per unit decreases as the quantity purchased increases. The price reductions are structured into “tiers,” with each tier offering a discounted rate once a specific threshold is met.

For example, a company might charge $10 per unit for the first 50 units, $9 for the next 100 units, and $8 for any quantity beyond 150 units. As a customer purchases more, they move into lower-priced tiers.

Similar to block pricing, the graduated approach incentivizes bulk purchases by offering customers better rates when they commit to larger orders. In fact, the two terms are sometimes used interchangeably, but there are slight differences between them.

You’ll frequently find this pricing strategy in B2B industries like wholesale, manufacturing, and SaaS, where large orders or subscriptions with multiple licenses are commonplace. It’s worth considering if you want to scale your sales volume, manage your stock, or improve customer retention rates.

Synonyms

• Tiered pricing
• Usage-based pricing
• Volume pricing
• Block pricing

Graduated Pricing vs. Other Pricing Strategies

The graduated pricing strategy has some similarities with other ones you might have heard of. It’s also got differences that are important to highlight.

Tiered vs. graduated pricing

While graduated pricing follows a tiered structure, it is not purely tiered pricing. When we think of the tiered pricing model, we think of a specific number of pricing levels, each with its price point.

For example, if you’re selling a SaaS product with three levels — Basic, Pro, and Enterprise — they’ll all have a flat per-month rate.

This is also sometimes called the “good-better-best” approach because it uses pre-set pricing tiers to communicate the value of different subscription plans to customers. You could even say it’s a prescriptive pricing approach in the sense that, by pricing each tier a certain way, you’re openly recommending the plan that suits each customer’s budget and needs.

Graduated pricing, on the other hand, offers a gradual discount as the quantity increases. The important difference is that you’re selling the same product for a lower price as volume increases, not different product tiers with corresponding features and prices.

Volume vs. graduated pricing

Volume-based pricing and graduated pricing are sometimes confused. While they’re similar, the important distinction is that graduated pricing breaks the prices into blocks. This is also called block pricing in some CPQ and billing systems.

So, if a company’s pricing options look like this:

• $10 per unit up to 50 units
• $9 per unit from 51-100
• $8 per unit from 101-200
• $7 per unit from 201 onward

…the customer pays $10 for those first 50 units no matter what. Then, every unit between 51 and 100 costs $9, and so on.

Volume discounting (also called price breaks) is a little bit more straightforward. It simply means that when you buy more, the overall cost per unit decreases.

For example, instead of paying $10 for each unit up to 50, your customer would pay $10 per unit if they purchase 50 or less. If they buy more than 50, the 10% discount ($1 off) would automatically be applied to the entire purchase.

Usage-based vs. graduated pricing

Usage-based pricing is a model where customers pay for the amount of product or service they use. For example, a company might charge based on the number of emails sent, storage used, or API calls made. Or, a telecom company might charge for every GB of data used.

Usage-based pricing strategies can have graduated elements. You could break things like API calls, data usage, or number of users into different tiers and charge customers based on the volume. So you might charge $4 per 1,000 API calls up until a certain threshold (say, 100k) and then offer a discount for anything above that number.

But they can also use a demand-driven pricing model where the price changes dynamically based on real-time fluctuations in demand. This is sometimes called surge pricing or dynamic pricing. It’s a popular model for services like ride-sharing apps, food delivery services, and hotel bookings.

Flat-rate vs. graduated pricing

Flat-rate pricing is simple: the customer pays a single price for a product or service. When you buy something at the store or subscribe to a streaming service, you’re paying a flat rate.

Flat-rate is also the first step in the good-better-best model we discussed above. If you’re selling multiple versions of the same product, you’ll charge a higher flat rate for the better version.

Graduated pricing is different because you can “graduate” into lower prices as volume increases. You can also create custom tiers, so this pricing strategy doesn’t necessarily have to be linear. In fact, in some industries (like insurance), prices tend to increase as volume increases because the risk does too.

Common Graduated Pricing Models

Now that we’ve gone over the differences between graduated pricing and other strategies, let’s dive into some common models. Each one offers a unique way to price your product or service based on the quantity purchased.

Quantity discounts

Quantity-based discounts are the most common type of graduated pricing. As we’ve gone through above, as the volume increases, the price per unit decreases.

The keys to getting this strategy right are:

• Setting the quantity threshold at a point that provides value for the customer and maximizes revenue for your business
• Offering discounts that are proportional to the volume purchased (e.g., 5% off for every 10 units)
• Clearly communicating the discount structure to customers
• Keeping the structure easy to understand
• Making sure the discount rate is still profitable for the business

The main advantage to quantity discounts is that they give custoimers an incentive to purchase more. Even if you’re sacrificing some of your margins, carrying costs can add up to 20-30% of your inventory’s entire value. So, it’s in your best interest to move products as fast as possible.

On the downside, it can be hard to get the quantities right, which means you might end up discounting too much or not enough. You also have to make sure the threshold is actually realistic enough to hit. If it’s too high, the average buyer won’t care enough to purchase more.

Take note of what your average order volume is, then set it slightly above that number.

Pricing tiers

When you group quantities into different tiers and apply a price to each tier, you’re using the tiered pricing model. This is a more complex version of quantity discounts that allows you to offer different price points for different quantities.

This works well when you have a lot of variation in your customer base. For example, if you sell a product that can be used by individuals or businesses, you’d have a higher-priced tier for businesses that purchase in bulk, along with per-user pricing (since they’ll need multiple licenses).

A huge benefit of this is it allows you to segment your customers based on their business needs and overall willingness to pay. However, you need to serve a diverse enough customer base for tiers to be worth it.

Usage tiers

Depending on what kind of product you’re selling, your usage tiers will be slightly different.

• A SaaS product would charge per “X” amount of a particular metric (e.g., API calls, CRM contacts, GB of storage used).
• A cloud computing company would charge based on the amount of compute time used.
• A ride-hailing app would charge based on the distance traveled.

Usage tiers work best when there’s a clear way to measure and track usage.

For instance, you wouldn’t use them for CRM software because there’s no clear-cut way to measure a customer’s “usage.” Team members use it too frequently, and for too many different tasks.

However, CRM contacts would work well with usage tiers because it’s easy to track and measure the number of contacts. Every time someone uses one, that activity is automatically recorded.

Seasonal pricing

Seasonal pricing is a graduated pricing model that offers different prices based on the time of year.

For instance, you might offer a buy-one-get-one-free offer for winter coats at a department store during the summer. Or, you might offer discounts on beach vacations in the off-season.

The goal here is to create demand when there normally wouldn’t be any. And if the products in question are seasonal themselves, this allows you to move old inventory and make room for new products.

Benefits of Graduated Pricing

When done right, breaking your product pricing into different blocks with corresponding per-unit values can be a huge win for your business and your customers.

• It lowers the barrier to market entry. When there are multiple price points, customers have more options and can choose the one that fits their budget best. If your ideal customer profile (ICP) has customers of various sizes, this helps you appeal to a greater percentage of them.
• Customers are happier with the end product. Since they’re getting a better deal on a product they’d use anyways, they’re less of a churn risk and more likely to become brand advocates. In the B2B space, better pricing means they can operate more profitably as well.
• They’re encouraged to keep buying. If they’re getting a better price by buying more, they’re incentivized to purchase in larger quantities or more frequently. Your average order value (AOV) and customer lifetime value (CLV) will increase significantly.
• Your cash flow improves. If your business needs immediate liquidity, incentivizing larger upfront purchases through graduated pricing will give you the immediate revenue boost you’re looking for.

Keep in mind that complex pricing structures can be a challenge for your business if your product and customer base aren’t inherently complex. Bringing down the unit price with a graduated model only makes sense if you’re selling a product or service that has a lot of possible variations, or if you have lots of customers who make bulk orders.

Factors to Consider When Implementing Graduated Pricing

We touched on this a little above, but you really need to be careful about how your customers will interpret and respond to graduated pricing.

There are several factors that you need to consider before implementing a graduated pricing model:

• How price-sensitive are your customers? You have to understand your customers’ willingness to buy in larger quantities and their perception of price-quality trade-offs. Customers who expect discounts at higher volumes will respond positively to graduated pricing if it’s transparent and offers a real incentive.
• What does the competitive landscape look like? Researching the pricing strategies of similar businesses can provide insights into setting appropriate discount levels. That way, you prevent yourself from undercutting your own value while ensuring your pricing remains competitive.
• Can you support higher-volume sales and faster inventory turnover? If your production capacity can’t support a large volume of orders, graduated pricing will be overbearing and potentially counterproductive.
• How automated is your sales process? If you have manual processes that make it difficult for your sales teams to apply appropriate discounts, graduated pricing may not be the right fit. Consider implementing automation tools before you make the switch.
• Will it work in practice as well as it does in theory? Start with a small test or pilot program and adjust based on customer feedback and performance.

How CPQ Software Helps Sell Products with Graduated Pricing

CPQ (configure, price, quote) software is a tool sales reps use to select items/bundles, calculate prices, and instantly create quotes and proposals. It’s built on product, pricing and business rules that you define. When reps are working with customers, the system automatically enforces those rules, guiding reps to the right products and always calculating the right prices.

This means a few important things for your graduated pricing strategy:

• Block quantities are enforced 100% of the time, so you’ll never have to worry about a customer accidentally getting or missing out on a discount.
• Your pricing strategy is more adaptable — you can make immediate changes to your rules based on real-time sales insights, so you can optimize prices faster.
• Your reps won’t have to cross-reference different documents to figure out what the right price is. It’s all in one place, which speeds up the sales process.
• Approval workflows are automated, which brings complex deals across the finish line a lot faster.

Some CPQ systems even support usage-based models. DealHub allows you to establish different pricing tiers according to usage in order to streamline quoting and automate usage-based billing.

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