pricing-strategies

Pricing Strategies And Models To Enable Your Business Model

A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Pricing strategy and revenue modeling

revenue-modeling
Revenue modeling is a process of incorporating a sustainable financial model for revenue generation within a business model design. Revenue modeling can help to understand what options make more sense in creating a digital business from scratch; alternatively, it can help in analyzing existing digital businesses and reverse engineer them.

A revenue model is a key component of a business model. When that becomes scalable, it also makes the whole business sustainable. That is why, figuring out how you will make money is a key part of the future success for your organization.

Where many tech companies do not stress over revenue generation, early on, once the product has been validated by the market it will need to become financially sustainable.

For that, pricing strategies and patterns can help figuring out a revenue model that works. The pricing patterns below can be used to build up a viable business model.

AppSumoed: transforming subscriptions in lifetime deals

appsumo-business-model
AppSumo partners up, usually with SaaS (Software as a Service) companies and offers life-time deals only available on its platform, for a limited time.

If you know AppSumo, that is among the most popular deals platforms in the SaaS space. AppSumo takes a company with a subscription revenue model, transforms it (only for its platform) in a lifetime deal, thus making it a no brainer for its audience to purchase the deal.

This sort of pricing strategy can be effective at launch. When you have a product and a brand that none knows, leveraging on this sort of pricing strategy can:

  • Help you feature your product on deals platforms which can amplify it in a very short time frame.
  • Enable a large number of users to join an entry product, thus prompting those users to convert in higher-paying tiers over time.
  • Making possible to gather feedback by a large number of initial users, thus helping them refine your product.

Thus, at launch it can be a good pricing strategy also for software products (which require continuous updates and support). However, that is not suited as a long-term pricing strategy.

It’s instead a good long-term strategy only for those products not requiring many updates over time (digital products, one-time services).

Auction: the winner takes it all

In an auction pricing strategy, two or more people bid on a product, and the product gets sold to the bidder who offers the most.

As highlighted on eBay’s website:

In an auction-style listing, sellers name a starting price and you bid against other buyers. You can watch the item to see how the bidding is going. When the listing ends, the highest bidder wins the item and completes the purchase.

ebay-business-model
eBay core business is a platform business model that makes money from transaction fees happening through its marketplaces (eBay and StubHub). eBay also makes money through advertising on its classifieds marketplace and other services. The company primarily makes money by charging fees on successfully closed transactions.

The auction makes sense in eBay’s case as the company is a marketplace (or platform business model) that succeeds in turning a revenue when sellers and buyers can close the bidding successfully.

Auction can be a good pricing strategy in a few circumstances:

  • Fast-changing inventory: the bidding system is successful as it enables a quick turnover of inventories, which in turn can drive more people on the platform as they are always on the look for new, exciting stuff.
  • Curated goods: this sort of system might also be very suited for platforms enabling transactions of goods which are harder to find anywhere else.
  • Maximized value: when the platform is highly curated and the items are well selected, the transaction value can be driven up by the fact that buyers are willing to pay more for those objectives they are looking for (collectors are willing to pay more).

Thus, in this scenario, this sort of system would work. In other cases, though, if the platform sells regular stuff, available anywhere else, it might make less sense.

Bundled: more for less

Bundling consists of grouping a set of products and services, more conveniently priced, of if they were priced singularly. Thus in the bundle, they cost more than the single product, yet overall way more convenient.

For instance, a single pen sells at $1. A bundled package of ten pens, each with a different color, can be bundled and sold at just $5. The customers pay more in absolute number, yet less in relative number, and they can get more variety.

Your margins are reduced, yet you also make the offer more attractive, and you can sell more, based on volume. Thus, the advantages of bundling are:

  • Amplify the reach of the product.
  • Expand the customer base.
  • Make the product more accessible.
  • Test pricing variations of otherwise products that get sold singularly.
  • Experiment with product variety.
  • Use the best selling products to push otherwise less known products.
  • Create higher-ticket, yet convenient offers.

Therefore, bundling can be a powerful pricing strategy. Yet, it needs to be tested carefully, as the risk is to dilute the core product offering. As companies build up distribution power in a market, they bundle up products in adjacent and complementary markets.

Consumption-based: pay what you consume

In a consumption-based model, customers only pay when the product gets used. This is usually well suited for those services or products that require continuous usage. For isntance, cloud services are primarily charged on a consumption-basis. This pricing model is the oppositve of a recurring model where certain resources are comprised indipendently from their usage.

For instance, you pay your Netflix subscription whether or not you watch it. Yet you also pay a convenient price, as if you do watch it as you could potentially watch the full library of content.

Customers usually like consumption-based, especially on a B2B, as this doesn’t create lock-in or overheads, and businesses only get charged if they do use it.

Couponized: discounted as default

In a “couponized” scenario, the platform acts as a sort of deal platform, where you can find as default continuous discounts. For instance, e-learning platforms like Udemy leverage on aggressive coupon strategies to enable a large number of people to join in. Also, a platform like Groupon built a whole business model on matching people with businesses offering coupons for the services offered.

While coupons can be a great way to attract more customers (we all like to save or feel like we’re saving money), and you can build a whole business model around coupons. Companies that offer a wide variety of products, or connecting a large number of sellers with potential buyers, can use coupons effectively.

Fixed-price: the safe price

In a fixed-pricing pricing strategy, the company “promises” to keep the same pricing level forever, thus assuring customers about the potential future market fluctuations.

While fixed-pricing can be great to attract a larger number of customers, at the same time, it might not scale well. Indeed, fixed pricing is just the opposite of a dynamic pricing strategy where pricing can vary according to demand and offer and the company, so the offer and demand of those services can adjust accordingly.

Pay-as-you-go: charge it up and go

In a pay-as-you-go pricing strategy you can enable customers to prepay for a cerain level of service, to be used at their discretion. In this sort of pricing model, flexibilty is the key advantage for the customers, as the service can be used within a time frame.

Pay as you want: customer-made pricing

In a pay-as-you-want model, customers make the price. This sort of strategy can be useful when launching a service that can have highly variable pricing, given its low marginal costs, thus making it possible to make an informed guest (driven by customers’ feedback) on whats the best pricing for that product. in short, rather than guessing you can just see what most customers pay for that product and price accordingly.

Beware though, pay as you want might work only in certain circumstances. For instance, if you apply the pay as you want formula, for customers who already know you, they might use it fairly and not against you (to get it for free).

In addition, pay as you want might be a good strategy to launch a product, as feedback (make sure though to set a minimum price) to know how much people would feel comfortable paying. Or a pricing strategy applied to a limited set of customers and conditions (for instance, to give back to lower-income customers), but make sure to prevent cannibalizing your existing customer base.

Platformed: get a cut on one or both sides

In a platform business model, you can make money either by charging a single side of the platform (LinkedIn charges recruiters) or by collecting a fee from both (Airbnb earns a commission from both hosts and guests). When you develop a successful platform, where people can transact with each other, you have the potential to charge on both sides or perhaps evaluate which side is willing or able to Austin the cost of the transaction in exchange for a continuous stream of customers.

airbnb-business-model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. Due to the pandemic, Airbnb is stretching its business model and experimenting with new formats like online experiences to transition toward fully digital experiences.

Psychological pricing: change the product’s perception

In a psychological pricing strategy, rather than changing the physical nature of the product offered you can leverage on psychological elements to carve the perception around your product. Some examples are time constraints (offers for a limited time), others are based on using the “9” at the end (for instance, use $1.99 rather than $2, as it might give the perception of a less expensive option).

More than a pricing strategy this is a tactic to be used whatever pricing option you choose as it can help you change the perception of your product by using only psychology. The key here is experimentation also based on what psychological tactics are been used by others. Model after them and test.

netflix-pricing-tiers
See also how companies like Netflix use psychological pricing to their packages.

SaaSified: transform a product into a service

In the SaaS industry, most software are sold as subscription services. This model proved viable as it enabled those companies to keep investing in continuous updates of the software, bug fixes, and the willingness to keep improving the product thanks to customers’ feedback.

wework-business-model
WeWork defined its revenue model space-as-a-service claimed to be more scalable than a traditional commercial real estate.

With a bit of thinking and tweaking, almost any product can be transformed into service. The advantage is that of creating a continuous relationship with customers while creating a more stable revenue stream.

Of course, continuous service requires an important investment in product development. And a great customer support team.

Subsidized: let the rich pay for the poor

In a subsidized pricing strategy, there is a set of customers who pay for all else. This sort of pricing strategy makes the product free for most customers, while the premium for others. It can take the form of various revenue streams from freemiums (where only a small percentage pays for the premium service, while most users will pick the basic, free service) to sponsorships (where a small number of sponsors pay to make the service available to a large segment of people who don’t pay for it).

freemium-business-model
Companies like MailChimp leverage a freemium offering as they have a stable and strong customer base able to sustain the free offerings for accounts that might never convert in paid customers.

Uberized: dynamic pricing

dynamic-pricing

Dynamic pricing is the practice of having multiple price points based on several factors, such as customers segments, peak times of service and time-based consumption that allow the company applying dynamic pricing to make the transactions on the platform more scalable.

Indeed, with dynamic pricing, demand and supply can adjust accordingly. For instance, if suddenly there is way more demand for a ride at a time of the day where fewer drivers are available, the price surges, thus making it possible for the few drivers left to accept the ride, as they can gain more.

This pricing strategy can work pretty well in case of service offered that can go through high volatility in terms of demand and offer, thus making it possible to scale revenues even when the volume of transactions grows exponentially.

Unbundled: let them get what they want

In an unbundled scenario, rather than trying to lock in with a higher-priced product bundle, the company can make available the only product people want the most.

For instance, Apple iTunes unbundled CDs, by enabling people to purchase single songs, which finally gave people the option to get only what they wanted, rather than purchasing the whole CD.

unbundling
Unbundling is a business process where a series of products or blocks inside a value chain are broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keep those that in a period in time consumers value the most.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here