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
That is why figuring out how you will make money is a key part of the future success of 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 figure out a revenue model that works.
The pricing patterns below can build up a viable business model.
AppSumoed: transforming subscriptions in lifetime deals
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 and transforms it (only for its platform) into a lifetime deal, thus making it a no-brainer for its audience to purchase the deal.
- Help you feature your product on deals platforms which can amplify it in a very short time frame.
- Enable many users to join an entry product, thus prompting those users to convert to higher-paying tiers over time.
- It is possible to gather feedback from many initial users, thus helping them refine your product.
Thus, at launch, it can also be a good pricing strategy 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.
The auction makes sense in eBay’s case as the company is a marketplace (or platform business model) that succeeds in turning revenue when sellers and buyers can close the bidding successfully.
The 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 can drive more people on the platform who are always looking for new, exciting stuff.
- Curated goods: this sort of system might also be very suited for platforms enabling transactions of goods that 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 buyers’ willingness 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, it might make less sense if the platform sells regular stuff anywhere else.
Bundled: more for less
Bundling consists of grouping a set of products and services, more conveniently priced 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 numbers, yet less in relative numbers, 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 instance, cloud services are primarily charged on a consumption basis. This pricing model is the opposite of a recurring model where certain resources are comprised independently from their usage.
AI business models, as well are developing around this pricing mode.
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
For instance, e-learning platforms like Udemy leverage aggressive coupon strategies to enable a large number of people to join in.
While coupons can be a great way to attract more customers (we all like to save or feel like we’re saving money), you can build a whole business model around coupons.
Companies that offer a wide variety of products, or connect many 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 for attracting 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 certain level of service to be used at their discretion.
In this pricing model, flexibility 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 with highly variable pricing, given its low marginal costs, thus making it possible to make an informed guest (driven by customers’ feedback) on 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.
However, pay as you want might work only in certain circumstances.
For instance, if you apply the pay-as-you-want formula to 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 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 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.
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), and 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.
SaaSified: transform a product into a service
In the SaaS industry, most software is sold as subscription services.
This model proved viable as it enabled those companies to keep investing in continuous software updates, bug fixes, and the willingness to keep improving the product, thanks to customers’ feedback.
Almost any product can be transformed into a service with a bit of thinking and tweaking.
The advantage is creating a continuous customer relationship and 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, a set of customers pay for everything else.
This pricing strategy makes the product free for most customers while 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).
Uberized: dynamic pricing
Dynamic pricing is the practice of having multiple price points based on several factors, such as customer segments, peak times of service, and time-based consumption, that allows the company to apply 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 the case of services offered that can go through high volatility in 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.
Pricing Strategies and Revenue Models:
- Pricing Strategy and Business Model Alignment: A pricing strategy serves as a crucial bridge between a company’s offerings and its business model. By setting the right prices for products or services, companies aim to strike a balance between meeting customer needs and generating sufficient profits. This alignment ensures that customers find value in the products while the company achieves its financial objectives.
- Importance of Revenue Modeling: Revenue modeling is the process of designing a sustainable financial model for revenue generation within a business. It involves understanding how different pricing strategies and monetization methods contribute to the overall financial health of the company. Successful revenue models not only support the company’s operations but also enable investments in growth and innovation.
- Revenue Model and Business Sustainability: In the context of digital businesses, a solid revenue model is crucial for long-term sustainability. While startups might prioritize user acquisition and product development initially, a point comes when the business must become self-sustaining financially. Revenue models guide how a company generates income, ensuring it can cover operational costs and continue delivering value to customers.
- Various Pricing Patterns:
- AppSumoed (Lifetime Deals): The AppSumoed strategy involves partnering with other companies to offer limited-time lifetime deals. This approach can create a surge in user adoption and provide feedback for product refinement. However, it might not be suitable for long-term profitability, especially if the product requires continuous updates and support.
- Auction Pricing: The auction pricing strategy, as seen on platforms like eBay, enables dynamic price discovery through competitive bidding. It’s effective for products with rapidly changing inventory or unique items that attract collectors. The auction model aligns well with platform businesses that connect buyers and sellers.
- Bundling: Bundling combines multiple products or services into a package that offers convenience and perceived value to customers. It’s advantageous for expanding customer reach, increasing sales volume, and experimenting with product combinations. However, careful consideration is needed to avoid diluting the core offering.
- Consumption-Based Pricing: Consumption-based pricing, commonly used in cloud services, charges customers based on their actual usage. This model is well-suited for services that require continuous engagement, enabling customers to pay only for what they use. It aligns with customer preferences for flexibility and cost-effectiveness.
- Couponized: The couponized strategy involves offering continuous discounts to attract price-sensitive customers. This approach can be effective for platforms with a wide range of products or services, as it appeals to customers seeking deals. However, relying solely on coupons may impact perceived product value over time.
- Fixed-Price and Pay-As-You-Go: Fixed pricing assures customers of consistent costs but may not accommodate dynamic demand or market changes. Pay-as-you-go models provide flexibility for customers to use services as needed, making them suitable for scenarios where usage patterns vary.
- Pay-As-You-Want: The pay-as-you-want model empowers customers to choose the price they are willing to pay. It can be useful for gathering pricing insights and launching products with uncertain value perception. However, careful implementation is required to prevent misuse.
- Platformed: Platform businesses can generate revenue from one or both sides of transactions. This approach depends on the value proposition for each side and the willingness to pay. Successful platformed models create a sustainable ecosystem where users find value and are willing to engage.
- Psychological Pricing: Psychological pricing leverages human cognitive biases to influence buying decisions. Tactics like time constraints create a sense of urgency, while using prices ending in “9” can make products appear more affordable. These strategies enhance the perceived value of products without changing their physical attributes.
- SaaSified: The SaaSified strategy involves transforming products into subscription-based services. This model allows companies to provide continuous updates and support, building long-term relationships with customers. It’s a common approach in the software industry to ensure ongoing revenue streams.
- Subsidized Pricing: Subsidized pricing involves offering products for free or at a lower cost to a large segment of users, with a smaller group of paying customers subsidizing the rest. This approach can be seen in freemium models or sponsorships. It’s a way to attract a wide audience while generating revenue from a subset of customers.
- Uberized (Dynamic Pricing): Dynamic pricing adjusts prices based on real-time demand and supply conditions. This strategy is effective for services that experience fluctuations in demand, enabling companies to optimize revenue during peak times. It aligns with customers’ willingness to pay more when demand is high.
- Unbundled Pricing: Unbundling involves offering individual components of a value chain as standalone products. This strategy caters to customers who seek specific features or services without paying for the entire package. Unbundling provides customization and flexibility while targeting different customer segments.
AppSumoed (Lifetime Deals)
- StackSocial: Promotes a variety of tech deals, from software to courses.
- Lifetime Deals: Platform offering lifetime subscriptions to various software tools.
- LTDFeed: Showcases lifetime offers from multiple sectors.
- Sotheby’s: Globally recognized auction house for art and collectibles.
- Christie’s: Another leading name in art auctions.
- Paddle8: Online auction platform for art and luxury collectibles.
- Microsoft Office Suite: Packages Word, Excel, PowerPoint, etc.
- Hulu/Disney/ESPN Bundle: Offers combined subscription to all three services.
- Cable TV Packages: Providers bundle channels together at different price points.
- Azure: Microsoft’s cloud service that charges based on consumption.
- DigitalOcean: Cloud infrastructure provider with a pay-as-you-use model.
- SendGrid: Email service that charges based on the number of emails sent.
- RetailMeNot: A leading savings destination for deals.
- Honey: Browser extension that searches for online discount codes.
- SlickDeals: Users share and vote on the best deals and coupons.
- Walmart: Retail products at set prices.
- McDonald’s: Fixed pricing for fast-food items across most locations.
- Apple Store: Products have a standard price across regions.
- Zipcar: Car-sharing service where you pay for the hours you use.
- Oyster Card (London): Pay-as-you-go system for public transportation.
- TracFone: Wireless service where you buy minutes as needed.
- Patreon: Creators receive donations/payments of any amount from fans.
- Humble Bundle: Customers can decide their price for bundles of games/software.
- Some Indie Games: Occasionally use a pay-what-you-want model for promotions.
- Etsy: Platform for sellers to offer handmade and vintage goods, charging fees.
- Fiverr: Freelancers offer services, and Fiverr takes a commission.
- Udemy: Instructors provide courses, and Udemy takes a share of the revenue.
- Gas Stations: Often price fuel at numbers like $2.99 9/10 per gallon.
- Retail Sales: Products might be priced at $49.95 instead of $50.
- Fast Food: Items priced at, for example, $4.99 instead of $5.
- Slack: Communication platform with monthly or yearly subscription pricing.
- Asana: Task management tool with a recurring fee for premium features.
- Zoom: Video conferencing software with a subscription model.
- Mobile Phones with Contracts: Carriers subsidize phone costs in exchange for long-term contracts.
- Kindle Special Offers: Discounted Kindle prices in exchange for viewing ads.
- Spotify Free: Ad-supported version that’s free for users.
Uberized (Dynamic Pricing)
- Amazon: Dynamic prices for products based on demand, availability, and competitors.
- Hotels.com: Hotel room prices that vary based on demand.
- Ticketmaster: Concert or event ticket prices may vary based on demand.
- A la Carte TV Services: Services like Sling TV let you choose individual channels.
- Airlines: Many now charge separately for baggage, meals, seat selection, etc.
- Modular Phones: Buy the base phone and then add on the features you want.
Expanded Pricing Strategies Explorer
|Pricing Strategy||Description||Key Insights|
|Cost-Plus Pricing||Markup added to production cost for profit||Ensures costs are covered and provides a predictable profit margin.|
|Value-Based Pricing||Prices set based on perceived customer value||Aligns prices with what customers are willing to pay for the product or service.|
|Competitive Pricing||Pricing in line with competitors or undercutting||Helps maintain competitiveness and market share.|
|Dynamic Pricing||Prices adjusted based on real-time demand||Maximizes revenue by responding to changing market conditions.|
|Penetration Pricing||Low initial prices to gain market share||Attracts price-sensitive customers and establishes brand presence.|
|Price Skimming||High initial prices gradually lowered||Capitalizes on early adopters’ willingness to pay a premium.|
|Bundle Pricing||Multiple products or services as a package||Increases the perceived value and encourages upselling.|
|Psychological Pricing||Pricing strategies based on psychology||Leverages pricing cues like $9.99 instead of $10 for perceived savings.|
|Freemium Pricing||Free basic version with premium paid features||Attracts a wide user base and converts some to paying customers.|
|Subscription Pricing||Recurring fee for ongoing access or service||Creates predictable revenue and fosters customer loyalty.|
|Skimming and Scanning||Continually adjusting prices based on market dynamics||Adapts to changing market conditions and optimizes pricing.|
|Promotional Pricing||Temporarily lowering prices for promotions||Encourages short-term purchases and boosts sales volume.|
|Geographic Pricing||Adjusting prices based on geographic location||Accounts for variations in cost of living and local demand.|
|Anchor Pricing||High initial price as a reference point||Influences perception of value and makes other options seem more affordable.|
|Odd-Even Pricing||Prices just below round numbers (e.g., $19.99)||Creates a perception of lower cost and encourages purchases.|
|Loss Leader Pricing||Offering a product below cost to attract customers||Drives traffic and encourages additional purchases.|
|Prestige Pricing||High prices to convey exclusivity and quality||Appeals to premium or luxury markets and enhances brand image.|
|Value-Based Bundling||Combining complementary products for value||Encourages customers to buy more while receiving a perceived discount.|
|Decoy Pricing||Less attractive third option to influence choice||Guides customers toward a preferred option.|
|Pay What You Want (PWYW)||Customers choose the price they want to pay||Promotes customer goodwill and can lead to higher payments.|
|Dynamic Bundle Pricing||Prices for bundled products based on customer choices||Tailors bundles to customer preferences.|
|Segmented Pricing||Different prices for the same product by segments||Considers diverse customer groups and willingness to pay.|
|Target Pricing||Prices set based on a specific target margin||Ensures profitability based on specific financial goals.|
|Loss Aversion Pricing||Emphasizes potential losses averted by purchase||Encourages decision-making by highlighting potential losses.|
|Membership Pricing||Exclusive pricing for members of loyalty programs||Fosters customer loyalty and membership growth.|
|Seasonal Pricing||Price adjustments based on seasonal demand||Matches pricing to fluctuations in consumer behavior.|
|FOMO Pricing (Fear of Missing Out)||Limited-time discounts or deals||Creates urgency and encourages purchases.|
|Predatory Pricing||Low prices to deter competitors or drive them out||Strategic pricing to gain market dominance.|
|Price Discrimination||Different prices to different customer segments||Capitalizes on varying willingness to pay.|
|Price Lining||Different versions of a product at different prices||Catering to various customer preferences.|
|Quantity Discount||Discounts for bulk or volume purchases||Encourages larger orders and repeat business.|
|Early Bird Pricing||Lower prices for early adopters or advance buyers||Rewards early commitment and generates initial sales.|
|Late Payment Penalties||Additional fees for late payments||Encourages timely payments and revenue collection.|
|Bait-and-Switch Pricing||Attracting with a low-priced item, then upselling||Uses attractive deals to lure customers to higher-priced options.|
|Group Buying Discounts||Discounts for purchases made by a group or community||Encourages collective buying and customer loyalty.|
|Lease or Rent-to-Own Pricing||Lease with an option to purchase later||Provides flexibility and ownership choice for customers.|
|Bid Pricing||Customers bid on products or services||Prices determined by customer demand and willingness to pay.|
|Quantity Surcharge||Charging a fee for purchasing below a certain quantity||Encourages larger orders and higher sales.|
|Referral Pricing||Discounts or incentives for customer referrals||Leverages word-of-mouth marketing and customer networks.|
|Tiered Pricing||Multiple price levels based on features or benefits||Appeals to customers with varying needs and budgets.|
|Charity Pricing||Donating a portion of sales to a charitable cause||Aligns with corporate social responsibility and attracts conscious consumers.|
|Behavioral Pricing||Price adjustments based on customer behavior||Customizes pricing based on customer interactions and preferences.|
|Mystery Pricing||Prices hidden until the product is added to the cart||Encourages customer engagement and commitment.|
|Variable Cost Pricing||Prices adjusted based on variable production costs||Reflects cost changes and maintains profitability.|
|Demand-Based Pricing||Prices set based on demand patterns and peak periods||Maximizes revenue during high-demand periods.|
|Cost Leadership Pricing||Competing by offering the lowest prices in the market||Focuses on cost efficiencies and price competitiveness.|
|Asset Utilization Pricing||Pricing based on the utilization of assets||Optimizes revenue for assets like rental cars or hotel rooms.|
|Markup Pricing||Fixed percentage or dollar amount added as profit||Ensures consistent profit margins on products.|
|Value Pricing||Premium pricing for products with unique value||Attracts customers willing to pay more for exceptional features.|
|Sustainable Pricing||Pricing emphasizes environmental or ethical considerations||Appeals to conscious consumers and supports sustainability goals.|
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