Tiered Pricing

How Does Tiered Pricing Work in SaaS?

Tiered pricing is a common pricing model, most often implemented by SaaS businesses, that allows them to optimize revenue streams by capturing value from different customer segments with distinct needs.

Fundamentally, tier-based pricing is offering a product at different price points based on predefined tiers, or perhaps packages, where each tier corresponds to a specific set of features, usage limits, or service levels.

By offering multiple pricing options, SaaS companies can appeal to a broader range of customers, from price-sensitive consumers to enterprise clients willing to pay a premium for advanced features and higher service levels, or put more simply, customers with the option to pay more for more value.

The strategic tier-based pricing approach enables SaaS businesses to expand their market reach, including their total addressable market (TAM), which contributes toward a greater revenue opportunity and has the potential to improve their profitability.

The price point set per tier must have structural alignment with the value proposition of the tier (i.e. the perceived value received by the customer).

What are the Benefits of Tier-Based Pricing?

One of the main benefits of tiered pricing is the process of establishing tiers requires in-depth market research to understand the customer base and their needs.

The value of such research cannot be quantified, given the fact that the long-term viability of a SaaS business model is understanding the needs of a customer and directly addressing the pain points.

The successful implementation of tiered pricing is, therefore, contingent on the ability to segment their customer base effectively and tailor offerings to meet the unique needs and preferences of each segment, i.e. capturing value using the same core product offering, but customized per end user.

From the perspective of the end user, or customer, the optionality to purchase a product at different price points, which to reiterate must reflect the coinciding value, tier-based pricing can be very attractive to budget-conscious startups with minimal implied runway (and thereby must be cognizant of their current burn rate) to resource-rich enterprises, like publicly-traded companies.

In fact, tiered pricing can be a method for a SaaS company to expand its offering to the B2C side of the business, which is yet another common strategy for SaaS companies to increase their total addressable market (TAM), as exhibited by companies like Dropbox and Box, who have expanded their offerings to include consumer-facing products.

If a product is suitable to individual consumers, SMBs, and large enterprises, the total revenue potential is far greater, at the risk of stating the obvious—not to mention, the margins earned on the B2C side will likely be much higher than the B2B side, offsetting a portion of the onboarding fees and incurred sales and marketing (S&M) spend.

Since tier-based pricing is a customer-centric pricing model, at its core, the strategic roll-out of the structured offering at checkout (and on customer acquisition strategies like product landing pages and sales and marketing initiatives) optimizes the revenue opportunity available to a SaaS company, including establishing a stream of recurring revenue with minimal churn.

How to Structure Tier Pricing Model in SaaS

In a tier-based pricing model, a SaaS company creates multiple pricing tiers, each with a unique combination of features, usage limits, or service levels.

Given the optionality, customers are granted the ability to choose the tier that best suits their needs and budget (or else, their offering will be perceived as “one size fits all”), which reduces the sizing of the total addressable market (TAM) attributable to a given product.

Most often, the lowest tier offers core features at an affordable price, while higher tiers provide advanced functionality and benefits at progressively higher prices, which should be intuitive (i.e. more value delivered corresponds to higher pricing, and vice versa).

The objective in a tiered pricing model in SaaS is to design each tier to appeal to specific customer segments, while ensuring to maintain simplicity.

By conducting thorough market research and analyzing customer data, SaaS businesses can identify distinct customer groups and their unique requirements.

However, customer segmentation can frequently be a “slippery slope”, considering each customer is unique, so understanding what features matter most to a customer is a critical requirement for a successful tiered pricing model.

Each pricing tier must offer the right combination of features and value to attract and retain customers in each segment, creating the necessity of continuous improvement to the strategy based on better understanding the target end market.

Tiered pricing is also tied to the concept of “upselling” in the SaaS industry, where customers are encouraged to upgrade to higher tiers as their needs evolve (i.e. their business continues to grow and needs increase in complexity).

By providing a clear growth path and offering incremental value at each tier, SaaS companies can incentivize customers to move up the pricing ladder, thereby increasing their lifetime value and revenue potential.

What are the Different Tier-Based Pricing Strategies for SaaS?

SaaS businesses employ several strategies in the implementation of tier-based pricing. The most common pricing strategies are described in the following table:

Tiered Pricing Strategy: Salesforce (CRM) Example

Salesforce (CRM)—a leading customer relationship management (CRM) SaaS platform—is one real-life example of a market leader with a highly effective tier-based pricing strategy.

Salesforce offers four distinct pricing tiers for its core CRM product: Essentials, Professional, Enterprise, and Unlimited.

Each tier is designed to cater to the specific needs and budgets of different customer segments, from small businesses to large enterprises.

• Essentials ➝ The Essentials tier is tailored for small businesses (SMBs), including startups, offering core CRM functionality at an affordable price point. The lowest tier offers the basic features such as account and contact management, opportunity tracking, and email integration. By providing a cost-effective entry point, Salesforce attracts smaller organizations just beginning to adopt CRM solutions, establishing a foundation for long-term customer relationships.
• Professional Tier ➝ As businesses grow and expand, their needs evolve, so Salesforce’s Professional and Enterprise tiers offer increasingly advanced features and functionality to cater more toward those aforementioned needs. The Professional tier introduces additional capabilities such as lead registration, campaign management, and collaborative forecasting, enabling growing businesses to streamline sales processes and improve team collaboration.
• Enterprise Tier ➝ The Enterprise tier further expands on these features, adding advanced analytics, workflow automation, and API access, empowering larger organizations to customize and integrate their CRM solution with other business systems.
• Unlimited Tier ➝ For the most demanding enterprise customers, Salesforce’s Unlimited tier provides a comprehensive suite of features and services. The tier set at the highest price point includes unlimited customization options, 24/7 priority support, and dedicated success resources, ensuring large organizations can fully leverage the platform to meet complex business requirements. By offering a premium tier with extensive support and customization options, Salesforce captures maximum value from its most significant and strategic customers, like large enterprises.

Salesforce’s tier-based pricing strategy has been instrumental in the company’s success, enabling it to effectively serve a wide range of customers and industries.

The strategic design of each tier is supported by years of in-depth customer research and end market analysis to meet the specific needs of different customer segments, yet manages to still retain a sense of simplicity.

Therefore, the tiered pricing strategy of Salesforce optimizes its revenue potential and improves long-term customer loyalty, as affirmed by its operating performance and market leadership at present.

The clear value proposition and incremental benefits offered at each tier encourage customers to upgrade as their businesses grow, providing a natural path for expansion and revenue growth.

In closing, by continually innovating and adding new features to its higher tiers, Salesforce maintains a competitive edge (or “economic moat”) and justifies premium pricing for its most advanced offerings, which should continue to contribute toward significant growth, market share retention, and profitability.