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TLDR: Pricing is hard! Most founders will get pricing wrong more times than they get it right. It’s critical to know the difference between pricing strategies and models. When defining your pricing model, ensure your unit of measure aligns with the value your customers gain from your product.
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In the last five years, we have had the opportunity to develop pricing models and strategies for companies of all sizes. Here are some things to consider when you are creating your pricing.
Pricing Strategies vs. Pricing Models - Most startup founders and early-stage leaders consider pricing a singular concept. However, there are critical differences between pricing strategies and pricing models that make a substantial difference when you get into negotiations.
- Pricing strategy is the overall plan for setting prices for your products or services.
- Pricing model is the specific format or template that a company uses to set its prices.
To be successful, you must understand your strategies and model to ensure you aren't leaving money on the table by confusing your buyers.
Pricing Strategy Components to Consider
Pricing Approach:
- Cost-plus pricing: Sets prices based on the cost of production plus a markup.
- Competitive pricing: Sets prices based on the prices of competitors.
- Penetration pricing: Sets a low price to attract customers but may not be sustainable.
- Premium pricing: Sets a high price to reflect the product or service's value.
- Freemium pricing: Offers a basic version of the product or service for free but charges for premium features or access.
- Value-based pricing: Sets prices based on the customer's perceived value of the product or service.
Primary Deal Terms:
- Discount Strategy
- Contract Minimums/Floors
- Billing Frequency
- Payment Terms
Common Pricing Models
- Flat-rate pricing: Charges fixed price for access to the product or service.
- Tiered pricing: Offers different price points for additional features or subscription levels.
- Per-user pricing: Charges set price per user.
- Usage-based pricing: Charges based on the customer's product or service use.
Strategy-Model-Strategy Sandwich - The best pricing for your company will depend on several factors, including the company's target market, the product or service being offered, and the company's goals. Above all, the model should align with the value of your product or service.
- (Strategy) Consider the pricing approach for your business.
- (Model) Define your Unit of Measure (UOM) - This could be the most critical aspect that defines how your customers interact with you (and during negotiations).
- (Model) Build your pricing model
- What is the minimum you are willing to charge?
- What is the maximum you think you can charge?
- Figure out the in-between (How? - try calculating a linear line between your min & max)
- (Strategy) Define the Standard Deal for your business and how far you are willing to deviate from that standard deal to win new customers.
Once you clearly understand your strategy and model, test it out. Keep track of average sales price (ASP), deviations from your standard deal, and if your strategies lead to a smoother negotiation.
If you have any questions about this process or need help, please contact us at Veles. We would love to help.
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