Price and package a product

To: CEO From: Head of Product Re: Alternative to a 30% January increase

Recommendation

Don't apply a flat 30%. Move pricing from seats with unlimited pages to a model that charges for pages. Self-serve keeps seats but adds an included page allowance and a per-page overage. Enterprise moves to a committed per-page rate at renewal. At current usage, this takes gross margin from 24% to about 53%.

Tom's increase would not get us to 41%. That figure assumes all contracts reprice in January, and only one enterprise contract renews then. Self-serve-only in January gives about 34%.

What the data says

• The margin problem is enterprise. Six contracts account for 71% of pages (19.4M of 27.4M) and 71% of serving cost ($23.2k of $32.9k a month). They pay $19.0k, so they lose $4.2k a month (−22%). Four of six are negative.
• Enterprise pays too little per page. Effective rates run $0.0007 to $0.0015 per page against a serving cost of $0.0012. Seat pricing lets page volume grow without any increase in what we charge. Northwind's pages tripled in a year and its bill didn't move.
• Self-serve is healthy. It runs at 60% margin. Startups are at 87%, and mid-market is at 40%, dragged down by heavy accounts. Q and P are negative.
• We are far below market. DocuLens lists at $0.012 per page up to 1M and $0.008 above, plus a $500 platform fee. At that list price, Northwind's 4.8M pages would cost about $43k a month, against our $3.2k. Enterprise discounts narrow this gap, but not by much.

Proposed model

• Self-serve: $99 per seat per month, including 25,000 pages per seat. $0.002 per page above that. Seats stay because they are simple and match Formwise. Our overage rate is one-fifth of Formwise's $0.01.
• Enterprise: a committed monthly page volume at $0.002 per page, with overage at the same rate. No seat fee. Offered on two-year terms with a price lock.
• Floor: $0.0017 per page. Anything below it needs CEO sign-off.

Because serving cost is falling about 10% a quarter, a locked rate becomes more profitable each quarter. If that holds, enterprise margin reaches about 60% within a year at current volume.

Effect by segment

Monthly run-rate at current usage, before churn, at $0.0012 per page.

Gross margin dollars rise from $10.2k to $36.9k a month. Startups barely change because most use less than 25k pages per seat. Mid-market carries the most self-serve risk: a few heavy accounts see large increases, such as Q ($594 to $1,382) and T ($792 to $1,498).

Getting there

Self-serve. Announce in January and take effect February 1 with 30 days' notice. New sign-ups get the new model immediately. For existing heavy mid-market accounts, cap the increase at 50% for the first three months. Offer annual prepay as an option.

Enterprise, by renewal date. No contract is repriced mid-term.

• Copperfield (January 2027): $0.002 per page takes it from $2.4k to about $4.8k a month. This is the first test of the model.
• Northwind (February 2027): Its ask is "two years at the same rate." At the same dollar amount, the effective rate would fall to about $0.0007 per page while volume triples. Counter with a two-year term, a committed 4.8M pages a month, $0.0017 in year one, and $0.002 in year two. That is about $8.2k a month in year one. Trade the rate for term and commitment. If they refuse to go below $0.0017, let them walk. They lose us $2.6k a month today, and losing them would improve gross margin dollars.
• Arcadia (March 2027): It is evaluating a competitor and is the only enterprise account with positive margin ($528 a month). Offer $0.002, benchmark against ExtractIQ at their volume, and concede only down to the floor and only on a multi-year deal.
• Halden (June), Meridian (September), Brightwater (November): standard $0.002.

The price test

The test's B arm was $129 against $99, which is a 30% increase. That makes it the most relevant evidence we have, and it doesn't support the January increase.

• The result is inconclusive. Conversion was 5.0% against 4.8%. The 95% interval on the difference is roughly −1.7 to +2.1 points. That interval can't rule out losing a third of conversion. "Not significant" does not mean "no effect."
• The assignment looks broken. The arms received 1,240 and 870 visitors against a 50/50 design. That is a sample-ratio mismatch (chi-square ≈ 65). Until someone explains it, we can't trust either arm.
• Its scope is narrow. It ran two weeks over the holidays, measured new sign-ups only, and counted first payments only. It says nothing about existing customers, seat expansion, churn, or heavy page users.

We shouldn't cite it as cover. Rerun it properly: a six-week randomized 50/50 test of the new model on new sign-ups, plus a notice-based read on existing self-serve accounts.

Why not 30% across the board

• It doesn't fix enterprise. A 30% increase moves enterprise from −22% to about 6% margin. Even then, it can't be applied mid-term.
• Seats don't track cost. Serving cost is about $13 per seat for startups and about $480 per seat for Northwind. A per-seat increase raises both sides equally and leaves the mismatch in place.
• It taxes the wrong customers. Light users absorb the same percentage increase as heavy users, while the heavy users are the ones we under-recover on.

Risks

• Enterprise pushback. A roughly 2x jump at renewal is the real risk. Expect one or two losses. The two-year lock and staggered renewal calendar limit the damage.
• Cost decline stalls. If serving cost stops falling, the $0.0017 floor needs review each quarter.
• Usage shifts. Heavy self-serve users may trim usage to avoid overage. That is acceptable given the margin, but we should watch conversion closely.

Decisions requested

1. Reject the flat 30% increase.
2. Approve the self-serve model effective February 1, with a 90-day cap for heavy mid-market accounts.
3. Approve the enterprise per-page rate card, with a $0.0017 floor and CEO sign-off required below it.
4. Rerun the price test properly before any new-signup price change.

MEMORANDUM

TO: Chief Executive Officer FROM: Head of Product, Parsewell DATE: October 24, 2024 SUBJECT: Alternative Pricing Model vs. Tom’s 30% Across-the-Board Increase

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1. Assessment of the Growth Team’s Price Test

Tom’s reliance on the December price test to justify a blanket 30% price hike is dangerously flawed. The test suffered from two fatal errors: 1. Sample Selection & Volume Discrepancy: Arm A ($99) attracted 1,240 visitors, while Arm B ($129) attracted only 870 visitors—a 30% drop in top-of-funnel capture. This points to a broken traffic allocation or immediate audience suppression at the higher price point. 2. Confounding Variables: Running a pricing test during December (8th–21st) captures holiday-shortened enterprise/developer activity, creating noise that masks true price elasticity.

While a 30% seat price increase showed a statistically insignificant conversion dip over a two-week window, applying that logic to usage or enterprise contracts ignores reality. Parsewell is an infrastructure API. Developers do not buy seats for fun; they buy seats to build systems that process millions of pages. Tying our revenue strictly to developer seats while our core cost driver—and customer value metric—is document volume is a structural mismatch.

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2. The Current State: Margin Erosion & Value Leakage

An analysis of our usage export reveals why Tom is panicking about gross margins (currently sitting at roughly 24% overall): * The Enterprise Subsidy: Our 6 Enterprise accounts processed 19.16 million pages last month (79% of total company volume) but generated only $18,600 in revenue. Because they enjoy "unlimited pages" tied to discounted seat licenses, their heavy usage swamps our inference costs ($0.0012/page). Consequently, 4 out of 6 Enterprise accounts have negative gross margins, costing us thousands monthly (e.g., Northwind Logistics loses $2,584/month). * The Self-Serve Engine: Mid-market and Startup tiers are healthy, generating positive gross margins because their volume scales predictably with seat counts.

A flat 30% seat hike fixes nothing for Enterprise: adding 30% to Northwind’s $3,200/month bill reduces their negative margin, but they still bleed cash because they process 4.8 million pages for a flat fee.

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3. The Alternative Pricing Model: Value-Based Usage Tiers

To fix gross margins structurally, we must decouple our monetization from developer seats and align it with the metric that drives our costs and customer value: processed pages.

We propose launching Parsewell V2 on January 1: 1. Self-Serve (Startups & Mid-market): Retain the base seat fee ($99/seat/month) to cover dashboard access, but introduce a generous included page allowance (50,000 pages/seat/month) with a clear, predictable overage rate of $0.005 per page. 2. Enterprise Contracts: Move away from flat seat-license bundles. Transition to a Platform Fee + Usage Model modeled after industry standards (competing with DocuLens/ExtractIQ): * Base Platform Fee: $1,500/month (includes dashboard, SSO, priority support, and 250k pages). * Overage / Metered Rate: $0.008 per page for all volume exceeding the base allowance.

#### Financial Impact Summary (Based on Last 30 Days Data) * Current Monthly Revenue: ~$41,000 | Current Cost to Serve: ~$31,000 | Current Gross Margin: ~24% * New Model Monthly Revenue: ~$81,500 | New Cost to Serve: ~$31,000 | New Gross Margin: ~62%

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4. Segment-by-Segment Impact & Table

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5. Execution Strategy & Enterprise Renewals

Transitioning self-serve is straightforward via a Stripe billing update with a 30-day grandfathering notice. Enterprise renewals require a tactical playbook to prevent churn, especially with accounts like Arcadia Health evaluating competitors.

• Copperfield Freight (Renews Jan 2027): Their contract is up immediately in January. We will introduce the new usage-based framework during December QBR. Position the $0.008/page rate against competitor DocuLens ($0.012/page) to show they are still getting a volume discount.
• Northwind Logistics (Renews Feb 2027): They want a 2-year renewal at the same rate despite a 3x volume surge. Do not accept. Counter-offer: Honor the flat seat rate for 12 months only if they agree to a volume cap of 2M pages/month, with overages billed at $0.008/page thereafter. Otherwise, transition them directly to the new platform + usage model.
• Arcadia Health (Renews Mar 2027 - Evaluating Competitor): Because they are price-sensitive and shopping around, offer a transitional "Volume Partnership Discount": a lower platform fee ($1,000) for Q1 while locking them into a 2-year tiered page commitment.

Conclusion

Tom wants a blunt instrument (30% across the board) to solve a surgical problem. A flat 30% price hike leaves money on the table for high-volume users while alienating self-serve customers. Our value-based usage model repairs our gross margins to over 60%, prices our heavy enterprise users fairly based on the compute power they consume, and keeps us competitively positioned against ExtractIQ and DocuLens.

Recommendation: move from seat-only pricing to a seat allowance plus page overages—not a blanket 30% increase. Parsewell sells document processing through an API, so pages are a better measure of value and cost than dashboard seats. Keep current contract prices as minimums during their terms; introduce usage charges at renewal.

Proposed steady-state model and 30-day effect

Figures are monthly run rates from the 30-day export; gross profit is revenue less listed serving cost. The model gives startups no increase in this snapshot, while charging the mid-market and enterprise accounts whose page usage is driving costs. Enterprise’s modeled uplift is not a January price-change forecast: contracts constrain timing, and negotiated transition terms will reduce or defer it. Serving cost is held constant in the comparison; the stated 10% quarterly cost decline would improve margins if it continues.

Rollout and renewals

• January: Publish the new self-serve schedule for new customers, with clear usage meters, alerts, and overage controls. Give existing self-serve accounts at least 90 days’ notice and a transition period; do not surprise-bill them. Show each account its included pages and forecast bill before charging overages.
• Enterprise: Honor current terms. At renewal, use the 50k-pages-per-seat allowance and overage rate as a transparent proposal, not a take-it-or-leave-it increase. Offer a ramp, annual usage commitment, and negotiated cap where needed; make any concession conditional on term, volume commitment, or other value.
• Renewal sequence: Copperfield is listed for January 2027, followed by Northwind in February and Arcadia in March. Copperfield is the first negotiation. Northwind’s usage has tripled and it wants two years at the same rate: counter with a two-year ramp and committed volume, rather than accepting flat pricing or imposing the full modeled charge at once. Arcadia is evaluating a competitor, so lead with a usage review and a capped transition. Prepare Halden (June), Meridian (September), and Brightwater (November) well before renewal. Confirm the applicable contract dates and notice provisions before sending any proposal.

What the price test says

It does not justify a blanket increase. The observed conversion rates were 5.0% at $99 and 4.8% at $129, but the visitor counts (1,240 versus 870) are materially imbalanced despite the intended 50/50 split. The 0.2-point difference is small relative to sampling uncertainty—roughly a ±1.8-point 95% margin—so the test cannot establish either a meaningful conversion loss or that $129 is better. It also measured short-term conversion among new self-serve visitors, not retention, revenue per visitor, API usage, or enterprise willingness to pay.

Run a properly randomized, adequately powered follow-up and track revenue per visitor and cohort retention, not conversion alone. Use those results to tune the self-serve seat price; use usage economics and renewal conversations to set enterprise terms. The export supports changing the pricing metric and addressing accounts with negative gross profit—not treating this test as cover for raising every price.