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What's the best pricing model for your business? Part 1

In our last two posts, we discussed how to avoid the most common pricing mistakes.  The key takeaway?  Learn as much from you...

In our last two posts, we discussed how to avoid the most common pricing mistakes. The key takeaway? Learn as much from your customers as possible, and constantly iterate on your pricing strategy.

Let’s say you’ve taken our advice. You have a wide variety of customer inputs - product pricing and product feedback being the main ones. You have a plan in place to continually evaluate your price.

With all that information, you’ve settled on a (randomly chosen) starting price of $10,000. But, you need another key input: how will you charge your customers? Will your charge your customers a flat fee of $10,000, or maybe break it into usage-based increments? You might decide to offer your product for free and only charge customers for much-needed add-ons or services.

After determining your product price, the next step is selecting a pricing model. In order to determine the optimal pricing model for your business, think about these key questions. You might already have some of the answers based on all the customer intel you gathered before. Other answers might be dictated by your funding status or decisions by yourself and your co-founders.

Is your company a business-to-business (B2B) or business-to-consumer (B2C) entity? You might think that businesses and consumers would respond well to similar types of pricing - and sometimes they do, especially in the case of cost-plus and value-based pricing. After all, businesses are made up of individual people who are also consumers. However, there are some types of pricing that are most effective for either audience.

B2B companies are widely successful in using flat fees charged on a monthly basis, tied to an annual contract. They are also effective in instituting per-user pricing, where the customer pays for an overall license to the product and then pays additional fees based on the number of users. Volume-based pricing is highly adopted as well, in terms of the amount of storage needed or emails sent, for example.. Think software here - Basecamp, Concur, Salesforce, Slack, and MailChimp are all great examples.

B2C companies are more likely to offer one-time purchase amounts, free products with additional charges for add-ons or services, and subscription plans that can be cancelled at any time (no contracts). For larger-ticket items, B2C companies may offer financing options or payment plans to offset costs. One-time purchases are the norm with retailers large and small. Free products with paid upgrades (or Freemiums) have flooded the market in recent years, as have a plethora of subscription services.

What are your goals relative to market entry? Now that you’ve thought over different pricing models for B2B and B2C companies, think about how you might want to enter the market. Do you want to….

  • Boost your company’s near-term revenues. Push for the highest price point with each individual customer - it will bring in the most cash per sale quickly.
  • Gain market share quickly. Getting visibility is more important to you than a high price. In this case, enter the market with a low price (or no price) across a broad spectrum of customers, with plans to upsell customers additional features or services.
  • Enter with a premium price and expand later. Set a high price point initially, with the plan to go back and determine lower price points and customer segments at a later date.

What type of pricing best contributes to your financial security? Your business’s operating costs, available cash flow status, plan for profitability, and access to credit may have a bigger hand in determining your pricing model. Maybe you are a B2C company planning to offer subscription-based pricing. What if you offered customers a discount to pay for a year up-front, or a discount for behavior that decreases some of your operating costs? How much would it help your bottom line?

Coming up with a pricing model is similar to determining a pricing strategy. The key input is data from relevant sources - customers, investors, employees, and even your company’s financial data. Consider the answers to all of these questions when deciding on a pricing model for your business.

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