---
name: pricing-frameworks
description: Set prices using value-based, cost-plus, competitive, and subscription models. Includes tiering, anchoring, discounts,
  and pricing experiments.
domain: mindset
tags:
- frameworks
- mindset
- personal-development
- pricing
- soft-skills
---

# Pricing Frameworks

Framework for setting and optimizing prices: value-based, cost-plus, competitive, subscription tiers, anchoring, discounts, and experimentation.

## When to Use

- Setting initial prices for a new product
- Optimizing existing pricing (increasing revenue per customer)
- Launching new pricing tiers or plans
- Annual price review
- **When NOT to use**: Dynamic pricing for commodity (use market price), or internal transfer pricing (use cost accounting)

## Pricing Models

### 1. Cost-Plus

**Formula**: `Price = Cost + Margin %`

**Example**: COGS = $10, margin = 50% → `Price = $10 / (1 - 0.5) = $20`

**Best for**: Physical goods, services where costs are predictable.

**Downsides**: Ignores customer willingness-to-pay. Leaves money on table.

---

### 2. Competitive

**Formula**: `Price = Competitor Price ± Premium/Discount`

**Example**: Competitors charge $100/month. You match ($100) or undercut ($80).

**Best for**: Commodity markets where differentiation is low.

**Downsides**: Race to the bottom if everyone undercuts.

---

### 3. Value-Based (Best)

**Formula**: `Price = Customer Willingness-to-Pay (WTP)`

**How to find WTP**:
- Customer interviews: "At what price would this be too expensive? Too cheap?"
- Van Westendorp price sensitivity meter
- Conjoint analysis (survey-based trade-off)

**Example**: SaaS tool saves marketing team 10 hours/week ($500 value). Price = $200/month instead of cost-plus $50/month.

**Why best**: Captures more value. Customers pay for what they get, not what you spend.

---

## Pricing Tiers (Good-Better-Best)

**Structure**: 3 tiers (good, better, best).

| Tier | Features | Price | Target Customer |
|------|----------|-------|-----------------|
| **Free/Basic** | Limited features | $0 | Evaluation, low use |
| **Pro** | Full features | $29/mo | Individual users |
| **Enterprise** | Advanced + support | $99/mo | Teams |

**Strategy**:
- **Decoy effect**: Make "Better" so obviously the best choice that most pick it
- **Feature barriers**: Limit features, not just usage (drives upgrade)

**Example**: Basecamp (3 plans). Middle plan is most popular.

---

## Anchoring

**Principle**: First price customers see becomes the reference point (anchor).

**Technique**: Show expensive option first (makes the next option feel reasonable).

**Example**:
- Enterprise: $500/mo (anchor)
- Pro: $100/mo (feels cheap vs $500)
- Basic: $29/mo (feels like deal)

**Without anchor**: Pro at $100/mo feels expensive.

---

## Psychological Pricing

| Tactic | Example | Why It Works |
|--------|---------|--------------|
| **Charm pricing** | $9.99 instead of $10 | Left-digit effect (seems cheaper) |
| **Prestige pricing** | $500 (whole number) | Luxury feel (round numbers signal quality) |
| **Bundle pricing** | 3 for $30 vs $12 each | Perceived value (savings framing) |
| **Decoy pricing** | $29/mo, $99/mo, $149/mo | Middle option looks like best value |
| **Flat rates** | Unlimited everything for $20 | Simplicity, no usage anxiety |

---

## Discounting

### When to Discount

| Good Reason | Bad Reason |
|-------------|------------|
| Customer is price-sensitive (limited budget) | You want to close quickly |
| Signing annual contract (prepayment reduces churn) | Customer threatens to leave |
| Student/NGO/nonprofit (brand goodwill) | Competitor offered a deal |
| First-time buyer (onboarding incentive) | You set the price too high |

**Guidelines**:
- **Annual discount**: 15-20% for prepaying 12 months (improves cash flow, reduces churn)
- **First month free**: Low commitment, shows value (but may attract tire-kickers)
- **Referral discount**: Give 20% off for referring friend (low-cost CAC)
- **Avoid permanent discounts**: Hard to raise prices later. Use time-limited.

---

## Pricing Experiments

**A/B test methods**:

| Method | What to Test | Duration | Success Metric |
|--------|--------------|----------|----------------|
| **Wild West** | One price change (old vs new) | 2-4 weeks | Revenue per visitor |
| **Van Westendorp** | Survey: "At what price is this...?" | 2-3 days | Acceptable price range |
| **Conjoint** | Trade-off survey (features vs price) | 1-2 weeks | Feature WTP |

**Example**: Test $99 vs $149 per month. Measure conversion rate + revenue per visitor. If $99 converts 2x but $149 earns 1.5x more revenue, $149 wins.

---

## Price Increase Playbook

**Why increase prices**:
- Costs increased (inflation, hosting, labor)
- Product value has grown (more features, better quality)
- Segment demands premium (better positioned)

**How to increase without losing customers**:
1. **Grandfather existing customers**: They keep old price for 6-12 months
2. **Announce early**: 30-60 days notice
3. **Justify with value**: "We've added X, Y, Z since launch"
4. **Offer annual lock-in**: Lock old price for 12 months prepaid

**Example email**:
> "We're increasing prices from $99 to $129/ month starting Feb 1. This helps us invest in X, Y, and Z. Your current price is locked for 12 months if you switch to annual billing before then."

---

## Common Rationalizations

| Rationalization | Reality |
|-----------------|---------|
| "Lower price = more customers" | Volume rarely compensates for margin loss. Optimize for revenue, not signups. |
| "We can't raise prices" | You can. Customers value your product more than they'd admit. |
| "Free tier = growth" | Free tiers can destroy growth (tire-kickers, support cost). Use trials instead. |
| "Competitive pricing is safest" | You're leaving money on the table. Value-based captures what you're worth. |

## Red Flags

- You don't know your customers' willingness-to-pay (guessing)
- Your pricing is based on what "feels right" (no testing)
- You only use cost-plus (ignores value delivered)
- You have one price for all segments (leaving money on table)
- You've never increased prices (>2 years same price)

## Verification

- [ ] Pricing model chosen (value-based preferred, cost-plus, or competitive)
- [ ] WTP estimate validated (customer interviews or survey)
- [ ] Tiers designed (Good-Better-Best, with decoy if applicable)
- [ ] Anchoring used (reference price set for context)
- [ ] Discount policy defined (annual discount %, when to offer)
- [ ] Price increase plan ready (grandfathering, justification, timing)

## Overview

> Section content — see SKILL.md body for full details.

## Process

1. Analyze the task requirements
2. Apply domain expertise
3. Verify output quality