There are different options for pricing products depeding on its features and physical nature.
Defining your pricing model
Defining your pricing model is an important strategic decision, which defines what type of customers will want your product. It will reflect on the customers who are willing to try your product or service. If you set the price too high in the beginning, it might be harder to get the first customers to try it. For example in the software development business, if you provide the customers a chance to test the product, you will be more likely to get feedback compared to a product, which you have to buy first.
It is also possible to change your pricing model. In case you will do that, remember to think about the customers who have already bought the product and their satisfaction (for example today you purchased a product and tomorrow it will cost 50 % less).
Define your pricing model in the beginning and test it! We have listed down different options for pricing below.
Cost and market based pricing
If you possess a product, which to manufacture demands a good deal of resources and manpower, the following is potentially the best option:
Calculate the production cost and add the mark up to get the selling price for customers or distributors.
• If your product is unique, there is no market price for it, which means you need to test it to see the price consumers are willing to pay to price you have set.
• If there are similar products on the market, you can compare your outcome to market pricing. Remember, a similar product is evaluated by customers, not you.
If your product is unique and more expensive, you need to make sure your customers value it.
Give it away for free, and make money on advertising – model
Most social apps, both web and mobile, including Facebook, Twitter, and Pinterest follow this model. It is a very difficult model to follow successfully. You also need to remember that the user is your product, and you are selling access to them to advertisers, who are your real customers.
Subscription pricing (previously called rental)
Subscription pricing has been around for centuries. Most magazines have been using this model to sell their products. Most rented real estate is based on this model, as well.
Subscription pricing has become common in the software, music and TV-industry (Netflix or MTV Katsomo in Finland). The idea is simple: Customers pay a fixed (usually a monthly) amount for the right to use the product or service. There are different subscription levels and subscription pricing can be used together with value pricing. A larger monthly fee will give you more.
Subscription pricing gives a company a stable monthly income, a regular customer base and may free time for product and service development instead of continuous selling.
Free product, bundled with paid services
This pricing model is common for open source software such as Red Hat Linux, in which the product is available for free download but customers pay subscription fees if they want support.
Other companies may, also, charge for installation, maintenance, training, customisation, and consulting services. This pricing model is essentially suitable for a service business that uses free software as a marketing tool.
The “Freemium” model
Many software companies like LinkedIn and Dropbox offer a free, limited-functionality version of their product, hoping that some users will pay a premium for advanced features.
The trick with this model is to offer just enough value in the free version to attract (and hopefully lock in) regular users, and incrementally offer more value in the premium version to entice conversion from free to paid and maximize cash flow.
Your pricing must be a function of the incremental perceived value you offer: Can you convert 1,000 users at $100 per year? Or 10,000 users at $10 per year?
If you can make a clear case for the value your product offers to the customer, you can price in proportion to the value. In some cases, the value could be monetary, as in savings: perhaps you have a SaaS (Software As A Service) solution that takes the place of traditional desktop software, and the end user saves on installation, on-going maintenance, upgrade costs, and local storage requirements. Perhaps the value is in terms of health benefits – maybe a new drug that treats a disease faster with fewer side effects.
The key to value-based pricing is to demonstrate you deliver considerably more value than available alternatives.
Tiered or volume pricing
If your product is purchased in different quantities by different types of buyers, you can offer tiered pricing. This is very common for B2B sales of printed matter or for apparel. Depending on the industry, it might be a 10% price break for ordering 100+ units, and a 15% price break for ordering 500+ units.
Tiered pricing, also, applies, directly or indirectly, to certain consumer products and services: for example, the “buy 9 and get the 10th one free” is volume pricing (just marketed in reverse).
Product or service configured to have a “base” model with a variety of optional upgrades may attract interested buyers with a low price on the basic version and sell on the features. This is similar to Freemium model pricing.
Razor and blade model
This pricing model involves a reusable “base” component you sell inexpensively (or even give away) and a consumable component that must be replaced regularly. This is why ink jet printers are so cheap – they make their money on the ink.
This can also be used with medical devices, for which a fresh, sterilized component must be used with each application.
Note: If you are selling the base unit at below cost, you obviously need a deep balance sheet because it might take years to earn your investment back.