Pricing is a critical element of any business model, and pricing models play a crucial role in setting the right price for products or services. A pricing model is a framework that businesses use to determine the cost of their products or services.
It is a critical component of pricing strategy that helps companies determine how much to charge for their offerings and be competitive in the market.
In this blog post, we’ll explore what a pricing model is, how it differs from pricing strategy, why you need a custom pricing strategy, and the factors to consider when developing pricing models.
What is a Pricing Model?
A pricing model is a framework that businesses use to determine the cost of their products or services. It is essentially a way of translating the value that a product or service provides to a customer into a monetary amount.
Pricing models vary widely, but they typically take into account factors such as the cost of production, the competition, the target market, and the perceived value of the product or service.
Pricing Model Vs Pricing Strategy
While pricing models and pricing strategies are often used interchangeably, they are not the same thing. A pricing model is a specific approach to determining the cost of a product or service, while a pricing strategy is the overall approach that a business takes to pricing its offerings.
Pricing strategy encompasses a range of factors, including the target market, the competitive landscape, the company’s goals, the operational expenditure and the desired profit margin.
Pricing models, on the other hand, are more specific and focus on the mechanics of pricing. For example, a company might use a cost-plus pricing model as part of its overall pricing strategy.
You can check our recent post here: Innovation Vs Profitability: The driving metric for new businesses.
Why do you need a custom pricing strategy?
A custom pricing strategy is essential for any business that wants to maximize profits and remain competitive in its market. A one-size-fits-all pricing strategy simply won’t work in most cases, as different markets and customers have different needs and preferences.
A custom pricing strategy also needs to take into account the unique aspects of a business, such as its target market, its competition, and its cost structure.
Below are some of the factors that drive Pricing Models.
- Customer behavior, spending patterns, price-quality perception
- Competitive Landscape
- Need for the product
- Differentiation in the product or service
Things to consider for Pricing New Products
According to a study conducted by McKinsey, almost 80-90% of new products are priced too low. Many companies adopt incremental pricing instead of conducting a price-benefit analysis while setting prices for new products.
A price-benefit analysis helps to determine whether price barriers might make products unfeasible as well as the attributes customers are most willing to pay for. Incremental pricing, on the other hand, uses existing products as a reference point for establishing the new products’ price.
To price a product optimally, companies should consider the following-
- Do you have competing products in the market? If so, then an incremental pricing approach may help you price products closer to the optimal price.
- Do you know the price ceiling? This helps you determine the higher end of the product’s price range. This range can be calculated by considering the product’s benefits, value it creates, size of the market, competitive landscape and degree of market demand
In conclusion, though often overlooked, optimum pricing of a product can be a definite game changer in a company’s survival, sustainability and overall growth strategy.