What are the pricing models and key strategies? Which will work for you?
This is 3rd article on Pricing, it would be great if you read 1 and 2 but these are independent ones on a connected theme so you can skip too.
Introduction
Launching a new product isn’t just about creating something that looks good or functions well; it’s also crucial to determine the right pricing. The various pricing terms and strategies overwhelmed me while setting up our new product. The real test came when I was asked to devise a pricing strategy. That was my wake-up call to delve deep into pricing models and strategies, exploring how to set prices effectively.
Understanding Pricing Models
A pricing model is a company's strategy to price its products or services. Ensuring the price is right for both the business and the customer is essential. Learning about pricing models helps a company attract customers, support business growth, and ensure profitability.
Common Pricing Models Explained
- Freemium Model
Basic services are free, but advanced features cost extra. This model lets customers try and then buy, increasing their likelihood of upgrading as they get attached to the product.
Reverse trials let users start with all paid features and then keep using basic features for free if they don’t upgrade. This helps more people try the product and keeps them interested, which might lead to them buying features later. Companies use tools to watch how people use the product and improve their plans. - Cost-Based Pricing
Add up the production costs, work on a margin, and set the price by adding them both. It’s straightforward — spend 99 rupees to make something, sell it for 100 rupees, and enjoy that 1 rupee profit. - Value-Based Pricing
Prices are set based on how much customers believe the product is worth. Brands like Apple thrive here, charging premium prices because of customers' trust and value in their brand. - Growth-Based Pricing
Popular in the tech industry, this model adjusts prices based on customer usage or business growth, making it flexible and scalable.
How Companies Sell Their Products
Understanding different sales strategies helped me see how companies ensure their pricing is competitive and effective:
- Licensing
Companies charge a fee for the right to use their product or software for a certain period, with renewal options. For instance, Adobe Creative Cloud requires a subscription to access its software. - Competitive Pricing
Setting prices slightly lower than competitors to attract more customers. For example, if competing coffee shops charge $3 for a latte, setting your price at $2.75 might draw more coffee lovers to you. - Subscription-Based
Customers pay a recurring fee to access services. Netflix, for example, uses this model to provide continuous access to its streaming content. - Open Source with Paid Features
The core software is free, but money is made from advanced features or additional services. WordPress operates like this, offering a free platform with the option to buy premium themes and plugins. - In-App Ads
Apps generate revenue through ads, and users can often pay extra to remove them. Many mobile games use this strategy to offer free gameplay while displaying ads. - Flat Subscription/One-Time Payment
Users pay once for lifetime access or a long-term subscription. Microsoft Office once allowed users to purchase its software with a one-time payment. - Per User/Per Seat Pricing
Pricing is based on how many people are using the service. Salesforce, for instance, charges businesses per user. - Traffic-Based Pricing
Prices depend on how much the service is used, like web hosting services that charge based on traffic. - Brokerage Pricing
Taking a cut of transactions processed through the platform, as seen with eBay, which takes a percentage of each sale. - In-App Purchases
Users can buy additional features within an app. Games like Candy Crush allow players to purchase extra lives or items.
Choosing the Right Pricing Strategy
Choosing the right pricing strategy isn’t just about picking one model; it’s often about combining several strategies based on your market, customer behaviour, and product type. Here’s how to decide what might work for you:
- Understand Your Cost Structure: Knowing your costs is crucial before setting prices. It ensures that no matter your pricing strategy, you’re covering your costs and making a profit.
- Know Your Customer: Understand what drives your customers — whether it’s value, convenience, or exclusivity. This knowledge can help you decide between models like freemium or premium pricing.
- Consider Your Competition: Look at how your competitors are pricing similar products. Competitive pricing can be a good choice if you’re entering a crowded market.
- Evaluate Long-Term Goals: Consider whether short-term revenue or long-term customer loyalty is more important to your business strategy. This decision will influence whether subscription models or one-time payments are more suitable.
Combining different models can often lead to the most effective pricing strategy. For example, you might use a freemium model with additional in-app purchases or combine subscription-based pricing with per-user charges.
Conclusion
Pricing is more than just a number; it’s a strategic tool that can attract customers, grow your business, and ensure sustainability. As we continue to refine our approach to pricing, we’ll focus on tailoring our strategies to meet both customer needs and business objectives effectively. Stay tuned for our next segment, where we’ll explore real-world examples and further refine our pricing tactics.
