pricing-optimization

Pricing Optimization

Workflow

1. Value Metric Selection

The value metric is what you charge for. Get this wrong and everything else fails.

Good value metric criteria:

• Scales with value delivered to customer
• Easy for customer to understand
• Predictable for customer to budget
• Grows as customer succeeds

Decision framework:

• If value scales linearly with users → per seat
• If value scales with consumption → usage-based
• If features differentiate segments clearly → tier-based
• If you can measure outcomes → outcome-based
• When in doubt → start with per seat (simplest)

2. Van Westendorp Price Sensitivity

Survey questions (ask all 4):

1. At what price would this be so cheap you'd question the quality?
2. At what price is this a bargain — great buy for the money?
3. At what price is this getting expensive — you'd think twice?
4. At what price is this too expensive — you'd never consider it?

Analysis: Plot cumulative distributions of all 4 questions. Intersections give:

Acceptable price range: Between marginal cheapness and marginal expensiveness.

Minimum sample: 200 responses per segment for reliable results.

3. Tier Design

3-tier standard (recommended starting point):

Pricing rules:

• Professional should be 2-3x Starter price
• Enterprise should be 3-5x Professional (or custom)
• Professional tier should be the obvious "best value" (anchor effect)
• Include one "decoy" feature in Professional that makes it clearly better than Starter
• Enterprise always includes "talk to sales" — never self-serve

4. Discount Strategy

Guardrails:

Rules:

• Never discount more than 40% (devalues product permanently)
• Always trade something: discount for annual commitment, case study, referral
• Track discount rate by rep (flag reps averaging > 20%)
• Sunset discounts: "This rate is locked for 12 months, then standard pricing"
• Document every discount reason in CRM

5. Price Localization

Purchasing Power Parity (PPP) adjustments:

Implementation:

• Use IP geolocation for initial pricing display
• Allow currency switching (not just symbol — actual price adjustment)
• Don't show the discount — just show the local price
• Gate enterprise features at full price regardless of region

6. Annual vs Monthly

Best practices:

• Default to annual on pricing page (show monthly price as comparison)
• Annual discount: 15-20% (2 months free is standard messaging)
• Show monthly price per-month even for annual ("$49/mo billed annually")
• Offer monthly-to-annual upgrade path with prorated credit
• Track annual vs monthly mix (target: 60%+ annual for predictable revenue)

7. Price Increase Playbook

Communication timeline:

Email template:

Subject: Changes to your [Product] plan

Hi [Name],

On [date], we're updating our pricing. Your plan will change
from $X/mo to $Y/mo.

Why: [Honest reason — new features, increased costs, market alignment].

What you can do:
- Lock in current pricing by switching to annual before [date]
- Upgrade to [plan] to get [specific new value] at the new rate
- Questions? Reply to this email — we're here to help.

[Name], [Title]

Expected impact: Well-communicated 10-20% increase typically sees < 2% incremental churn. Poorly communicated or >30% increase can see 5-10%+ churn.

8. Stripe Integration Quickstart

Checkout Session Creation

import Stripe from 'stripe';
const stripe = new Stripe(process.env.STRIPE_SECRET_KEY!);

async function createCheckout(priceId: string, userId: string) {
  return stripe.checkout.sessions.create({
    mode: 'subscription',
    payment_method_types: ['card'],
    line_items: [{ price: priceId, quantity: 1 }],
    success_url: `${process.env.APP_URL}/dashboard?session_id={CHECKOUT_SESSION_ID}`,
    cancel_url: `${process.env.APP_URL}/pricing`,
    metadata: { userId },
    subscription_data: { metadata: { userId } },
  });
}

Webhook Handler

// app/api/stripe/webhook/route.ts
import { headers } from 'next/headers';
import Stripe from 'stripe';
const stripe = new Stripe(process.env.STRIPE_SECRET_KEY!);

export async function POST(req: Request) {
  const body = await req.text();
  const sig = (await headers()).get('stripe-signature')!;
  let event: Stripe.Event;
  try {
    event = stripe.webhooks.constructEvent(body, sig, process.env.STRIPE_WEBHOOK_SECRET!);
  } catch {
    return new Response('Invalid signature', { status: 400 });
  }

  switch (event.type) {
    case 'checkout.session.completed': {
      const session = event.data.object as Stripe.Checkout.Session;
      // Create subscription record, link to userId from metadata
      break;
    }
    case 'invoice.paid': {
      // Extend subscription period, send receipt
      break;
    }
    case 'customer.subscription.updated': {
      // Handle plan changes, status transitions
      break;
    }
    case 'customer.subscription.deleted': {
      // Mark subscription canceled, revoke access
      break;
    }
  }
  return new Response('OK', { status: 200 });
}

Critical: Never parse the body as JSON before passing to constructEvent — it needs the raw string for signature verification.

9. Subscription Patterns

Freemium Feature Gates

// lib/subscription.ts
type Plan = 'free' | 'pro' | 'enterprise';
const FEATURE_ACCESS: Record<string, Plan[]> = {
  'export-csv': ['pro', 'enterprise'],
  'api-access': ['pro', 'enterprise'],
  'custom-domain': ['enterprise'],
  'team-members': ['pro', 'enterprise'],
};

export function hasAccess(feature: string, plan: Plan): boolean {
  return FEATURE_ACCESS[feature]?.includes(plan) ?? true; // unlisted = free
}

Usage-Based Billing

// Report usage at end of billing period or in real-time
await stripe.subscriptionItems.createUsageRecord(subscriptionItemId, {
  quantity: apiCallCount,
  timestamp: Math.floor(Date.now() / 1000),
  action: 'increment',
});

10. Pricing Page Implementation

Plan Comparison Component Pattern

const PLANS = [
  { name: 'Free', price: '$0', priceId: null, features: ['5 projects', 'Community support'] },
  { name: 'Pro', price: '$29/mo', priceId: 'price_pro_monthly', features: ['Unlimited projects', 'Priority support', 'API access'], popular: true },
  { name: 'Enterprise', price: 'Custom', priceId: null, cta: 'Contact Sales', features: ['Everything in Pro', 'SSO', 'SLA', 'Dedicated CSM'] },
] as const;

Upgrade/Downgrade Flows

// Upgrade: prorate immediately
await stripe.subscriptions.update(subscriptionId, {
  items: [{ id: subscriptionItemId, price: newPriceId }],
  proration_behavior: 'always_invoice', // charge difference now
});

// Downgrade: apply at period end
await stripe.subscriptions.update(subscriptionId, {
  items: [{ id: subscriptionItemId, price: newPriceId }],
  proration_behavior: 'none',
  billing_cycle_anchor: 'unchanged', // change takes effect at renewal
});

Customer Portal (self-serve management)

const portalSession = await stripe.billingPortal.sessions.create({
  customer: stripeCustomerId,
  return_url: `${process.env.APP_URL}/dashboard/billing`,
});
// Redirect user to portalSession.url

11. Testing Payments

Idempotency: Use Idempotency-Key header on Stripe API calls to prevent duplicate charges:

await stripe.charges.create({ amount: 2000, currency: 'usd' }, {
  idempotencyKey: `charge_${orderId}`,
});

Testing checklist:

• Successful checkout → subscription created in DB
• Card decline → user sees error, no DB record created
• Webhook replay (stripe trigger checkout.session.completed) → idempotent
• Subscription cancel → access revoked, status updated
• Plan upgrade → prorated charge correct
• Plan downgrade → takes effect at period end