Wharton@Work

April 2025 | 

The Power of Tiers: Upgrading Your Pricing Strategy

The Power of Tiers: Why Your Pricing Strategy May Need an Upgrade

If your go-to streaming service suddenly asked you to pay more — or settle for less — you’re not alone. Streaming platforms, cloud storage providers, and social media giants are quietly rolling out tiered pricing, reshaping what users get for free — and what they don’t. Wharton Professor Z. John Zhang says tiered models are not a fad or even just a strategy: they’re a necessity. “If you’re not offering customers choices, you’re leaving money on the table and losing customers,” he explains.

Multiple pricing tiers allow companies to capture diverse customer segments; unlock untapped revenue streams; build stronger, more loyal customer relationships; and even shape supply and demand. But while shifting away from one-size-fits-all pricing can unlock new opportunities, it must be executed thoughtfully — as Unity Technologies, the company behind the Unity game engine, discovered. Its move from a flat fee to a “Runtime Fee” model that charged developers per game install after hitting revenue and usage thresholds triggered a backlash across the gaming industry. Facing threats and boycotts, the company walked back many elements of the new pricing model and issued an apology.

The Case for Tiered Pricing

Instructive missteps aside, Zhang says taking a nuanced approach to pricing is a strategic move that helps firms to better leverage and monetize the value they create. “Streaming is really good example,” he notes. “As you build your platform, you charge one low price for everybody as you grow your customer base. But you cannot burn through your investors’ money forever. At some point they expect you to leverage your pricing power and provide some kind of return. And the best way to do that is to capture more of the value you created. To do that, you need a nuanced approach. A simple pricing mechanism won’t do it.”

Tiered or differentiated pricing, Zhang argues, “helps you kill two birds with one stone. It allows you to hold on to diverse customers while helping you cover all your costs by generating more profits. By creating a higher price option for customers who use your service more, you’re probably charging more than what the difference in levels of service would justify, because you know those customers appreciate your service more than anybody else.”

But it’s not just about increasing revenue. “The profits generated by this higher price can help you expand your coverage in the market,” says Zhang, “allowing you to afford to provide a minimum package to a large number of people. And competition makes you stay disciplined in terms of how high you can raise your prices.”

In addition to growing the customer base, providing different levels of service that better meet various customer demands, and generating higher profits, a tiered pricing strategy can also work to increase supply and control demand. Zhang uses medical services as an example. “Any government may be tempted to mandate a low price. When you do something like that, it may feel good every time you go there to pay the same low price. But the problem is that the single low price increases demand: people may not think twice about going to a doctor and they may end up going more often than necessary.”

On the supply side, one low price reduces the incentive — and the time — for doctors to provide more individualized or premium care. High demand means, says Zhang, “a lot of services have to be rationed. Because the demand is too high and the supply is too low, you often have to wait a long time to get your turn.”

“If you instead allow more differentiated services and differentiated prices,” he continues, “you can increase the supply and control the demand while satisfying the needs of diverse customers. Offering more expensive options means some of the customers who used to show up at the clinic will go elsewhere, which reduces wait time.  And the high-paying customers in turn allow you to subsidize the customers who are paying the lower price and make medical service more accessible.”

Avoiding the Pitfalls

While Zhang calls tiered pricing “a lesson for everybody in every industry,” he says those different prices must reflect the real differences in your customer base. Tiers that are not designed to meet customers’ distinctive needs can lead to reduced sales and dissatisfaction. That can happen when the lower price option is “so attractive that nobody wants to pay the high prices,” he says. “Those willing to pay a higher price have to feel they are getting more of what they want for that price. If your tiers don’t represent real, meaningful differences in levels of service, those who would otherwise be willing to pay more won’t.”

User frustration and a sense of exclusion can also be issues, as Substack found out when it introduced tiered pricing in 2024. Subscribers complained that the multiple tiers (including basic access, premium content, and exclusive perks) were confusing. More important, though, was the sense of missing essential content that was locked behind higher-priced tiers. On a site that once offered unlimited access, the perception of exclusion led to significant negative feedback. As a result, Substack eventually simplified its subscription options, and reinforced transparency by engaging with its community of creators and consumers through webinars and Q&A sessions, demonstrating its commitment to improving the platform.

Embracing the Model

Despite the challenges that some companies have faced, tiered pricing isn’t going away — because when done thoughtfully, it works. “Whole industries are moving to tiered pricing,” says Zhang. “It has caused a lot of concern, but ultimately it’s good for the firm and good for consumers.” The key is execution: when companies balance clarity, fairness, and value, they can retain a broader mix of customers while generating the steady revenue needed to invest in better products and services.

As pricing models evolve, the message for business leaders is clear: one-size-fits-all pricing no longer fits. “In any business, if you care about your profitability, and if you are dealing with customers who are not identical, tiered pricing is the way you need to go,” says Zhang. “And if you are not going that way yet, you need to find a way to get there.”