TL;DR
- As you ponder over the right pricing model for your product or service, it's essential to grasp that there's no one-size-fits-all solution.
- Explore the nuances of different pricing models, highlighting how each can cater to various aspects of your business and customer expectations.
- From the simplicity of flat-rate subscriptions to the flexibility of tiered and pay-as-you-go models, and the strategic use of freemium, bulk, per-user, and market pricing models, understanding these options is crucial.
- The choice of a pricing model is a strategic decision that impacts your product's market positioning, customer perception, and ultimately, your revenue.
- Factors such as your product's unique value, competitive landscape, and customer base's price sensitivity play a pivotal role in this decision.
- In-depth research and understanding of customer goals and ability to pay are crucial for merging product value with a successful pricing strategy.
- By carefully analyzing these elements, you can select a pricing model that not only attracts customers but also drives profitability and long-term success for your business.
What’s a Pricing Model?
What price to charge? This is the ultimate question every business owner asks when rolling out a new product or service.
Pricing models are a dime a dozen. There is no one-size-fits-all approach. An approach that suits one product may not work for another product. Hence, you cannot pick one out of the fluke. You need to pick the right one that suits your product and business needs. In order to set your prices correctly, you should consider how much value your product will deliver to your customers.
So, let’s circle back to the question: What is pricing model? A pricing model is how your pricing strategy is presented to customers. The model is a detailed design that should be based on the following:
- Your buyer personas
- Your multiple-plan offerings
- Features offered at each level
Nevertheless, businesses can use multiple pricing models to maximize profits for different products. In the pricing world, pricing models are often misquoted for pricing strategies and vice versa. It’s time to make one thing clear: Both terms mean different things.
Pricing Strategies Vs. Pricing Models: How Different Are They?
- A pricing strategy is a method for setting the price points for your offerings. The term pricing model refers to a pricing format which is all about how you package and offer your services and products to customers.
- Pricing strategies are internal to your business. Pricing models are external and aimed at customers.
The art of pricing is about arriving at a pricing point that creates a win-win situation for everyone involved. Eventually, the right pricing works both ways. It must be at a point where your customers are willing to pay and should also bring in profitable revenue and business success.
Pricing Decisions: What Makes it Important to Get Them Right?
Pricing is like walking a tightrope. It directly impacts a company's revenue. Setting the right price ensures that you are maximizing your revenue potential by capturing the value customers are willing to pay for your product or service. Pricing too high may deter potential customers, while pricing too low may leave money on the table.
Customers have a mindset that products with lower prices may be low in quality. Also, fixing a low price itself could indicate poor quality. Does that mean you can fix high prices? Not likely. Not all customers will find a high price attractive. Even those who want to make the purchase will not be ready to pay exorbitant prices.
A well-calibrated pricing strategy allows you to position your product or service effectively against competitors. Pricing that offers a compelling value proposition while remaining competitive help attracts and retain customers, especially in a saturated or price-sensitive market.
Setting prices that adequately cover your costs and generate profit margins is essential for the long-term sustainability and growth of your company.
For these reasons, you must find the right pricing model to showcase your product value. The price should convince your customers to make the purchase and make them feel like they’ve made the right choice. Also, they should feel like they made the right decision to choose your product instead of your competitors. That is why your pricing strategy should benchmark against that of your competitors. It is vital that you know what they are charging for similar products. Ultimately, a good pricing will foster trust with your customers and support your business objectives.
Let’s unravel some of the types of pricing models used by some well-known products.
Top 7 Pricing Model Examples to Understand How Pricing Models Work
1. Flat-rate subscription model
Also known as fixed pricing, it is the least complicated pricing model where the users pay a fixed price on a regular basis. This model is often used for a single product with limited features.
Example: An unlimited project product management tool may cost $125 per month. The price is fixed, and the customer pays the same price every month to use the tool.
2. Tiered pricing model
Tiered pricing suits many businesses because it allows you to customize the packages to meet various target audiences. In the tiered pricing model, there are multiple packages with various feature combinations. Each package is priced differently, keeping in mind the different buyer personas.
Examples: Most companies that offer consumer goods use the tiered pricing model. It is also the most preferred model for streaming services, SaaS companies, and makers of apps, mobile games, and videos.
3. Pay-As-You-Go pricing model
Also known as the usage pricing model, it charges the customer based on how much they use the product or service. Since the price goes up and down along with the usage, it makes sense to correlate your charges accordingly. The scalability of this model makes it ideal for businesses with a volatile demand for their offerings.
Example: Cloud storage service providers and phone carriers can use the pay-as-you-go model. The former can be charged on the amount of storage used, and the latter can be based on the number of minutes used.
4. Freemium model
As the name implies, this model offers either Free or Premium options. It is needless to explain that the free option comes free of cost with limited product features and capabilities. In the Premium option, users pay a fee for additional access to features, usage, etc.
Example: LinkedIn, the social media platform, is available at Freemium plans. The Premium plan is available at a fixed price with more benefits. Users can start using the platform for free, and once they are happy, they can upgrade to Premium if they wish to gain more insights and benefits.
5. Bulk pricing
Also termed Volume Pricing, the price of the product or service decreases as the volume increases. The pricing model is designed to encourage large orders by offering high discounts for higher-volume purchases.
Examples: Stock image businesses rely on bulk pricing to sell their downloadable digital products. Users can pick the package they want according to the number of videos and images they wish to download.
6. Per-user pricing
Per-user pricing has different costs based on the number of people using the product or service. An individual user will pay a fixed price for a month. When they add more users, the package price will increase substantially.
Examples: Software companies like Salesforce offers various customizable plans based on the feature requirements and user count. The plans are:
- Essential
- Professional
- Enterprise
- Unlimited
7. Market pricing model
The market pricing model relies heavily on supply, demand, and market saturation. You need to know what your competitors charge for similar products so that your price point aligns with theirs.
Example: Smartphone manufacturers, streaming services, and automotive industry players rely on the market pricing model to sell their goods and services.
With so many pricing models to choose from, how will you know what’s the best one for you? It requires a lot of groundwork and research.
Also Read: Top Guidelines to Understand & Implement Dynamic Pricing in SaaS
Choosing a Pricing Model: 6 Aspects to Consider to Pick the Right One
1. Value metric
A value metric is what you charge your customer for, such as per GB usage, per seat, per call, per API usage, per unit of electricity, etc. Different pricing models have different value metrics.
2. Your product
Rather than a flat-rate pricing model, consider a tiered model with add-ons if you can easily sell more of your product or service. It may be possible to combine two models in a hybrid price point, depending on what you sell. Also, consider the flexibility and scalability of your pricing model. Evaluate whether it can accommodate changes in customer demand, market conditions, or business growth.
3. Customer base
It takes a lot of research to understand your target audience and their expectations. You need to understand their considerations and what price points will work for them. Anticipate how your target customers will perceive and accept the pricing model. Consider their price sensitivity, value expectations, and purchasing behaviors. In order to do so, segment your target market based on customer characteristics, needs, and willingness to pay.
4. Your competitors
Your competitors are a vital parameter to help in choosing your pricing model. A comprehensive competitor analysis will tell you what your competitors are charging for similar products in the market. You can also identify gaps that are yet to be filled by your market competitors.
5. Your costs.
Take into consideration the cost of your goods and services. How much did it cost you to bring them to fruition? It may be one of the last considerations, but your pricing model must include fixed and variable costs.
6. Your time
Choosing a complex pricing model will not only cost you resources but also your valuable time, which you will also need to consider when setting your price points. If your strategy is time-bound, you will need to consider the following:
- For how long will you adopt the approach?
- The impact on your profits for that specific time period.
Let’s Conclude
While there are different pricing models, the ideal choice will be driven by factors like:
- Your product type
- Your customer’s willingness to pay
- Your product value.
For all this to merge into a successful pricing strategy, you need to do in-depth research. Ultimately, your chosen model should match your customer’s goals and ability to pay when they want your product.
Understanding pricing models can be a tricky process. However, you can rely on Togai, the pricing implementation platform, to know how it works. We can help you implement any pricing strategy 10x faster! Schedule a demo today to get started.
