Pricing your products or services accurately is one of the greatest challenges you are going to face as a business owner or manager. The importance of pricing is obvious, as it has a direct correlation to the amount of money you bring into your company. 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 are able to make plenty of sales. In the end, only companies who are able to find the ‘sweet spot’ for pricing will be able to thrive well into the future.
For that reason, it is a good idea to use advanced pricing models to settle on a price point that makes sense for your market and your products. It doesn’t really matter what you would like to sell your products for – it only matters what customers are willing to pay.
Finding that number is a complicated task in many cases, which is why we have compiled the list of pricing models below. Review these options and use the ones that are going to help you find the perfect number to attach to everything you sell.
This is perhaps the most-common way to price the products that you take to market. 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, imagine you are in an industry which tends to sell products for around 3 times the cost of production. If you have determined that your average cost on one unit is $10, you will naturally look to sell the item for around $30 (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 $30, you may decide to move down to $27 or $28 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 $35.
As the name would indicate, this pricing model is all about the market conditions that you find around you. Fortunately, in the internet 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 a product that falls well outside the market norms for pricing is always going to be an uphill battle, so the market pricing model is a smart one to use.
It is worth noting that using a market pricing model doesn’t mean you always have to be the lowest priced product available. In fact, you might intentionally decide that you want to be the most expensive version of a specific type of good. 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.
This is a great model to use if you are offering a service – or, more specifically, a selection of services. In the portfolio pricing model you are going to set up a pricing structure 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 service for less money would never make sense to your audience, so keep the portfolio pricing model in mind when structuring your overall price strategy.
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). Obviously you can’t use this model if you are in the business of selling sandwiches or something similar, but the freemium plan can work perfectly for some industries.
There will always be a feeling of nervousness when you take a new product, with a new price, out to market. Even with the use of great pricing models you can never be quite sure how consumers are going to react. To give yourself the best possible chance at success with your pricing decisions, be sure to consider the use of some of the models listed above. Also, remember one key thing with regard to pricing – your prices can always be changed. If your first decision was not spot on, feel free to adjust as you go until you settle on a price that strikes a balance between affordability and profit margin. 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.
You can read more about Pricing Models in our free eBook ‘Top 5 Marketing Models’. Download it now for your PC, Mac, laptop, tablet, Kindle, eBook reader or Smartphone.
- Pricing your products or services accurately is one of the greatest challenges you are going to face as a business owner or manager.
- Cost based pricing is a pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price.
- A product’s market price lies at the point of intersection between the available supply of the good or service and market demand for it.
- Portfolio pricing involves an attempt to maximise the revenue from each customer by making it attractive to buy a full range of products or services.
- Freemium is a pricing strategy by which a product or service is provided free of charge, but money is charged for proprietary features, functionality, or virtual goods.
- Pricing is not an exact science and initial pricing decisions may need to be changed in the light of experience.