Pricing Models
Determining the most appropriate pricing model for your business is tricky and takes considerable research, planning and testing before full implementation across all of your products and services. In the same time, pricing your products or services accurately is one of the greatest challenges you are going to face as a business owner or manager. If you price your products and services too high, you are going to risk driving customers into the arms of your competitors.
On the other hand, prices that are too low will leave you with small margins, even if you can make plenty of sales. In the end, only companies who can find the ‘correct spot’ for pricing will be able to thrive well into the future.
You can use the following models when determining how to best price your products and services;
1) Cost Based Pricing
With this model, you are going to use the cost of production as the basis for the final price that consumers see when they make a purchase. The multiple that you use to price your goods is going to depend on the industry in which you are working. Some industries see multiples around 2–3 times the cost of production, while other industries are around 5 times or higher.
For example, let’s say you are in an industry that tends to sell products at about 3 times the cost of production. If you have determined that your average cost on one unit is $100, you will naturally look to sell the item for around $300 (if using a cost-based model). Multiplying your cost by three is a great way to get in the right ‘neighborhood’ for your pricing, but you can then tweak the final number until you hit a spot that you feel is a winner. For instance, if you see that many of your competitors already sell for $300, you may decide to move down to $250 just to have a slight edge on price. Or, if you think your product is of a superior quality to the competition, you could set your price at $350.
Scott Gerber, founder of the Young Entrepreneur Council, suggests in INC.VIDEO that business owners consider tiered pricing, which would enable them to offer extra options at higher prices above a base level.
2) Market Pricing
This pricing model is all about the market conditions that you find around you. Fortunately, in the technology age, it is relatively easy to determine market pricing for just about any product or service. A quick internet search should lead you to the prices of your competitors, and you can then react appropriately. Trying to sell an off-market product for pricing will always be challenging, so it is a smart way to use a market pricing model.
The price that you choose relative to the rest of the market should match up with the marketing strategy you are using to reach your customers. If you are marketing your product as high-quality, it would make sense to have a higher price. On the other hand, if you talk about great value and affordability in your adverts, you better come in on the low end of the spectrum.
3) Portfolio Pricing
In the portfolio pricing model, you should make a pricing that makes sense throughout your product or service line. For instance, if you run an accounting agency, you may offer basic tax preparation services for a certain rate. Then from there, your more advanced accounting services move up the pricing scale. It makes sense to price out all of your services in this way so that each of your customers feels they are getting a good deal.
Providing more services with less money does not always attract the attention of the customer, so keep the portfolio pricing model in mind when structuring your overall price strategy.
4) Freemium pricing
The last model on our list is one that will only work for a specific segment of the market. In freemium pricing, you give away your base service or product for free, in the hopes that satisfied customers will decide to pay for more advanced features.
This is a pricing model that is commonly used in the software world. A basic version of a piece of software may be made available to everyone for no charge, while an advanced version can be purchased for a flat rate (or a monthly subscription).
There will always be a feeling of nervousness when you take a new product, with a new price, out to market. You can never be quite sure how consumers are going to react so even making the best pricing plan will not be enough. Also, remember one key thing with regard to pricing — your prices can always be changed. As you gain experience with setting prices, and as you learn more and more about your market, you should become highly accurate with most of your pricing choices. Whatever approach you take to pricing, it’s important to prepare well, do your homework and keep in mind the important variables — from product value to company costs to market dynamics to customer perceptions — that go into choosing the right numbers.
