Today it’s easier than ever to start a business. The barriers of entry are low and the cost of running a business can be close to zero. With the advent of communication channels and lean software development processes, choosing a pricing model is more like an everyday chore than a serious task. Most business owners simply chose the pricing model they like and move on. They don’t spend hours agonizing over pricing because they can change it with a click of a button.
This is the nature of the current market. Businesses aren’t afraid to experiment with different pricing models because they know that being agile pays off. There are too many pricing models to choose from, so business owners make quick decisions and then iterate based on the customer feedback.
Of course, this approach toward pricing only works for online businesses. Retail businesses with physical products still have to rely on data and market research to determine their pricing.
This article is intended to explore most popular business pricing models:
Most popular business pricing models:
This is one of the most basic pricing models. Cost-based pricing is based on the notion of a margin. You determine how much profit you want and come up with the desired margin. You then add the margin to the cost of goods or services. Cost-based pricing has been used for years as a simple and effective model to derive substantial profit. However, the major drawback of this pricing model is that it doesn’t provide any direction on how to work out the margin.
Competitors often dictate how your business performs. Following the competitive pricing model, you research your competitor’s pricing and then establish the price based on your research. Your final price might be similar to competitors’ pricing, or it can be lower or higher depending on what positioning you’re aiming for. But no matter what price you come up with, competitive pricing means that you’ve taken into account what competitors are doing.
Brand pricing is based on perceived value of the product rather than on the actual cost of production or external factors like competitor pricing. This strategy is often employed by luxury brands, that need to communicate their high value and aspirational image to the consumer. When the customers see the higher price, they tend to form a certain image in their mind and expect the product to increase their social status.
This pricing model is mainly used by service providers such as writers, designers, and coaches. When the contract is signed, the service provider is supposed to track hours and then bill the client based on the number of hours spent multiplied by the cost of one hour. Rate-based pricing can be very cost-effective for the clients, but it doesn’t provide much security for the provider, as there is no guaranteed workload.
This is the preferable pricing model for projects where the scope is clearly defined. Project-based pricing implies that you estimate the number of hours you plan to spend on the project and then multiply that number by your hourly rate. Project-based pricing is never 100% accurate, but depending on the project it can be beneficial for both the paying customer and the provider.
Value-based pricing is in a way similar to brand pricing. With the brand-based pricing, you determine the pricing based on how you want the customers to perceive your brand. With value-based pricing, you already know how the customers view your product and set the price based on how much they are willing to pay.
Tiered pricing is used by many software brands. You give customers a choice between limited edition product and all-in-one solution. There can be several pricing packages in between. For example, standard package of features might cost $39, premium package with marketing automation feature - $119, and enterprise solution with all the features and integrations - $297.
This pricing model is often used by museums and personal blogs. With Pay-What-You-Want model customers determine the price they are willing to pay. This is a great pricing model if you have no clue about the price and want to collect the data to make the final pricing decision. Pay-What-You-Want pricing also works great for organizations with social missions.
Free Product with Paid Service (Freemium)
This pricing model has been getting very popular recently as companies are trying to find the way to keep customers paying long after they shipped the product. Open source software is usually free, but companies are charging for support and custom development services.
Utilized by most air-companies, period-based pricing model has an indisputable advantage over other pricing models as it allows companies to change prices based on the demand. The changes can be made throughout the year considering the time of the year, time left before the service is rendered (the earlier you purchase the better), or the level of interest in the product.
Often offered by print businesses, volume-based pricing model implies that the positive or negative change in pricing is conducive to the volumes ordered. For example, you might give a 15% discount on 500+ orders, and 20% discounts on 1000+ units. Volume-based discounts are so popular within the printing industry because some printing machines are not cut out to produce low volume orders, so when the customer places a low volume order the extra materials produced go to waste. In such situation, it’s easier for a printer to give the discount than allow for waste to occur.
Razor and blade model
This pricing model is used for physical products. You usually pay a small price for the product but the replacements needed for the correct functioning of the product are purchased separately. Ink-jet printer brands often use this pricing model. With razor and blade model you need to ensure that the initial offer is lucrative enough to lure people in. You also want people to understand that buying original components is a must.
Monthly subscription fee pricing
Pricing models change as new products get created and people keep innovating. Recently, Lyft introduced a new monthly subscription plan. Passengers can get up to 30 rides on the Lyft’s $199 monthly subscription plan. This pricing model is a mix of software subscription pricing model (tiered-based pricing) and volume-based pricing, only instead of a certain number of different features you get a certain number of similar services.
This is a general overview of the most popular pricing models, however, not all of them can be applied to your business. There are pricing strategies that work for software products only as well as models that work for physical products only. But with due research and deep understanding of your product, you can find the model that will be appealing to customers and have a positive impact on the bottom line.