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5 pricing models and how to find the right one

Learn how to choose the right pricing model and maximize your profits.

Determining prices for your products and services can be a difficult task. If your prices are too high, you’ll lose out on sales. If they’re too low, you’ll lose revenue and profit. But you don’t have to resort to guesswork to price your products. There are pricing models and strategies you can employ to discover the best prices for both your customers and your company.

A pricing model is how your pricing strategy is presented to your customers. It is basically a detailed design for executing your pricing strategy.

While intertwined, pricing strategy and pricing models are two different concepts. Both are necessary to provide your customers with effective pricing.

A pricing model is the way you implement your pricing strategy. There are several types of pricing models to choose from. Keeping your pricing strategy in mind, your model should consider: how it relates to your buyer personas, whether you will offer multiple plans, and what features are offered at each level.

Your business may use a variety of pricing models for different products or use more than one model to maximize profits. We will discuss some of the most common models in a moment.

A pricing strategy is your high-level plan for setting the best prices for your products and services, keeping in mind production cost, your customers’ perception of the product’s value, the type of product, and whether you’re selling a product or service. The pricing strategy you choose may vary from one product to the next, and it will likely change over time.

Pricing strategies include:

  • Penetration pricing: launching a new product with low prices and realigning when a customer base is established
  • Premium pricing: pricing an item higher to boost its perceived value
  • Price skimming: charging a higher price when a product is new on the market and then reducing it later to appeal to those with higher price sensitivity
  • Bundle pricing: grouping several items together and offering them at one price so that customers perceive that the value is greater than the price
  • Loss-leading: selling new products at a heavily discounted price to gain customer attention. The loss is recouped on other items with better margins, presented to customers gained by the loss-leading strategy.

Pricing is a key factor in many purchasing decisions. Choosing the right pricing model portrays value to your customers. “Cheap” may mean a lower price, or it could indicate poorly made products. Consumers associate low prices with low quality. Make sure your pricing model reflects the value of your products.

Here’s where balance comes in. If your price is too high, potential customers won’t be willing to pay. Your ideal price is one that customers are willing to pay, that shows value, and convinces them to purchase the product over the competition.

The consequences of a weak pricing model include sending the message that your product does not offer high value, making potential customers feel uncertain about making a purchase, and targeting the wrong customers for the chosen pricing model.

The right pricing model portrays value, convinces customers to buy, and gives them confidence that they are making the right decision buying from you. Remember, effective pricing builds trust with your customers as it supports your business goals. 

Choosing the right pricing is critical for driving value for consumers. For example, with tiered pricing, customers can choose the tier that provides them with the most benefits specific to their needs. This allows businesses to gain customers who perceive value at different price points. 

Before you can establish a pricing strategy or choose a pricing model, you need to establish a foundation for your pricing decisions. A price optimization study is the best way to find the best price point for a product or service.

Use the Momentive Van Westendorp Price Sensitivity solution to find out what customers perceive as an acceptable price for your product, what price point is considered too high, and the optimal price range. Expert researchers will help design and analyze your pricing study, considering only the highest-quality data and removing low-quality respondents from the data set.

There isn’t a way to choose a pricing strategy without conducting market research on your competitors. You need to know their offerings, strengths and weaknesses, and pricing. You’ll use the data to decide if you’ll beat your competitors’ prices or value as you enter the market. 

Look at both direct competitors, who sell exactly the same product as you and indirect competitors who sell a comparable alternative product.

Find out what customers are willing to pay at different price points, purchase frequency, predicted churn, and predicted customer lifetime value.

Your research will help you determine what will appeal to your customers in the long run. 

Some pricing strategies to research include:

  • Multi-step discounts: the more the customer purchases, the higher the percentage discount
  • Time-based discounts: the discount increases if, for example, a subscription is purchased for three years rather than one
  • Time and loyalty discounts: a longtime subscriber receives incentives for signing up for automatic renewal or new services added to their subscription
  • Price guarantees: guarantee that your product is offered at the absolute lowest price and offer to refund the difference if it is found cheaper somewhere else

There are many pricing models you can choose from. Here, we discuss five of the most common models and when to use them.

  1. Freemium

The freemium (a combination of the words “free” and “premium”) pricing model involves offering a free version of your product with opportunities to upsell your customers to a paid version. Some freemium services offer incentives for referring customers.

A great example of the freemium pricing strategy is Spotify. You can listen to music and podcasts free of charge, but you must listen to periodic commercials and can only skip a limited number of songs when listening. Premium paid plans include ad-free listening, offline play options, and multiple accounts at a discounted price. Some customers are satisfied with the free tier, but many have upgraded.

Another example of freemium pricing is the free trial. Many streaming services offer seven-day free trials for customers to watch their programming. Customers can do nothing and pay for continued service use or cancel before the seven-day limit.

The main purpose of the freemium model is to attract new customers, usually to a digital product. Your product must appeal to mass markets—it should be easy to understand and offer an excellent user experience. You also must be able to balance your resources until your initial freemium customers upgrade. And you need to be able to analyze your data accurately to assess what features should be offered free and what should be gated for premium users.

  1. Tiered subscription

Tiered subscriptions offer customers multiple options and flexibility depending on their needs. Going back to our Spotify example, there are five subscription tiers. The first tier is free, which is why we discussed it as a freemium model. There are then successive tiers for individual users, duos, families of up to six accounts, and heavily discounted student plans. (Students also receive an ad-supported subscription to Hulu as well as Showtime streaming services.)

Tiered pricing appeals to a wider, more diverse range of customers. It is usually associated with digital services that can be customized to meet the needs of a range of target markets. 

  1. Flat-rate subscription

In a flat-rate subscription model, users pay a set price on a regular basis. This is also known as fixed pricing. Basically, this model offers a single product with a fixed set of features at a set price each billing cycle. For example, if your company offers a product management tool, you may charge $125 per month for unlimited projects. 

Flat-rate subscriptions work best for products with limited features and one buyer persona.  

  1. Bulk pricing

In the bulk pricing model, the price decreases as the volume of goods or services increases. This is also known as volume pricing. It is straightforward and simple to understand. It encourages large orders by offering higher discounts for higher volume purchases. For example, stock image businesses use volume pricing for their downloadable digital products. Users can choose packages based on the number of images and videos they want to download. 

Bulk pricing is most often used in business-to-business (B2B) sales and wholesale.

  1. Market pricing

In the market pricing model, the price of the product fluctuates according to supply and demand. This means you need to know what competitors are charging for similar products so that you can align your price with theirs. This model is linked to the product lifecycle. This model does not consider the customer. It is based solely on your competitors and market saturation.

Examples of market pricing include the automotive industry, smartphones, and streaming services. 

Use market pricing when your product is comparable to your competitors’ products. This gives you an accurate price point to work with. You’ll have to position your product as having superior value to remain competitive.

Your ideal pricing model is dependent on the type of product you’re selling, what your customers are willing to pay, and what value your product offers. Choose the right pricing model to ensure sales success.
The basis for a good pricing strategy and pricing model is research. Start with pricing optimization research from Momentive today to find out exactly what your customers are willing to pay for your product!

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