Understanding tiered pricing: Bucket vs Progressive tiers

Today’s post is on tiered pricing structures, specifically on understanding bucket vs progressive pricing tiers. This helps the reader in two scenarios:

• You are buying goods/services and are evaluating a tiered offer: The pricing offer has multiple tiers. The more one buys, the more the discount per transaction/per license.
• You are partnering with another company and are evaluating a reveue share term sheet: The revenue share term sheet has tiers to incentivize both parties to grow together.

This post discusses:

1. Definitions: “Bucket” vs “Progressive” Tiers
2. Implications for pricing

There will be simple math. Let’s dive in.

1/ Definitions: “Bucket” vs “Progressive” Tiers

Tiered pricing means the pricing proposal has different (usually lower) prices at different tiers, based on some growth assumption, e.g., sales volume growth. One example is revenue share between two companies, for joint revenue targets. A revenue share proposal based on monthly volume could look like this:

0–$1M of sales: 0.2% revenue share

$1M — $10M: 0.3% revenue share

$10M+: 0.4% revenue share

“Bucket” tiers mean that all of the volume in a tier qualifies for that tier’s pricing. For example (using the proposal above):

• If the sales are $500K that month, that is 0.2% * 500K, so $1000 of revenue share.
• If sales are $8M that month, that is 0.3% * 8M, so $24,000 of revenue share.
• If sales are $11M that month, that is 0.4% * 11M, so $44,000 of revenue share.

“Progressive” tiers has different math. For example (also using the proposal above):

• If sales are $8M that month, the math is (1M * 0.2 %) + (7M * 0.3%) = 2000 + 21,000 = $23,000 of revenue share.
• In progressive tiers, only the applicable volume per tier qualifies for that specific tier’s % revenue share. At each tier, the incremental volume is calculated against that tiers’ revenue share %, and then is added up.
• For clarity, let’s use the same proposal again and assume that sales were $11M that month. So the math is (1M * 0.2 %) + (9M * 0.3%) + (1M * 0.4%) = 2000 + 21,000 + 4000 = $27,000.

A sharp eyed reader probably notices how the progressive tier scenario shares less revenue than the bucket tier scenario, especially as volumes grow. Good or bad, that depends on deal objectives. But that’s why it’s important to clarify whether tiers are “bucket” or “progressive”.

Photo by Ray Reyes on Unsplash

2/ Implications

• Takeaway 1: Bucket tiers are simpler to calculate and audit. Bucket tiers are faster to calculate and audit. If optimizing for speed and simplifying finance operations, especially when the business is smaller, choosing bucket tiers might be sensible.
• Takeaway 2: Review tiered pricing proposals closely. Bucket vs Progressive is not always stated clearly in pricing offers. Ask for a clear mathematical example of the tiers. Specific to payments pricing (be it blended or interchange ++ pricing), when reviewing a tiered proposal, ask the acquirer if it is bucket or progressive tiers. The acquirer might prefer progressive tiers (better margins for them). [1]
• Takeaway 3: Bring early clarity to a revenue share term sheet. There’s no need to be ambiguous about bucket vs progressive tiers, especially when building a mutually beneficial deal. It’s best to relentlessly clarify what tiered structure both sides want.

[1] Detailed example

Imagine the IC++ tiers offer is:

• 0-100K: IC + scheme + 0.90% + 0.05 per auth
• 100K++: IC + scheme + 0.75% + 0.05 per auth

Bucket pricing: At 120K/month of volume, all of the volume qualifies for the tier of 0.75% + 0.05 per auth.

On the other hand, progressive pricing is nuanced and the math looks like this:

• 0-100K: Pay 0.90% + 0.05 per auth
• Next 20K: Pay 0.75% + 0.05 per auth

So progressive tier fees land between 0.75% and 0.9%.