Price and package a product

To: CEO From: Head of Product Date: January 2027 Subject: Alternative to the 30% Across-the-Board Price Increase: Shifting to Usage-Based Pricing

1. Diagnosis: We Have a Metric Problem, Not a Price-Level Problem

Tom is right to sound the alarm on our gross margin falling from 41% to 24.4% ($10,775 margin on $44,127 monthly revenue). However, a flat 30% price hike across seats and enterprise contracts will not fix our unit economics, and it risks triggering churn among our highest-margin customers.

Our fundamental issue is a mismatch between our value metric (seats) and our cost driver (pages processed): * Startups (50 accounts): Generate $9,999/mo in revenue and cost $1,297 to serve (87.0% gross margin). They average 21.6k pages/month. * Mid-Market (24 accounts): Generate $15,147/mo and cost $8,454 to serve (44.2% gross margin). Three high-volume accounts (P, Q, V) are already gross-margin negative. * Enterprise (6 accounts): Generate $19,000/mo and cost $23,232 to serve (-22.3% gross margin). Four of our six Enterprise customers are underwater. Northwind Logistics alone processes 4.82M pages, costing us $5,784 while paying $3,200.

Because our API is integrated by a few developers and runs headless in production, customers scale page volume massively without adding seats. Even if we could magically apply Tom’s 30% hike to all Enterprise contracts tomorrow (ignoring that four don’t renew until Mar–Nov), Enterprise revenue would rise to $24,700 against $23,232 in costs—a dismal 5.9% gross margin. Meanwhile, we would penalize our 87%-margin Startups, giving them a reason to look at Formwise ($79/seat).

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2. Critique of the December Price Test

We cannot use the Growth team’s price test to justify a broad 30% increase for four reasons: 1. Severe Sample Ratio Mismatch (SRM): The test intended a 50/50 split across 2,110 visitors, but routed 1,240 (58.8%) to Control and 870 (41.2%) to Variant ($\chi^2 = 64.9, p < 0.0001$). Our randomization or tracking broke—likely due to caching, bot traffic, or self-selection before the event fired. The readout is invalid. 2. Significantly Underpowered: With only 104 total conversions, the 95% confidence interval for the difference is roughly $\pm 1.9\%$. The test could not detect anything smaller than a ~38% relative drop in conversion. "Not statistically significant" here means "insufficient data," not "no effect." 3. Wrong Cohort & Seasonality: A two-week window in mid-December captures holiday anomalies and tests initial sign-up conversion of small self-serve accounts, telling us nothing about 90-day retention, seat expansion, or Enterprise contract elasticity. 4. Ignoring Usage Economics: Raising the seat price to $129 still leaves unlimited pages uncapped, inviting adverse selection from heavy API users.

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3. Proposed Pricing Model: Platform + Usage (Hybrid)

Competitors price on pages ($0.008–$0.015/page) or cap pages per seat (Formwise at 50k/seat). Our cost to serve is $0.0012/page (falling 10%/quarter). We must align revenue with page volume while retiring the "seat" tax for API products.

The New Model: * Starter (Self-Serve): $199/month platform fee. Includes 50,000 pages/mo and unlimited seats. Overage: $0.006 per page. * Growth (Self-Serve): $499/month platform fee. Includes 150,000 pages/mo and unlimited seats. Overage: $0.004 per page. * Enterprise (Annual Contract): $1,500/month ($18k/yr) platform fee. Includes 500,000 pages/mo and unlimited seats, plus SLA/SSO. Tiered overage: * 500k – 2M pages: $0.0035 per page * 2M+ pages: $0.0025 per page

Why this works: Even our lowest Enterprise tier ($0.0025/page) yields a 52% gross margin on marginal pages today, expanding to 67% over the next year as inference costs drop 10% per quarter. Meanwhile, we remain 50% to 70% cheaper per page than DocuLens ($0.008–$0.012) and ExtractIQ ($0.015).

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4. Segment & Financial Impact

The table below compares our current state, Tom’s 30% hike (assuming 100% immediate realization and zero churn), and the proposed model (assuming customers optimize for the lowest-cost tier at current volumes):

(Note: Table sums exact per-account figures from the export; CSV rounding accounts for minor differences from the $44,127 / 24.4% total).

Customer Impact by Segment: * Startups (Neutral/Positive): Every single Startup processes $\le 40,000$ pages. On Starter ($199/mo), all 50 accounts are 100% covered by the 50k included allowance. The 17 accounts with 3 seats see a 33% price drop (from $297 to $199); the 19 accounts with 2 seats pay the exact same ($198 vs. $199); the 14 single-seat accounts pay $100 more (which we will grandfather for 6 months). Removing seat limits encourages whole-team adoption. * Mid-Market (Rebalanced to Value): All 24 accounts optimize onto the Growth plan ($499 base + $0.004 overage). Low-volume, high-seat accounts (e.g., Mid-market L at 7 seats / 134k pages) actually see a $194/mo price reduction, protecting them from churn. High-volume, unprofitable accounts (e.g., Mid-market Q at 544k pages, currently -$59 GM) move from $594/mo to $2,075/mo (68.5% GM). * Enterprise (Profitability Restored): Average effective price becomes $0.0033/page—still ~65% below DocuLens, giving us massive pricing power while turning a -$4.2k monthly loss into a +$41.4k gross profit.

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5. Rollout & Enterprise Renewal Playbook

Self-Serve Rollout (February 1): 1. New Sign-ups: Launch Starter and Growth tiers immediately on the pricing page. 2. Existing Self-Serve: Migrate accounts whose bill decreases or stays flat (37 of 74 accounts) immediately in February—this builds goodwill and unlocks unlimited seats. For accounts whose bill increases (14 single-seat Startups and 23 high-volume Mid-Market accounts), grant a 90-day transition window at legacy rates, paired with new dashboard usage alerts and an annual-commit discount option.

Enterprise Renewals (Account-by-Account): We cannot unilaterally hike annual contracts in January, as 5 of 6 renew later in the year. However, we have two immediate renewals and strong competitive leverage: * Copperfield Freight (Renews Jan 2027 | 2.38M pages | Currently $2,400/mo, -$456 GM): Immediate priority. Under the new card, their usage prices at $7,700/mo ($92.4k/yr). Playbook: Offer a 1-year transition bridge at $5,500/mo ($66k/yr)—a 48% gross margin for us, and still less than a third of what DocuLens ($19.5k/mo) would charge them. * Northwind Logistics (Renews Feb 2027 | 4.82M pages | Currently $3,200/mo, -$2,584 GM): Their pages tripled in a year and they want a 2-year lock at the same rate. Locking in -$31k/yr in losses for two years is a non-starter. Standard new pricing is $13,800/mo. Playbook: Show them their 3x volume growth and competitor benchmarks ($39k/mo on DocuLens). Offer the 2-year lock they want in exchange for a stepped commitment: $8,500/mo in Year 1 (47% GM today, rising to >60% as costs fall) and $11,500/mo in Year 2. * Arcadia Health (Renews Mar 2027 | 3.31M pages | Currently $4,500/mo, +$528 GM): Evaluating a competitor. Paying $0.00136/page today. Playbook: Any competitor they are evaluating will quote them $25k–$40k/mo for 3.3M pages. Position our new model aggressively: waive the $1,500 platform fee for Year 1 and lock in a flat $0.0028/page ($9,268/mo) on a 2-year deal. We double our revenue, hit a 57% gross margin, and remain 70% cheaper than the competitor they are evaluating. * Halden (Jun), Meridian (Sep), Brightwater (Nov): Begin QBRs 120 days prior to renewal, sharing usage telemetry that highlights their cost-per-page savings vs. market benchmarks before introducing the new rate card.

Recommendation to the CEO

Reject the blanket January increase. Replace unlimited-page seat pricing with a platform fee plus metered pages, and migrate enterprise accounts at contractual renewal. Validate the proposed rates before broad rollout; the December test does not establish willingness to pay for this model.

The problem is the pricing metric, not simply the price level. Dashboard seats do not track extraction value or cost. Six enterprise accounts generate 19.36 million pages—71% of all usage—but lose $4,232 a month at today’s costs. Meanwhile, small startups subsidize heavy users.

Across all 80 accounts, current monthly revenue is $43,057, cost to serve is $32,903, and gross margin is 23.6%, consistent with Tom’s reported 24%.

Proposed model and customer impact

Include unlimited dashboard users. Charge for successfully processed pages, with clear definitions for multipage documents, retries and failures. The calculations below assume exported pages are billable; validate that assumption before launch.

These are static, fully migrated scenarios, not forecasts: they assume unchanged usage, no churn and today’s exported costs. Monthly gross profit rises from $10,154 to $94,073. A further 10% cost reduction would raise proposed gross margin to approximately 76.7%, but we should not depend on it.

The startup revenue reduction is deliberate: remove the collaboration tax and preserve an accessible entry point. Heavy users should fund their own consumption.

The rates are plausible hypotheses, not proven willingness to pay. Our $0.006 self-serve rate is below the published competitor page rates; enterprise at $0.004 is half DocuLens’s published high-volume rate before platform fees. Those comparisons require fresh verification and equivalent accuracy, features and service levels.

Why not Tom’s approach?

At unchanged usage, a universal 30% increase produces $55,974 monthly revenue and 41.2% gross margin. It restores the historical aggregate margin but leaves the structural problem intact:

• Enterprise gross margin remains only 5.9%.
• Northwind and Halden remain loss-making.
• Growing page volume can erase the improvement without adding seats.
• Low-volume customers pay more despite being highly profitable already.
• Existing enterprise contracts cannot simply be repriced in January without contractual authority or agreement.

Our alternative is economically stronger, but its large mid-market and enterprise increases create meaningful retention risk. We must test that risk rather than treat modeled revenue as secured.

Migration and enterprise renewals

January: launch metering and shadow invoices, not a forced universal increase. Instrument billable pages, audit costs and billing, and show customers their projected bills. Provide usage forecasts, threshold alerts and optional spend limits; do not silently interrupt production workflows.

For new self-serve customers, pilot the model after repairing experimentation. For existing self-serve customers, provide at least 90 days’ notice, subject to applicable terms. Offer a six-month, explicitly expiring migration credit for large increases. Publish both discounted and eventual bills so credits do not disguise the destination price. Separate price effects from usage growth in reporting.

For enterprise, honor existing agreements until renewal unless customers voluntarily amend. Proposed first-renewal pricing is $500 + $0.003/page for 12 months, stepping to $0.004 in year two. Even the transitional rate produces approximately 62% enterprise gross margin at current usage and cost.

Renewal sequence, with monthly-equivalent first-year prices:

• Copperfield, January 2027: $7,640; begin negotiations immediately.
• Northwind, February: $14,960. Reject two years of unlimited usage “at the same rate.” Offer two-year rate certainty only against a defined page commitment, with paid excess usage. Its threefold volume growth makes this essential.
• Arcadia, March: $10,430. Start an executive-led retention discussion now; benchmark extraction quality and switching economics before conceding price.
• Halden, June: $12,380.
• Meridian, September: $6,950.
• Brightwater, November: $8,720.

Commitments should reflect validated usage and seasonality, with transparent true-ups and no unlimited overage loophole. Do not promise that renewal discounts are permanent. Escalate concessions below our margin floor to Finance and Product jointly.

Revenue will ramp through these renewals and subsequent step-ups, not jump to the table’s total in January. Build the forecast account by account, including churn, credits and volume scenarios.

One data issue needs resolution first: enterprise revenue per listed seat exceeds $99, despite the pricing document describing discounted seat rates. Use observed revenue for this analysis, but reconcile actual contract units and entitlements before quoting renewals.

What the price test actually says

The intended 50/50 allocation produced 1,240 versus 870 visitors. That is severe sample-ratio mismatch: approximately χ² = 64.9, p < 10⁻¹⁴ under equal allocation. Investigate assignment, exposure logging, eligibility, channel mix and exclusions before trusting the causal result.

Observed conversion was 5.00% versus 4.83%. Ignoring the allocation problem, the difference is approximately −0.17 percentage points, with a rough 95% interval of −2.04 to +1.70 points. “Not statistically significant” does not establish equivalence or rule out commercially material harm.

It also tested only new self-serve sign-ups, over two weeks—not existing customers, retention, enterprise renewals or usage-based pricing.

Repair the experiment, predefine a commercially meaningful conversion-loss threshold, and measure revenue per eligible visitor, paid activation, retention, usage and contribution margin. Use evidence to choose pricing—not the test as cover for a predetermined increase.

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.