How to Choose the Right Pricing Model for Your Business

There are many different pricing models you can use for your business. And your pricing strategy is about so much more than just offering a competitive price point.

Because business goals, market fluctuations, supply costs and shortages, and other factors determine your individual prices, it’s easy to get lost in the weeds. That’s why choosing the right pricing model for your brand is so important.

Here are some things to consider when you are searching for the right pricing model for your goods and services.

Where to Start: Common Pricing Models

There are dozens of common pricing models to choose from, and more are being created all the time. But there are 7 that are most used.

Value-based Pricing

Many pricing methods may seem abstract, but value-based pricing is often the pricing model that most people think of.

Value-based pricing is pretty straightforward. To determine the price point using this model, you do some research to first find out what the customer is willing to pay (this research can include industry, comparable products and services, quality, your local market expectations, etc.).

The next step is to determine what the cost of production will be for your item, and then you select a price point that is higher than that cost, and often a bit lower than the cost customers are willing to pay.

Cost-plus Pricing

This is a similar pricing model to the value-based model, it’s just a bit more situated in straight math rather than markets, customer sentiment, and other factors.

The cost-plus method is simply taking the costs associated with producing and offering a good or service, and then adding the ideal profit margin to it.

For example, if you are selling smartphone chargers, and the cost to produce one charger is $10 and your goal is a profit margin of 25%, the customer-facing price point for that charger will be $12.50.

Competitive Pricing

Another straightforward pricing model, competitive pricing is determined by comparing your competitor’s prices for similar products or services and then modeling your own price point after those currently found in your industry or area.

Economy Pricing

Economy pricing is simply a strategy by which you sell your goods and services at a lower price than your competitors. This works for commodities and generic or unbranded items. Think of Walmart’s Equate brand of personal care products versus brands like Dove, TRESemmé®, and the like.

Penetration Pricing

Penetration pricing is a model that involves a slightly more complex pricing strategy.

This pricing model allows you to gain market share by initially offering your goods and services at a much lower rate than your direct competitors. Over time, you can increase the price to make it more comparable to industry standards.

The downside of this model, however, is that you have to build enough brand loyalty to overcome the customer losses you’ll experience when your price increases.

Dynamic Pricing

Dynamic pricing is ever-changing. This means the price fluctuates on a semi-recurring basis. This pricing model can be seen in things like gas prices, Uber rides, and other products and services that require a custom quote and have variables built in.

For example, this model won’t work for subscriptions and many SaaS services, because these are expected to be fixed recurring expenses.

H3 Price Skimming

Price skimming is the opposite of penetration pricing. With this pricing model, your initial product offering starts high and is gradually lowered over time. For example, Apple products, cars, and other limited editions or big launches are going to work well for this method.

Pricing Factors to Consider

Your pricing model is the framework that can help you more easily determine what price point you will sell your goods and services to customers. But there are several factors to consider.

The first thing you’ll want to consider is cost. Unless you are a non-profit committed to simply sharing money and resources with others, your business will need to set prices above cost to make a profit. There is a movement in small businesses and philanthropic industries that include offering certain products and services at cost in order to build brand reputation or fulfill sustainability pledges and other company missions.

Cost and procurement of materials are variable. For example, if a winery uses a specific Ukrainian-made bottle for one of their popular wine varieties, they likely had to find another supplier at least temporarily, and that often increases costs.

There are also competitor and economic factors to consider.

When it comes to pricing based on your competitors, there’s a fine line. You don’t want to price things too high and essentially overprice yourself out of business, but you also don’t want your offerings to be too cheap – this often leads to a customer perception that they are cheaply made or low quality.

Economic factors like inflation, certain industry supplies (oil, lumber, and metal, for example), global events, and political and social changes can affect the cost and availability of materials, as well as the demand for certain products and services.

Put Your Pricing Model to Work: Some Tips

When you are implementing a pricing model, it’s important to remember that you can make changes. Try different approaches and make adjustments as you are learning and working through your operations and supply chain management. The goal is to create a pricing strategy that works for your customers and doesn’t hurt your bottom line.

Remember that your customers should be the ultimate test. Are they satisfied with your pricing structure? If not, do some digging and find out what they don’t like about your prices or why you aren’t seeing the sales numbers you hoped for. IT’S also good to remind yourself that your competitors’ price point could be wrong as well. Supply and demand for a specific product or service can ebb and flow, and it can also crash and burn.

Your pricing model should not change much, but your pricing strategies should always be evolving to suit your market conditions.

From Pricing Model to Payments: ReliaFund Is Here

Once you’ve chosen and implemented the pricing model that works best for you, it’s time to make payment processing easy for you and for your customers, whether they live down the street or in another country.

ReliaFund has been a formidable presence in electronic payment processing since 2001. We are your all-in-one payment processing platform for ACH, credit and debit card, check, recurring, and online payments. Check out our range of payment processing services today.