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14 KiB
Markdown
380 lines
14 KiB
Markdown
# Pricing Ontology
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Status: draft.
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## Purpose
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This document defines the canonical vocabulary for `adaptive-pricing`. It separates strategic intent from billing mechanics, names composable pricing primitives, and provides stable terms for downstream modeling, validation, simulation, and payment-provider mapping.
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Patterns and market context live in `PricingPatternsAndStrategies.md`. Research sequencing lives in `PricingResearchRoadmap.md`.
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---
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## Design Principles
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1. **Strategy before mechanics.** A pricing strategy explains why a price exists; a pricing model explains how a customer is charged.
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2. **Internal model is source of truth.** Payment providers execute artifacts; they do not define the conceptual model.
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3. **Composable primitives.** Complex offerings are built from meters, fees, commitments, discounts, and constraints—not from provider-dashboard concepts alone.
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4. **Explicit commitments.** Discounts and favorable unit economics require offsetting commitment or risk reduction.
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5. **Inspectable boundaries.** Cost floor, margin, risk, and governance limits are first-class concepts.
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---
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## Core Concepts
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### Pricing Strategy
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The seller-side rationale for how an offering should be priced.
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A pricing strategy answers why a price should exist and what business outcome it should optimize. It draws on cost floor, value range, market competition, lifecycle phase, customer segments, willingness to pay, growth objectives, margin objectives, and risk tolerance.
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A pricing strategy may recommend one or more pricing models but is not itself a billing configuration.
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### Pricing Model
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The structured definition of how a customer is charged for an offering.
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A pricing model specifies charge components, parameters, tiers, commitments, discounts, billing cadence, and eligibility rules. It may include fixed, seller-controlled, customer-tunable, calculated, and constrained parameters.
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Examples: flat subscription, per-seat, usage-based, tiered package, credit block, outcome fee, hybrid subscription plus usage.
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### Pricing Configuration
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A resolved instance of a pricing model for a specific customer, segment, contract, or lifecycle phase.
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A configuration binds parameter values, applies discounts, enforces commitments, and produces an auditable price outcome. Customer-tuned configurations must remain inside seller-defined boundary conditions.
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### Value Metric
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The unit of value that scales price with customer benefit or consumption.
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The value metric is the primary scaling dimension of a pricing model. It should correlate with delivered value, be hard to game, and be legible to buyers.
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Examples: seats, API calls, documents processed, revenue influenced, tickets resolved, tokens consumed, active projects.
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A strong value metric aligns revenue growth with customer success. A weak value metric creates adoption friction or margin leakage.
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### Lifecycle Phase
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The stage of the product or offering lifecycle that informs pricing strategy and acceptable tradeoffs.
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Canonical phases:
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1. **Exploration** — learn willingness to pay and viable business models
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2. **Introduction** — support market entry and early adoption
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3. **Growth** — scale acquisition, segmentation, and expansion revenue
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4. **Maturity** — optimize margin, packaging, and retention
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5. **Saturation** — differentiate, bundle, and defend share
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6. **Decline** — harvest, migrate, or wind down gracefully
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Lifecycle phase influences recommended models, discount tolerance, and migration policy.
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---
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## Charge Components
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### Access Fee
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A recurring or one-time charge for entitlement to use the product, platform, or feature package regardless of measured usage.
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Also called base fee, platform fee, or subscription fee. May be fixed or vary by tier, segment, or commitment.
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### Setup Fee
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A one-time charge covering onboarding, implementation, migration, or provisioning effort.
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Often negotiable or waivable in exchange for stronger commitment or higher recurring minimums.
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### Usage Meter
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A measured unit of consumption that drives variable charges.
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A meter defines what is counted, how it is aggregated, the measurement window, and the billing treatment. Multiple meters may exist in one pricing model.
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Examples: API requests, compute minutes, stored gigabytes, messages sent, seats active in period.
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### Included Usage
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Usage quantity bundled into an access fee or package before overage charges apply.
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Included usage creates predictability for customers and anchors expansion revenue for sellers.
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### Overage
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Variable charge applied when measured usage exceeds included usage or committed quantity.
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Overage makes usage-based models predictable at the package level while preserving upside from heavy consumption. Overage rates are often higher than in-band usage rates.
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### Tier
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A bounded band of quantity, capability, or segment that maps to specific prices or entitlements.
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Tiers may be customer-selected packages (Good/Better/Best), graduated usage bands, or enterprise capability sets.
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### Volume Discount
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A unit-price reduction triggered by higher quantity, subject to enforceable or economically meaningful commitment.
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Volume discounts must not rely on optimistic usage alone. Valid triggers include minimum turnover, prepaid packages, committed usage bands, longer contract duration, or reduced cancellation flexibility.
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### Graduated Price
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A price schedule where each usage band has its own unit rate and contributes independently to the total charge.
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Distinct from volume pricing, where the qualifying band sets one unit rate across all units.
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### Stairstep Price
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A price schedule where each quantity range maps to a single fixed charge for the whole step.
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Useful when offerings are sold in discrete capacity blocks.
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---
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## Commercial Terms
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### Commitment
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An enforceable or economically meaningful obligation that reduces seller risk in exchange for more favorable pricing.
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Commitments offset discount exposure, revenue volatility, or upfront investment. They are central to safe customer tuning.
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Examples:
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- minimum monthly or annual turnover
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- contract duration
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- prepaid usage packages
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- committed usage bands
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- take-or-pay structures
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- guaranteed platform fee
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- reduced cancellation flexibility
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- customer-funded onboarding
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A pricing model should make commitments explicit, measurable, and auditable.
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### Discount
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A reduction from a reference price, expressed as percentage, fixed amount, coupon, promotional rate, or improved unit economics.
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Discounts should be attributable to a rule, segment, lifecycle policy, or commitment. Unbounded discounting is an anti-pattern.
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### Credit
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Prepaid purchasing power denominated in currency or meter units.
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Credits decouple cash collection from consumption timing. They can improve budget control, create commitment, and introduce breakage risk. Credit models require explicit expiration, rollover, refund, and revenue-recognition rules.
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### Outcome Fee
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A charge tied to an observed business result rather than raw usage alone.
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Outcome fees align price with customer value but require clear attribution, measurement windows, dispute handling, and baseline definitions.
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Examples: percentage of revenue generated, share of cost saved, fee per qualified lead, bounty per resolved ticket.
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### Risk Adjustment
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A pricing modifier reflecting seller exposure to default, churn, support burden, abuse, implementation effort, or capital lockup.
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Risk adjustments may appear as higher base fees, larger prepayment requirements, shorter billing periods, or tighter usage caps.
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### Prepayment
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Payment collected before service delivery or before usage is consumed.
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Prepayment reduces seller risk and may unlock discounts or improved unit economics.
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---
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## Economic Boundaries
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### Cost Floor
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The minimum economically viable price boundary derived from fixed costs, variable costs, operating cost, support cost, payment-provider fees, capital requirements, risk, and desired margin.
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The cost floor answers: what must we charge to avoid building an unsustainable offering?
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### Value Range
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The range of prices that can reasonably be justified by value created across segments, use cases, maturity levels, and usage patterns.
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The value range answers: what could this be worth to customers under different conditions?
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### Market Competition
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The externally visible pricing context created by substitutes, alternative workflows, internal build options, open-source alternatives, and budget expectations.
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Market competition answers: what price can we ask while remaining attractive?
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### Boundary Condition
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A seller-defined constraint that a pricing configuration must satisfy to be valid.
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Examples:
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- minimum margin
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- maximum discount exposure
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- payment-provider fee coverage
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- expected usage variance limits
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- support and onboarding capacity
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- churn or default risk thresholds
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- compliance and tax constraints
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- sales approval thresholds
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- segment eligibility
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Boundary conditions should be inspectable, testable, and versioned.
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---
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## Parameter Classes
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### Fixed Parameter
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A pricing parameter set by the seller and not negotiable by the customer.
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Example: tax treatment, core meter definition, product SKU identity.
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### Seller-Controlled Parameter
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A parameter the seller may vary by segment, lifecycle phase, or sales policy but that is not directly tuned by the customer in self-serve flows.
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Example: list price, standard tier packaging, default contract duration.
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### Customer-Tunable Parameter
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A non-fixed parameter a customer may adjust within allowed bounds.
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Examples: monthly base versus usage mix, commitment length, prepaid balance, support level.
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Customer tuning must not create arbitrary discounts. Tunable choices are solved against seller goals and boundary conditions.
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### Calculated Parameter
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A parameter derived from other parameters by rule or solver.
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Example: effective unit price, expected LTV, required prepayment amount, overage rate after tuning.
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### Constrained Parameter
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A parameter restricted to a domain, range, or conditional dependency.
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Example: usage price may only decrease if minimum commitment increases.
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### Payment-Provider Parameter
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An implementation-specific field required to map the internal model to a provider artifact.
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Example: Stripe price ID, billing scheme, aggregate usage mode, tax behavior.
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Provider parameters are downstream of the canonical model, not replacements for it.
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---
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## Evaluation Concepts
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### Comparable Customer Lifetime Value
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A seller-side comparison metric estimating expected lifetime value for a customer under a given pricing configuration, normalized for comparable segments, usage expectations, risk classes, and contract conditions.
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Abbreviation: `average_comparable_customer_lifetime_value`.
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Used to ensure customer-tuned models do not reduce seller economics below an approved reference.
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### Reference Model
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The predefined pricing model used as the baseline for comparison.
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The most favorable predefined model available to a customer segment sets the comparison anchor for tuned configurations.
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### Required Improvement Factor
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A seller-configurable multiplier that tuned pricing must meet or exceed relative to the reference model.
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```text
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average_comparable_customer_lifetime_value(tuned_model)
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>= average_comparable_customer_lifetime_value(reference_model)
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× required_improvement_factor
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```
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---
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## Governance Concepts
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### Pricing Experiment
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A controlled test of price, packaging, or model changes to estimate willingness to pay, conversion, retention, or margin effects.
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Examples: Van Westendorp, conjoint analysis, Gabor-Granger, A/B pricing tests.
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### Dynamic Pricing
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Pricing that changes with demand, capacity, inventory, or market signals.
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Requires governance, explainability, audit trails, and often customer-visible policy.
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### Personalized Pricing
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Pricing that varies by customer characteristics, behavior, or predicted willingness to pay.
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Benefits revenue optimization but raises trust, fairness, and regulatory concerns.
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### Grandfathering
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A policy that preserves legacy pricing for existing customers after list prices or models change.
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Important for trust-preserving lifecycle migrations.
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### Pricing Explainability
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The ability to show why a configuration is valid, invalid, recommended, risky, or favorable.
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Explanations should reference strategy, boundary conditions, commitments, and comparison metrics—not opaque optimizer output alone.
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---
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## Primitive Composition Map
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Complex pricing models are usually compositions of:
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| Primitive | Role |
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| --- | --- |
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| Access fee | Entitlement and predictability |
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| Usage meter | Value alignment and expansion |
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| Included usage | Package framing |
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| Overage | Heavy-usage economics |
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| Tier | Segmentation and packaging |
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| Commitment | Risk offset for concessions |
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| Discount | Promotional or earned price reduction |
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| Credit | Prepaid consumption control |
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| Outcome fee | Value-based alignment |
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| Risk adjustment | Protection against seller exposure |
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| Boundary condition | Economic safety |
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| Lifecycle phase | Strategic context |
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---
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## Non-Canonical or Context-Dependent Labels
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These terms appear in provider dashboards and sales conversations but should be mapped to canonical concepts rather than used as roots in the model.
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| Label | Canonical mapping |
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| --- | --- |
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| Stripe Price | Payment-provider artifact for a charge component |
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| Coupon | Discount rule with provider execution metadata |
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| Plan | Customer-facing package; usually Tier + Access fee + entitlements |
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| SKU | Commercial identifier; not a strategy |
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| List price | Seller-controlled reference price before discounts |
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| Negotiated deal | Pricing configuration with bespoke commitments |
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| Take-or-pay | Commitment with penalty or minimum billing rule |
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---
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## Open Ontology Questions
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Tracked for Phase 1 research in `PricingResearchRoadmap.md`:
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- Standard naming for hybrid models with multiple active meters
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- Outcome fee evidentiary objects and dispute lifecycle
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- Revenue-recognition mapping for credits, breakage, and prepaid balances
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- Minimum viable primitive set for marketplace and platform fee models
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- Relationship between segment eligibility and personalized pricing |