Stairstep Pricing

Publication Date :

19 Jan, 2025

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Table Of Contents

What Is Stairstep Pricing?

Stairstep pricing refers to a tier-based pricing model whereby the product price is segregated into different tiers or slabs with a predetermined range of units consumed. Thus, a customer is charged a consistent price if their unit purchase falls within a specific range known as tiers.

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Such a pricing model blends flat and tiered pricing models. Moreover, it is a widely used approach in Software as a Service (SaaS), the Internet of Things (IoT), and forecasting model-based businesses. It informs customers that they will be imposed an elevated price even if they buy one additional unit beyond the range.

Key Takeaways

Stairstep pricing is an arrangement where the companies set different price points for every tier or range of volume purchased or consumed. There are multiple slabs or tiers in such a pricing model.
Thus, a customer would be charged the same price, no matter how much of a product or service they utilize within a particular tier or range.
Such pricing is familiar in recurring billing businesses, e-commerce, SaaS companies, IoT businesses, and firms based on forecasting models.
However, this pricing model is unsuitable for physical product-based companies.

Stairstep Pricing Model Explained

Stairstep pricing is a model that has multiple tiers, each one made up of a consumption range. Also, each of these tiers has a flat rate. However, this price point increases with every level or tier, depending upon the volume of products used or purchased. Thus, customers have to pay a higher price if they increase their consumption of goods or services even by one unit above the specified range, thus leveling up their consumption volume and price to the next tier or slab. However, there is no price relaxation when buying one unit less.

Such pricing models are often employed in recurring billing, e-business, telecom, SaaS, or subscription-based products. Let us discuss its diverse applications:

1. IoT Businesses: The Internet of Things products, such as the data transmitted using gadgets, sensors, appliances, and actuators, are often priced using stairstep strategies. For instance, GPS tracking services.

2. SaaS Companies: These companies provide Software as a Service (SaaS) products, such as video conferencing, digital marketing, web hosting services, etc. They plan their subscription models based on stairstep pricing.

3. Forecasting Model-Based Businesses: Most companies apply usage-based models designed using stairstep pricing strategies, capitalizing on the anticipation of high product usage in the future.

However, in such a pricing method, "Less Is More," it is often advisable to have a few tiers that cover the overall pricing range since providing too many options to the customers may confuse them and divert them to competitors offering a more straightforward pricing choice. Also, the companies using these models should have a robust data collection and management system to acquire accurate information on product usage by every customer for correct billing.

Examples

When there are different pricing models available for various businesses, the stairstep pricing provides unique advantages to the SaaS and other related companies, as explained through the following examples:

Example #1

Suppose a song streaming application has a collection of all the latest songs in high-quality resolution. The company uses the following stairstep pricing model:

Tiers	Number of Songs Downloaded	Price
1	0 - 500	$20
2	500 - 1000	$40
3	1000 - 5000	$90
4	5000 - 10000	$200

Now, a user downloading 499 songs and a user downloading only 1 song will both be charged $20. However, the users downloading 501 songs would pay $40. Thus, such a pricing method clearly distinguishes between the different price levels based on the tier in which a customer's product or service usage falls.

Example #2

Suppose a SaaS company facilitates content-based companies in finding the keyword search volume, price, competition level, etc., for their mobile applications and websites. The annual subscription is based on the stairstep pricing, as follows:

In the above pricing model, there are three different tiers:

Tiers	Number of Credits/Year	Annual Price
Bronze	0 - 100,000	$21
Silver	0 - 400,000	$72
Gold	0 - 2,000,000	$300

Each credit is equal to one keyword research. Thus, if users select the Bronze plan, they will be charged $21 yearly, regardless of whether they use 1 credit or 99,999 credits in the year. Moreover, users who want to get 200,000 credits have to pay $72 annually. Also, they will need to renew the plan after a year since any remaining credits will expire.

Challenges

The stairstep pricing models find immense use in today's digital era, where most of the products are software-based services. However, this type of pricing possesses various challenges, as discussed below:

Not suitable for physical products: Such models don't work for the material products that involve a high cost of production since, in such cases, if the customers purchase a high volume at the same price, then the company would incur a loss.
Considered immoral by few customers: Low-end customers or small businesses may find this pricing method unfair because they have to pay higher even if they purchase at the lower end of a specific range.
Deciding the number of tiers is complex: One of the most arduous tasks for a firm that uses this model is deciding the price breakup based on product volume and selecting an optimal number of tiers. Since only one or two tiers would limit the customers' choices, and forming many tiers would confuse the buyers.