Differentiation is the secret weapon of pricing.

Economics 101 teaches us that people have different willingness to pay for the same thing. Mary might look at a pizza and decide it’s worth $18. I’d pay $22 because I’m a fanatic for quality sauce and crispy dough. Businesses can’t charge us different prices for the same pie, so the only way to capture that extra value is by offering differentiated versions. Bigger size. Extra toppings. Faster delivery.

That’s the essence of tiering: create versions of the same thing that appeal to different willingness to pay.

Early on, a company doesn’t have to think about this. Growth comes easily when the market is new, the product is fresh, and demand is surging. One version of the product is enough. But as the market matures and new customer growth slows, companies can’t just rely on acquiring more buyers. They need to extract more revenue from the same pool of customers.

That’s where differentiation comes in.

Consider Apple. At a glance, the differences between iPhone models are minor. An extra camera lens. A slightly bigger screen. Maybe a better battery. Your everyday experience — texting, browsing, using apps — is almost indistinguishable across models.

But the lineup isn’t about specs. It’s about willingness to pay. Apple carefully structures its products to capture more from people who want “the best,” even if they can’t tell the difference in camera quality with the naked eye.

Back in 2007, there was one iPhone at one price. Today, there are multiple versions, each carefully designed to nudge different customer segments toward spending more. Personally, I bought the Pro even though I know the base model would have been fine. Others buy the entry model to feel smart about saving money. Apple has figured out how to separate that extra couple of hundred dollars from me.

This isn’t unique to Apple. The same logic has spread across industries.

We’ve all grown accustomed to being segmented and tiered — often so gradually we barely notice. Differentiation has become the default way to monetize.

But there’s a fine line. Customers will pay more for meaningful differentiation, but they hate feeling nickel-and-dimed. Airlines are a prime example — some customers tolerate the upsell game, but others actively seek alternatives that promise a simpler, all-inclusive experience. Bad tiering doesn’t just irritate; it creates openings for competitors.

But note even industries where people hate the tiering, like airlines, continue doing it and winning customers.

In SaaS, the stakes are even higher. Differentiation isn’t just about squeezing a few more dollars per user. It’s often the difference between average performance and best-in-class net dollar retention.

The reality: most SaaS companies undercharge their largest accounts. Their tiers are built logically — maybe each step up adds 30% more cost. But it leaves money on the table. The real pattern should look more like 20-20-60. Lower tiers are close together, while the top tier is dramatically higher.

Why? Because your largest accounts will pay far more than you expect if you give them a reason. That reason doesn’t have to be massive functionality gaps. It just has to matter enough to them. Maybe it’s advanced analytics. Maybe it’s priority support. Maybe it’s enterprise-grade security or compliance.

Look back at the iPhone lineup: the gap between models isn’t life-changing. But it’s enough to make the high spenders self-select into the top tier.

Differentiation isn’t about tricking customers. It’s about aligning product design with the spectrum of willingness to pay. The more thoughtfully you do it, the more revenue you can capture without alienating buyers.

In consumer markets and SaaS companies alike are only now getting smarter about tiering. But there is still a long way to go. Companies that learn to differentiate well — especially at the top end — will separate themselves with superior retention, expansion, and growth.

Two lessons are emerging from the way AI companies approach pricing—and they’re useful for any operator, regardless of industry.

Lesson one: speed of change.
Traditional SaaS companies often go a year or two between pricing updates. That pace already feels outdated. OpenAI, by contrast, has adjusted pricing 2–3 times in a single year. Competitive pressure, rapid product releases, and shifting customer expectations are driving shorter pricing cycles. Operators should take note: if you’re only revisiting pricing every other year, you’re leaving money (and learning) on the table. A twice-yearly pricing review should be the new baseline.

Lesson two: new value → higher prices.
When OpenAI releases a new model, it arrives at a higher price point. At the same time, older models become cheaper. This creates a natural segmentation: customers who value cutting-edge capabilities opt for the premium tier, while others self-select into cheaper plans. That mix is not a problem—it’s by design. The lesson here is clear: when you introduce something better, it should command a higher price. And when you introduce something cheaper, not everyone will downgrade. Many customers will still pay more for the best. AI spending is still increasing, even with a flood of cheaper options.

“In the absence of differentiation, price is all you have left to compete on” - Unknown

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