Price architecture: getting the right customer to select the right plan.
Key distinctions
Three conditions before calculating.
Aligned metric
The billing base must grow with customer value and stay predictable. A metric that is only correlated with costs encourages workarounds or makes the invoice hard to anticipate.
Credible boundary
A limit on seats, volume, automation, security or support must correspond to a distinct need. Arbitrary boundaries create frustration and negotiation without improving self-selection.
Economic migration
Moving a feature changes upgrade, downgrade, churn and cost to serve. The contribution must be projected on all four flows, not only on the hoped-for upgrades.
Method
Building a testable price architecture
- 01Segment the needs
Identify intensity of use, criticality, integration, governance, support and willingness to pay; avoid segmenting only by company size.
- 02Choose the metric
Compare seat, usage, transaction, outcome or flat fee on value alignment, predictability, auditability and cost of administration.
- 03Position the boundaries
Assign each capability to the plan whose customers value it and whose economics can support it; document marginal costs and workaround behaviours.
- 04Simulate the migrations
Apply a plan-to-plan transition matrix with net price, margin, churn and cost of transition; test a progressive rollout by cohort.
The value boundary between Essential, Pro and Enterprise
Each plan combines a price, a cost, a population, a value limit and an economic result so that migrations become calculable.
Essential
€49Pro
€99Enterprise
€199A new boundary adds €3,270 of monthly contribution
The mix of 1,000 customers is 50% Essential, 35% Pro and 15% Enterprise. Unit monthly contributions are €35, €71 and €124. A boundary moves the mix to 42%, 40% and 18%, but adds €3 of service to the Pro plan.
Reference: 500 × 35 + 350 × 71 + 150 × 124 = €60,950. New mix: 420 × 35 + 400 × 68 + 180 × 124 = €64,220. Monthly gain: €3,270.
The boundary is economically positive before churn. It can be tested if a customer loss below 51 average monthly contributions stays plausible.
Acceptance conditions
What must be true to act.
- 01
The price metric grows with a verifiable customer value.
- 02
Each boundary corresponds to a distinct need and cost.
- 03
Upgrade, downgrade, churn and workaround are simulated together.
- 04
Existing customers have a documented transition rule.
Limits
What this analysis does not prove.
- A structure that is optimal at acquisition can become bad after usage expands.
- Migration simulations depend heavily on elasticities between plans.
- Too many tiers increase the cost of choosing, selling and administering.
References
Works cited.
- Moorthy, K. S. (1984), “Market Segmentation, Self-Selection, and Product Line Design”, Marketing Science.
- Shaked, A. & Sutton, J. (1982), “Relaxing Price Competition Through Product Differentiation”, Review of Economic Studies.
- Dolan, R. J. & Simon, H. (1996), Power Pricing.