Goldilocks pricing is a marketing strategy that uses product differentiation to offer three versions of a product to corner different parts of the market: a low-end version, a middle version, and a high-end version. Some groups refer to this as good–better–best pricing, but we just call this tiered pricing in the SaaS space.
With this model, you can tap into new markets across your customer base and cater to individual customer segments without stretching your company too thin. But to capture more revenue from your entire total addressable market (TAM), it’s important to effectively set up tiered pricing and know when it’s not the best fit for your SaaS product.
What is tiered pricing?
Tiered pricing is a pricing model in which providers divide a product or service into multiple pricing levels, otherwise known as tiers. Each tier is unique and could offer a different level of service, additional features, or specific usage limits.
With these split offerings for the same product, how do you set prices that balance your customers’ needs and your own revenue goals?
The tiered pricing structure is split into different price points, and each tier typically targets a different customer segment. For example, the entry-level tier might only provide a product’s basic features at an affordable price point. This makes it a reasonable choice for individual customers downmarket. But as a customer moves up to the next tier, they’ll gain access to more advanced features, increased usage allotments, and expanded capabilities. The set price also increases with each tier.
Ultimately, the goal of this model is to balance a company's features with its prices to incentivize customers to pay for the tier that matches their needs. This allows companies to expand their TAM by offering multiple pricing options and gives customers the flexibility to choose a pricing tier that fits their budget.
How tiered pricing compares to flat-rate and usage-based models
Unlike flat-rate pricing, where all customers pay the same single price regardless of their needs, a tiered model offers different pricing tiers that meet customers where they’re at. But tiered pricing models don’t just benefit users. Companies can ultimately capture more customer value by matching their pricing offers to their customers’ willingness to pay.
Tiered pricing also differs from usage-based pricing, where customers pay based on actual consumption. Sure, usage-based pricing allows companies to scale their costs alongside their customers’ usage volume, but it can lead to unpredictable billing for users, especially if their usage spikes unexpectedly during a particular month.
However, by introducing tiered usage within this model, you can cap how much each customer uses at a specific level:
| Number of events | Annual cost | Incremental events (million) | Price per incremental event (per million) |
|---|---|---|---|
| 0–10,000,000 | $10,000 | 10 | Flat fee of $10,000; no per-unit price |
| 10,000,000– 50,000,000 | $12,400 | 40 | $60 |
In this example, the first 10,000,000 events are covered by a flat fee, and additional events are priced incrementally at $60 per million events after crossing the initial threshold.
This tiered usage model gives customers a better understanding of how their costs are calculated and prevents any unwanted sticker shock at the end of each billing period. To enhance the customer experience further, businesses can implement usage alerts. These notifications inform customers when their usage approaches or exceeds the tier’s threshold so they can manage their usage accordingly.
In short, tiered pricing delivers more customer targeting and segmenting capability than flat-rate pricing and more predictable billing than usage-based pricing.
Benefits of tiered pricing for SaaS businesses
Tiered pricing can provide tremendous advantages for SaaS companies that want to improve their customer acquisition, revenue growth, and retention. This model delivers key benefits for SaaS companies, including broader customer reach, higher revenue potential, and improved retention, as detailed in the next sections below.
1. Attracts a broader customer base
A tiered pricing strategy helps SaaS providers appeal to diverse customer segments across different lifecycle stages. This is because a tiered model gives companies the flexibility to acquire potential customers from small startups to large enterprises.
In many cases, these entry-level plans act as a magnet for individual users. Then, once these individuals integrate the tool into their workflow, they’ll become champions of the product and pitch a premium plan to the rest of their team or department. This is the ideal scenario for SaaS companies that want to attract new customers.
2. Increases revenue potential
With pricing tiers, a SaaS business can also better monetize its customer base based on their specific needs. As these clients grow over time, tiered pricing allows companies to upsell more advanced tiers of their products to capture additional revenue. These gradual tier upgrades encourage customers to pay for features that closely match their needs at each lifecycle stage rather than a one-size-fits-all package.
For example, Twilio, a cloud communications platform, uses a combination of usage-based pricing and tiered plans. Twilio offers a base tier with a flat fee for access to its API and a pay-as-you-go model for usage, such as text messages or voice minutes. Similarly, its higher-tier plans include volume discounts, premium support, and additional features like advanced analytics or custom integrations.
You can also layer your pricing tiers on top of other pricing strategies, like usage-based pricing. For example, with Togai, it’s easy to implement usage-based pricing to charge users based on their actual product usage and offer dedicated pricing tiers at the same time.
3. Improves customer retention
Since tiered pricing adjusts alongside customer growth, customers can stay with the same SaaS client as they scale rather than switching to a new solution altogether. This alone offers several pros for SaaS companies.
For one, the ability to configure pricing tiers as needed makes it much easier to improve a company’s customer satisfaction score (CSAT). But more importantly, it means that customers will stick around longer, increasing customer lifetime value (CLTV) and retention. Not only do these metrics have an immediate impact on a company’s revenue, but they also increase the company’s odds of achieving a favorable valuation from investors.
Common challenges in tiered pricing
Tier-based pricing isn’t all bells and whistles. While SaaS companies get tons of flexibility in how they capture the value of their product with this approach, they can encounter plenty of issues along the way.
Customer confusion
Offering too many tiers with unclear features or user thresholds may overwhelm customers and complicate their purchase decisions. This can cause decision fatigue, leading to poor tier selection and negatively impacting the customer experience.
To avoid this, you’ll want to get crystal clear on the value proposition of each tier and simplify each one with a defined set of features.
Feature creep
Similarly, loading too many features into your lower tiers diminishes the value and ROI of your more premium offerings. When basic plans contain most “must-have” capabilities, fewer users will pay for premium plans, and your profit margins will shrink as a result. To avoid this feature creep, you’ll need to carefully balance capabilities across tiers to incentivize upgrades and upsells.
However, instead of bundling all your advanced features into higher tiers, you can also make select features available as add-ons or pay-as-you-go options for customers in lower tiers. For example, a SaaS analytics platform could offer basic reporting in its entry-level plan but then allow users to access advanced visualization tools or custom dashboards for an additional fee.
This approach not only increases your feature-based revenue by monetizing specific features across all tiers but also improves your product’s overall stickiness.
Pricing adjustments
You may need to raise or lower prices as markets shift over time. However, abruptly changing your tier pricing can cause customers to panic and churn. In this case, you may consider grandfathering in your existing users and giving them advanced notice of any pricing changes.
Examples of unsuccessful tiered pricing
Even successful companies can fail at tiered-based pricing. It doesn’t mean that the individual pricing model or company is ineffective, but it does prove that tiered-based pricing only works in the right context. Here are two examples of when companies were unsuccessful with tier-based models.
Basecamp
In 2004, the project management platform Basecamp implemented a tiered pricing strategy that led to customer confusion. The distinctions between the company’s tiers were complex and unclear, making it difficult for business owners to understand the added value of higher-priced plans. This lack of transparency decreased the perceived value of Basecamp’s offerings because customers couldn’t easily identify the incentives for choosing a more expensive tier.
Consequently, many opted for the lower-priced options or sought alternatives, impacting Basecamp’s revenue and customer retention.
Mailchimp
In May 2019, the popular email marketing platform Mailchimp expanded its pricing structure by adding multiple tiers with minimal feature differences.
However, this approach frustrated business owners who felt compelled to pay more for services that offered little additional value. The lack of significant differentiation between these tiers decreased the perceived value of Mailchimp’s higher-priced plans, leading to customer dissatisfaction and public backlash.
Also Read: A Detailed Handbook on Tiered Pricing Models, Structures, Pros & Cons
Examples of SaaS companies with successful tiered pricing models
While some companies struggle with tiered pricing, most SaaS businesses see it as a must-have. In fact, many of the tools you use every day probably offer different pricing tiers to suit various customer needs.
Here are a few more notable examples of SaaS companies that have seen success with tier-based pricing.
Slack
Slack is a standout example among SaaS companies that successfully use tiered pricing to address a diverse range of customer needs. The company’s basic tier provides essential communication tools for small teams or businesses, making Slack accessible and cost-effective for those just getting started or with limited budgets. This entry-level offering enables users to experience Slack’s core functionality without committing to a higher price point.
Source: Slack’s monthly pricing plans
Dropbox
Dropbox offers tiered storage and collaboration capabilities at levels serving everyone from individuals up to large enterprises.
Entry-level tiers provide basic cloud storage for individual users at affordable monthly rates. The mid-level tier offers scaled storage and adds light collaboration for small teams. At the highest part of the price spectrum, Dropbox’s top-tier enterprise plans offer unlimited storage, advanced user controls, integration support, and specialized assistance for companies managing terabytes of data.
Source: Dropbox’s monthly pricing plans
GitHub Copilot
GitHub Copilot’s tiered pricing strategy is effective because it aligns with the diverse needs and budgets of its user base, from individual developers to large enterprises.
By offering distinct value propositions at each tier, such as accessibility for individuals and enhanced administrative controls for businesses, GitHub captures a broad market while incentivizing upgrades as user requirements evolve. Additionally, the free access for students and open-source contributors fosters early adoption and long-term loyalty, creating a pipeline of future paid users.
Source: GitHub Copilot’s monthly pricing plans
How to set up tiered pricing for your SaaS product
Now let’s get into the nuts and bolts of how to set this pricing model up in your SaaS business.
1. Define your customer segments with market research
Your pricing tiers won’t be effective unless you design them with your customers in mind. To get ahead of this problem, conduct in-depth buyer and user persona research to understand your target customers. Then, group them into segments with common use cases, business sizes, and budgets to inform your pricing tiers,
For example, if you find that startup customers just need core features while your enterprise clients need more advanced functionality, you may create Startup, Growth, and Enterprise tiers. It’s important to make sure each persona maps cleanly to a pricing tier designed for them by analyzing key factors such as usage patterns, feature preferences, and budget constraints for each segment.
You might also consider surveying your existing customers or using analytics tools to understand how different personas interact with your product and ensure that each pricing tier aligns with your customers’ unique needs and expectations.
2. Choose features for each tier
Once you’ve analyzed your customer base, you’ll want to assign your feature sets to the personas and use cases of each defined tier.
For instance, your Startup tier may only include basic functionality like limited usage, staggered customer support, and restricted access to any add-on modules within your platform. You can then design and position your Growth tier with greater functionality and a higher price tag. At the next level, you can create an Enterprise tier with premium tools for large and more complex accounts, like customized onboarding, custom integration capabilities, and a dedicated account manager. However, you may want to introduce sales-negotiated contracts at this tier to meet the needs of your enterprise clients.
3. Set appropriate price points
Once you’ve designed your individual tiers, you’ll want to leverage data on each customer segment’s willingness to pay and any relevant competitor pricing to identify the right price points for each tier.
For example, enterprise plans should be designed for customers with larger budgets and more complex needs, such as requiring multiple layers of integrations, single sign-on (SSO), and advanced data security features. In contrast, startup-focused plans can be tailored to "get started and go" types by offering simplified onboarding, essential functionality, and minimal setup requirements to help small teams or new businesses quickly adopt and scale with the product.
As a general rule, try keeping 2x price differences between each of your tiers to signal added value from upgrades. However, you can make adjustments as needed to be sure your pricing is based on value and not meaningless differentiation between tiers.
4. Create a clear upgrade path
Finally, be sure to design self-service in-app offers, pricing calculators, or sales rep-assisted upsell opportunities so your customers can eventually opt-in to higher-priced tiers. This will make it easy for your customers to compare the tangible benefits of moving from a lower tier to a higher one.
On the flip side, you should also build downgrade flexibility into your tiers so that your customers aren’t trapped into paying for unnecessary features if their needs change over time. After all, it’s better if they switch to a lower-priced tier instead of churning entirely.
FAQ
How does tiered pricing work in sales-negotiated contracts?
In sales-negotiated contracts, tiered pricing involves customizing pricing tiers to meet the specific needs of larger clients, typically enterprise-level customers. These contracts often include advanced features, higher usage limits, or additional services like dedicated account management and custom integrations. These services are tailored through direct negotiation with the sales team.
What is a tiered service model?
A tiered service model divides a product or service into different levels or "tiers," each offering varying features, usage limits, or benefits at different price points. This approach allows businesses to cater to diverse customer needs and budgets while maximizing revenue opportunities.
What are three-tier prices?
Three-tier pricing refers to offering three pricing options—typically an entry-level tier with basic features, a mid-level tier with additional value, and a premium tier with advanced features and capabilities. This strategy, often called "good-better-best" pricing, helps attract a wide range of customers by aligning price with value.
How do you calculate tiered pricing?
To calculate tiered pricing, businesses define pricing levels based on customer segments, features, and value. Start by identifying the cost to serve each tier and the willingness of customers to pay. Then, set price points that reflect the value provided at each level, often with a 2x to 3x price difference between tiers to signal upgrades.
