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 incorporates a sustainable financial model for revenue generation within a business model design. Revenue modeling can help understand what options make more sense in creating a digital business from scratch; alternatively, it can help analyze existing digital businesses and reverse engineering 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 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
AppSumo partners up, usually with SaaS (Software as a Service) companies, and offers lifetime 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 and transforms it (only for its platform) into 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 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 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.
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’s core business is a platform business model that makes money from transaction fees 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 revenue when sellers and buyers can close the bidding successfully.
The auction can be a good pricing strategy in a few circumstances:
Fast-changinginventory: 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.
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 deal platform where you can find default continuous discounts.
For instance, e-learning platforms like Udemy leverage 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 services.
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.
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), 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.
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 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.
WeWork defined its revenue model as space-as-a-service and claimed to be more scalable than traditional commercial real estate.
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).
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 into paid customers.
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 allow the company is applying dynamic pricing to expand its revenue generation.
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.
Unbundling is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those in a period in time consumers value the most.
Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a product pricing strategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.
Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.
Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.
A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.
Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.
A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
A pricing strategy or model helps companies find the pricing formula to fit 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.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
