The paradox lies in the belief that adding a lower‑priced tier automatically widens the addressable market and deepens network effects. What actually happens is that the new tier creates a cheap exit route, lowering the perceived cost of leaving a higher‑priced plan.

Customers who once tolerated a modest premium because alternatives seemed costly now see a viable downgrade, and the firm loses the incremental margin that funded product development and support. The dynamic intensifies when the low tier shares the same feature set, merely throttled by usage caps, because the psychological cost of switching drops dramatically.

A team of product managers rolled out a “starter” plan during a quarterly sprint, and within weeks the churn metric on the “standard” plan spiked noticeably, prompting the CEO to question whether the growth in sign‑ups was worth the loss of high‑value users. The hidden trade‑off is not about volume versus profit; it is about the elasticity of loyalty to price gaps, a factor rarely modeled in unit‑economics spreadsheets.