Dear SaaStr: Why are pricing tiers so effective?
I’m no pricing psychologist, but a few thoughts:
- Buyers like a >few< choices. Not too many, but 2 or 3. It empowers them. In product marketing and sales, always give a buyer that is interested, but dragging their feet … choices. One cheaper but still good and fair. One premium. It really helps to make buyers feel empowered.
- Tiers are understood. Buying is a confusing process. Your job is to take friction out of it (generally speaking). Tiers have been established for decades and are a well-understood process for presenting options where pricing can be at least semi-transparent. 3 Series, 5 Series, 7 Series BMW. Etc. etc. We’ve been trained to expect tiers, and they make us comfortable. Give buyers a well-understood buying process, and the sales process is simply easier.
- Buyers think they know which tier to choose, and quickly self-align to them. This is important, and profoundly helpful. When we added an Enterprise tier back in the day, our F500 companies immediately understood that was the product for them. They didn’t try to buy the single-seat Pro version. And they didn’t complain about multiple editions. This is especially critical to vendors that sell to very different-sized customers (small, medium, enterprise). Tiers help prospects self-segment into the right funnel.
My advice: innovate on product. But generally, don’t innovate so much on pricing per se. Use patterns buyers are already comfortable with. Especially these days. When everyone’s bought 100+ SaaS products already.
Even at little team SaaStr, we “know” we are too big for Salesforce Essentials ($25) and too small for Enterprise. Professional is the “right” edition for us. And indeed, it is what we pay for … with little protest or drama … even though it is hardly cheap.
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Jason Lemkin, Khareem Sudlow
