A tiered data plan is a data service, usually for Internet access for home and mobile data users, in which the user is charged for a differential or variable rate based on the amount of data he or she transmits. It is most common for mobile phone data, but some ISPs also incorporate tiered plans for home Internet use.
Tiered plans were introduced as Internet usage expanded rapidly in the U.S., beginning in the early 2000s. This caused problems for broadband service providers because of limited spectrum for data transmission. Tiered data plans have not been without controversy, especially after they were introduced in the U.S. mobile phone market around mid-2010. Users were upset because they were now being forced to limit their data usage, whereas they previously had no caps on data.
Techopedia explains Tiered Data Plan
There are different ways in which data provider companies can implement data tiers. They can either:
Cap usage per period, for example a fixed amount of 2 GB per user per month for, say, $25. If you hit this limit then your data service is disconnected for the rest of that month.
Introduce a higher rate above a certain limit. For instance, the plan may specify that the first gigabyte of data per month is charged a flat rate of $20. Any additional data above that will cost $35 per gigabyte.
Throttling above certain limits. The data provider may state that the first 2 GB of data will be downloaded at unlimited bandwidth speeds. After that, any additional data transmitted will be subject to a maximum of 200 Kbps download and 100 Kbps upload.
In 2005, Internet providers successfully lobbied for a change in regulation under the Federal Communications Commission, which altered the classification for broadband service providers from "telecommunication service providers" to "information service providers". What may seem like a minor technical alteration actually meant that broadband service providers were no longer subject to the so-called common carrier regulations. Since the beginning of the 20th century, common carriage guidelines, introduced mainly to govern the nascent telephone industry, required that quality of service be the same for all, preventing one customer from being favored over another.
Tiered data plans for the mobile phone industry began with AT&T Mobility in June 2010. Before that, data usage on mobile phones was not a major problem. But with the massive popularity of the iPhone, there was an exponential increase in the number of users owning and accessing data on their smartphones. The iPhone spawned a number of smartphone competitors, further exacerbating the problem, and AT&T was forced to introduce tiered plans such as $15 for 200 MB and $25 for 2 GB. Other mobile service providers such as T-Mobile and Verizon Wireless soon followed suit.