Determining prices for products and services is a very important decision for any business. Post pandemic, because of inflation, pricing a product or service appropriately has become even more critical.
There are three major influences on pricing decisions: customers—due to their effect on demand; competitors—who influence pricing through their actions; and costs—which impact supply.
The following are nine popular pricing models. Companies should consider the nature of their products and services, their industry, business strategy, short-term goals, and long-term goals to determine the appropriate pricing models for their business.
Value-based pricing is when companies price products or services based on what customers are willing to pay. Even if they can charge more for a product, they decide to set their prices based on customer interest and data.
If used accurately, this method can increase your customer satisfaction and loyalty. It can also help you prioritize your customers in other facets of your business, like marketing and service.
This model works well for any price-sensitive products such as milk, bread, meat, fruit or toothpaste.
This pricing model uses competitor prices as a benchmark. You can price your products slightly below, the same as, or slightly above your competition, or the average price of competition.
Competition-based pricing is often used when you have a similar product or service to competitors. This strategy is great for products, digital products, and events.
A cost-plus pricing method focuses solely on the cost of producing your product or service. This is also known as markup pricing.
To apply the cost-plus method, the selling price is set by evaluating all variable costs a company incurs and adding a markup percentage to establish the price.
This strategy is great for products and retailers.
Freemium pricing is when companies offer a basic version of their product hoping that users will eventually upgrade and pay for the better software.
Free trials and limited access offer a “peek” into a software’s full functionality, and build trust with a potential customer before purchase.
With freemium, a company’s prices must be a function of the perceived value of their products. Examples of freemium models are Dropbox, Trello, EchoSign, Yammer, WordPress.
This method is great for SaaS and other software companies.
A penetration pricing strategy is when companies enter the market with an extremely low price, effectively drawing customers’ attention.
Penetration pricing isn’t sustainable in the long term, however, and is typically applied for a short run.
This pricing method works best for new businesses or for businesses who are breaking into an existing and competitive market.
Contrasted with Penetration pricing, a skimming pricing strategy that sets new product prices high and lowers them over time as competitors enter the market or the product becomes less popular.
This model is awesome for technology products and new products and services. This pricing model should be considered if your market is not yet crowded with competitors, if you are launching an innovative product, if consumers you target are willing to pay a higher price, and if your demand curve is inelastic, where price changes do not affect the product demand.
Companies price products high to present an image of high-value, luxurious, or premium. It focuses on the perceived value of a product rather than the actual value or production cost. Thus, this model is a direct function of brand awareness and brand perception.
Fashion, technology, and luxury industries should consider this strategy. Examples of companies using this model are Salesforce, HubSpot, Rolex, Chanel, Gucci, Apple, etc.
Also known as rate-based pricing, hourly pricing is essentially trading time for money.
This pricing strategy is the best fit for consultants, freelancers, contractors, and other individuals who provide business services.
A project-based pricing strategy is the opposite of hourly pricing — this approach charges a flat fee per project instead of a direct exchange of money for time.
Pricing is estimated from the value of the project deliverables or a flat fee based on the time of the project.
This pricing strategy is great for consultants, freelancers, contractors, and other individuals who provide business services.
If you have questions about pricing models and other business best practices, partnering with a Client Accounting & Advisory Service (CAAS) team like ours can help you determine the appropriate strategies to achieve your business goals. Leave a comment below, or feel free to reach out to me directly. I’m happy to help!