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The Business Engineer

pricing strategies - Part 1

Published 28 days ago • 9 min read

A pricing strategy or model helps companies find the pricing formula that fits 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

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.

Below is the complete list of the pricing models we have identified in our research!

AppSumoed: transforming subscriptions into 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.

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 (digitalproducts, 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-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.

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

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.

Psychological pricing: change the product's value 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 subsidize 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 at scale

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.

Tomorrow I'll give you a recap of the various pricing strategies and in which context they work, with some case studies.

Stay tuned!

Read Also:

Ciao!

With ♥️ Gennaro, FourWeekMBA


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The Business Engineer

The Only Official Newsletter of FourWeekMBA - By Gennaro Cuofano

At the intersection of business model strategy, technology, and business development, The Business Engineer is the only official newsletter of FourWeekMBA.com, the leading blog about business model strategy and business engineering. The blog reaches millions of business people each year.

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