# Pricing Strategy — Frameworks and Playbooks Reference

*Part of the Pricing Strategy skill: https://wavect.io/.well-known/agent-skills/pricing-strategy/SKILL.md*

The applied frameworks behind a pricing strategy: behavioral pricing-page design, expansion revenue and NRR, the LTV:CAC ratio, the competitive price-value map, the price-increase playbook, and discount discipline.

## Behavioral Economics in Pricing Page Design

### Anchoring and the Decoy Effect

The **asymmetric dominance effect** (Ariely): adding a "dominated" option
makes one of the remaining options look more attractive.

Classic 3-tier structure with deliberate anchoring:
- Starter: €49/mo — limited features, designed to make Pro look reasonable
- Pro: €149/mo — the tier you want most customers on; highlighted
- Enterprise: €499/mo — the anchor that makes Pro feel affordable

The Enterprise tier exists primarily to anchor Pro as "reasonable." Even if
few customers take Enterprise, the tier improves Pro conversion rate.

**Decoy positioning:**
A "decoy" tier has worse value than the tier you want customers on, but better
on one dimension to make them compare. Example:
- Basic: €49/mo — 5 users, 10 projects
- Pro: €99/mo — unlimited users, unlimited projects ← target
- Team: €89/mo — unlimited users, 10 projects ← decoy (worse than Pro overall)

The Team tier makes the Pro tier look like an obvious choice.

### Prospect Theory (Kahneman) Applied to Pricing

People feel losses more intensely than equivalent gains (loss aversion ratio ~2:1).

**In pricing page copy:**
- "Save 2 hours per day" is less persuasive than "Stop losing 2 hours per day
  to [painful task]"
- "Free trial" framing: "Start free, upgrade when you're ready" (gain) vs.
  "Try for 14 days before losing access" (loss) — the loss frame converts better
  for high-intent traffic, worse for low-intent traffic
- Annual pricing: "Save €300/year" vs. "Pay only €X/month, billed annually"
  — the per-month framing reduces anchor shock; the savings framing works when
  the customer already wants to buy

**Charm pricing:**
Prices ending in 9 (€99 vs. €100) work in consumer contexts. In B2B, round
numbers signal confidence and professionalism. Use €100, €500, €2,000 in
B2B — not €99, €499, €1,997.

## Expansion Revenue — The Only Path to NRR > 100%

NRR (Net Revenue Retention) measures what percentage of last month's revenue
you still have this month from the same customers, after churn, contraction,
and expansion. NRR > 100% means you grow without acquiring a single new customer.

**The three expansion mechanisms:**

1. **Seat expansion**: customer adds more users. Only works if per-seat pricing
   is correctly aligned with value. Fails if users share logins or if the product
   is used by one power user.

2. **Usage expansion**: customer consumes more of the variable metric. Works
   automatically in usage-based models. Requires instrumentation to identify
   and act on customers approaching limits.

3. **Tier upgrade**: customer moves from Starter to Pro to Enterprise. Requires
   a clear upgrade trigger — a feature or limit they will hit as they grow.

**The upgrade trigger design:**
The upgrade trigger is the single feature or limit that makes the current tier
insufficient for the customer's growing needs. It must be:
- Genuinely useful at the higher tier (not artificially withheld)
- Hit at a predictable point in the customer's growth journey
- Reachable by the Economic Buyer with minimal internal friction

Example of a well-designed upgrade trigger: project-management tool that limits
the free tier to 5 projects and the Starter tier to 20 projects. At 18 projects,
a well-designed product sends an in-app notification: "You've used 18 of your
20 projects. Upgrade to Pro for unlimited projects." The trigger is behavioral,
not arbitrary.

**NRR benchmarks by category:**
- Infrastructure / developer tools: top quartile > 130% NRR
- B2B SaaS platform: top quartile > 120% NRR
- SMB-focused SaaS: top quartile > 105% NRR (SMB churn is structural)
- Consumer: rarely > 100% (expansion mechanisms are weak)

If NRR < 100%: you are in a leaky bucket. No growth rate is sustainable with
NRR below 100% at scale.

## The LTV:CAC Ratio and How Pricing Determines It

LTV (Lifetime Value) = ARPU × Gross Margin % × (1 / Monthly Churn Rate)
CAC (Customer Acquisition Cost) = Total sales + marketing spend / New customers acquired

Target: LTV:CAC ≥ 3:1 (sustainable). Above 5:1 may indicate underinvestment
in growth. Below 3:1 = the business model is broken at scale.

**How pricing model choice directly affects LTV:CAC:**

| Pricing model choice | Effect on LTV | Effect on CAC | Net LTV:CAC effect |
|---|---|---|---|
| Value-based (higher price) | +30–50% LTV | No change | Ratio improves dramatically |
| Usage-based with expansion | +20–40% LTV via NRR | Slightly higher (complex to sell) | Usually positive |
| Freemium | LTV unchanged | CAC decreases by 40–60% (PLG) | Ratio improves if conversion rate > 2% |
| Annual contracts | +15–20% LTV (lower churn) | -10% CAC (faster close) | Strong improvement |
| Monthly only | Baseline | Baseline | Baseline |

**The most underrated lever:** switching from monthly to annual contracts.
Customers on annual contracts churn at roughly 1/3 the rate of monthly customers.
If monthly churn is 5%, annual churn is approximately 15–20%/year (vs. 46% annualized
for monthly). LTV increases by 2–3× at the same price. Offer annual at 15–20%
discount — this is economically rational for both sides.

## The Competitive Price-Value Map

Position your pricing on two dimensions: price (horizontal axis, low to high)
and perceived value (vertical axis, low to high).

**Zone analysis:**
- **Top-left**: High value, low price — underpriced. You are leaving money on
  the table and signaling low quality. Raise price.
- **Top-right**: High value, high price — premium positioning. Sustainable if
  brand supports it. Requires proof of value.
- **Bottom-right**: Low value, high price — overpriced. Churn risk. Must either
  improve product or reduce price.
- **Bottom-left**: Low value, low price — commodity. Requires either moving
  up-market (increase value) or scale economics (decrease cost structure).

**How to build the map:**
1. List 5 alternatives the customer considers (including "do nothing" and "hire
   a person to do this")
2. For each, estimate their price point from their public pricing page
3. For each, score perceived value 1–10 from customer interview data
4. Plot. Where does your product sit? Where do you want it to sit?

The goal is to be in the top-left quadrant — perceived as high value, positioned
as a fair or even underpriced option. This is the "obvious choice" positioning.

## Price Increase Playbook

Every SaaS product that has not raised prices in 2+ years is leaving money on
the table. Here is the rollout playbook:

**Step 1: Segment before you announce**
- Identify customers on the new price vs. grandfathered (legacy price)
- Never raise prices on customers mid-contract (wait for renewal)
- Determine which customers are most likely to churn at the new price and
  assess whether losing them is acceptable (low-margin, high-support customers
  are often worth losing)

**Step 2: Lead with value, not apologetics**
Bad: "Due to increased costs, we're raising prices by 20%."
Good: "We've shipped [X major features] since you joined and [Y customers] are
now getting [Z outcome]. Effective [date], pricing for new customers will be
[new price]. As an existing customer, you're grandfathered at your current rate
until [6 months]. After that, the new price applies."

**Step 3: Give meaningful notice**
- Minimum: 60 days notice for monthly customers
- Minimum: 90 days for annual customers
- Offer an annual lock-in at current pricing as a conversion play during the notice period

**Step 4: Measure the outcome**
- Track churn rate in the 60 days post-announcement vs. baseline
- Track trial-to-paid conversion rate at new price point
- Track ACV for new customers vs. old cohorts

A price increase that causes < 10% incremental churn is almost certainly
net-positive revenue. Example: 100 customers at €100/month → raise to €120/month
→ 8 customers churn → 92 customers × €120 = €11,040 vs. 100 × €100 = €10,000.
Net positive even with churn.

## Discount Discipline

Discounting is the most common pricing failure in early-stage B2B sales.
Every discount:
- Establishes a precedent the customer will expect forever
- Signals that the list price is not the real price
- Attracts price-sensitive customers who are the first to churn

**The discount framework:**

| Situation | Appropriate? | Response |
|---|---|---|
| Customer asks for a discount with no justification | No | "Our pricing reflects the value we deliver. What specifically is creating the budget constraint?" |
| Customer is on a longer trial or POC and wants a reduced first-year price | Yes, with conditions | Offer 20% off Year 1 in exchange for a 2-year commitment |
| Customer is a reference-able case study in a target vertical | Yes | Exchange value: discount for right to use them as a case study and reference |
| Prospect says "competitor offers X for less" | Rarely | Ask to see the competitor quote. Often it is not a real offer. If it is real, use it to understand what they are actually comparing. |
| Customer is at end of quarter and you need to hit a target | Never | This is the worst reason to discount. It trains every future customer to wait for quarter-end. |
| Customer's company is going through a downturn and may churn | Yes, strategically | Offer a temporary reduction with a clear return to standard pricing, tied to a usage or revenue milestone |