prd-v03-pricing-model

name

prd-v03-pricing-model

description

Select and validate pricing model for PRD v0.3 Commercial Model. Triggers on requests to set pricing, choose monetization model, design pricing tiers, validate willingness to pay, or when user asks "how much should we charge?", "what pricing model?", "freemium vs paid?", "how to structure tiers?", "price point?". Consumes Competitive Landscape (CFD-) and Product Type (BR-) from v0.2. Outputs BR- entries for pricing rules, tier boundaries, and competitive positioning.

Pricing Model Selection

Position in HORIZON workflow: v0.2 Product Type Classification → v0.3 Pricing Model Selection → v0.3 Moat Articulation

Core Principle

Pricing follows value timing: When and how customers receive value determines the pricing model. Don't copy competitors without understanding their value delivery pattern.

Pricing Model × Product Type Matrix

Product Type	Typical Model	Why It Fits	Anti-Model (Avoid)
Fast Follow	Match market structure	Users expect familiar pricing	Premium positioning (no differentiation)
Undercut	Flat rate, aggressive discount	Price IS the value prop	Per-user (negates savings)
Clone	Parity or slight discount	Must compete on terms users know	Innovation pricing (confuses buyers)
Slice	Usage-based or ecosystem-tied	Value tied to platform activity	Flat fee (misaligned with usage)
Wrapper	Per-integration or usage	Value = connections made	Per-seat (value isn't user count)
Innovation	Value-based, potentially premium	Funds education, signals quality	Race to bottom (devalues category)

Value Timing → Model Selection

Ask: When does the customer get value?

Value Pattern	Recommended Model	Examples
Continuous recurring	Subscription (monthly/annual)	SaaS tools used daily
Per-transaction	Usage-based	API calls, exports, generations
One-time outcome	One-time fee or lifetime	Logo design, course completion
Milestone-based	Tiered + upsell triggers	Features unlock as needs grow

Competitive Anchoring Decision Tree

1. Do competitors use per-user pricing?
   ├─ YES → Calculate "SMB penalty" (5-user annual cost)
   │   └─ Flat pricing at 50%+ savings = strong positioning
   └─ NO → Match model, differentiate on value/features

2. Is competitor pricing transparent?
   ├─ YES (Tier 1) → Use as direct anchor
   └─ NO ("Contact sales") → Find proxy or G2/Capterra estimates

3. Should we undercut, match, or go premium?
   ├─ Undercut: When we're simpler/niche and can sustain margins
   ├─ Match: When competing on features, not price
   └─ Premium: Only with clear, provable differentiation

SMB Penalty Calculation

Per-user pricing penalizes SMBs with larger teams. Calculate the arbitrage:

Competitor: $30/user/mo
SMB with 5 users: $30 × 5 × 12 = $1,800/year

Our flat rate: $99/year
Savings: ($1,800 - $99) / $1,800 = 94%
Headline: "94% less than [Competitor] for teams of 5"

Rule: If savings exceed 70%, lead with price in positioning.

WTP Validation Hierarchy

Tier	Method	Confidence	When to Use
1 (Highest)	Actual purchase, payment collected	95%+	Post-MVP, real customers
2	Pre-order, payment intent, trial→paid	70-85%	Landing page tests
3	Email signup at stated price	50-65%	Smoke tests
4	Survey, interview ("would you pay X?")	25-40%	Early exploration only
5 (Lowest)	Assumption, gut feel	<20%	Never use alone

Gate rule: Tier 1-2 evidence required before locking pricing. Tier 4-5 only for hypothesis generation.

Free Tier Design Rules

Only include a free tier if it serves a strategic purpose:

Purpose	Free Tier Design	Example
Viral acquisition	Generous + sharing incentive	Dropbox referral
Product-led growth	Useful enough to hook, limited enough to upgrade	Notion personal
Market education	Demo the category value	New category tools
Usage seeding	Get data/content, charge for output	Canva designs

Anti-patterns:

• Free tier that satisfies most users (no upgrade trigger)
• Free tier that requires support (costs without revenue)
• "Free forever" for unlimited users (cannibalizes paid)

Rule: Every free tier needs a clear upgrade trigger tied to value moment.

Tier Design Framework

Structure tiers around value events, not feature count:

Tier	Purpose	Design Principle
Free/Trial	Hook and demonstrate value	First win in <5 minutes
Entry/Starter	Convert to paying	Lowest price that sustains business
Pro/Growth	Capture value from power users	Features that scale with success
Enterprise	Custom needs, high touch	SLAs, SSO, dedicated support

Tier boundary rules:

• Entry price = CAC payback in ≤3 months
• Pro upgrade trigger = clear usage milestone (not feature gate)
• Enterprise = only if you can support it (don't fake it)

BR- Output Format

Create pricing BR- entries using this structure:

BR-PRC-XXX: [Rule Name]
Rule: [Imperative statement — what MUST happen]
Rationale: [Business driver — why this rule exists]
Enforcement: [Where enforced — code, contract, process]
Evidence: [WTP validation, competitor anchor, cost structure]
Exception: [Override conditions and approver]

BR- Categories

Prefix	Category	Example Rules
BR-PRC-	Price constraints	Price floor, ceiling, discount cap
BR-PKG-	Packaging rules	Tier boundaries, feature gates
BR-CMP-	Competitive positioning	Anchor target, undercut threshold

Example BR- Entries

BR-PRC-001: Entry Price Floor
Rule: Entry tier never below $15/mo (annual) or $19/mo (monthly)
Rationale: Below $15/mo, CAC payback exceeds 6 months
Enforcement: Stripe product configuration, pricing page
Evidence: CAC estimate $45, need 3-month payback
Exception: Founding customer 50% discount (Matt approval)

BR-PKG-002: Free Tier Upgrade Trigger
Rule: Free tier limited to 50 [units]; show upgrade at 40 (80%)
Rationale: Create natural upgrade moment without frustration
Enforcement: Usage tracking + UI prompt at threshold
Evidence: CFD-XXX shows competitors gate at 25-100 units
Exception: None — critical for conversion funnel

BR-CMP-003: Competitive Price Anchor
Rule: Maintain ≥50% savings vs [Competitor] at 5-user level
Rationale: Price advantage is core differentiator for SMB segment
Enforcement: Quarterly competitive price review
Evidence: CFD-XXX (competitor pricing); BR-001 (product type: Undercut)
Exception: If competitor drops price, floor takes precedence

Anti-Patterns to Avoid

Don't	Do Instead
Copy competitor pricing blindly	Understand their value timing and cost structure
Innovation product at Fast Follow price	Price for value, not market incumbents
Free tier without upgrade trigger	Define clear conversion moment
Discount to win deals	Maintain price integrity, add value
Change pricing weekly	Set, validate, iterate quarterly
Gut-feel price points	WTP validation (Tier 1-2 evidence)

Validation Workflow

Before locking pricing:

1. Calculate cost floor: What's minimum price for positive unit economics?
2. Identify anchor: What do customers pay today? (competitor or workaround)
3. Design tiers: Entry + Pro minimum; free only if strategic
4. Test WTP: Landing page with price, measure signup conversion
5. Lock BR- entries: Document as enforceable rules

Output Requirements

Before advancing to Moat Articulation:

• Pricing model selected with rationale (ties to product type)
• Price anchor identified (CFD- reference)
• Entry price point defined with unit economics check
• Tier boundaries defined (or "no tiers" justified)
• Free tier decision documented (yes + trigger, or no + why)
• WTP validation plan created (even if not yet executed)
• ≥3 BR-PRC/PKG/CMP entries created

Downstream Connections

Consumer	What It Uses	Example
v0.3 Moat Articulation	Price as moat element	"Price leadership" defense
v0.5 Red Team	Pricing risk assessment	"What if competitor undercuts?"
v0.9 Unit Economics	Price inputs to CAC/LTV	Revenue per customer calculation
GTM Strategy	Pricing messaging	"91% less than [Competitor]"

Detailed References

• Good/bad examples: See references/examples.md
• BR- template worksheet: See assets/br-pricing.md