Pricing Models – Which one is right for you?
Cost plus some additional amount for profit is the more traditional approach to pricing. However, economists tend to recommend the value pricing approach as being the sounder approach to pricing. Unfortunately, value pricing is a lot harder to do since the business owner never really knows what the customer value amount is at any one moment. Nevertheless, businesses are moving towards value pricing as the way to maximize their sales prices and ultimately their bottom line.
Here are some of the more common pricing models:
Cost-plus pricing models:
1. Cost plus a percentage markup
2. Single flat fixed fee
3. Unit pricing – i.e., cost per employee
4. Industry standard pricing – i.e. union rates
5. Hourly rates for time spent
6. Blended hourly rates – team rates rather than individual rates.
7. Competitive price matching
8. Annual contract with inflation increases
Value pricing Models:
1. Base price plus optional add-ons – Instead of bundling a bunch of services, you break them down to their most basic categories and let the customer add on the features they are willing to pay for. An example is the airline ticket in which meals and luggage are an additional charge.
2. Menu pricing – The customer is given a good, better and best option for a bundle of services. This seems to be the norm for most web-based software services today.
3. Demand-based dynamic pricing (surge pricing) – The price is constantly adjusted based on demand. Think of Disney and the price differences between busy and non-busy days.
4. Percentage pricing – Think of real estate commissions which are based on a percentage of the sales price.
5. Component-based menu pricing – To buy a computer from Dell, you go to their website, select the model, and then add all the components that you want included.
6. Auctions – The ultimate in value pricing where customers bid against each other to determine who values the product the most.
7. Contingent pricing – This is mostly seen in the legal profession where they only get paid if they win.
8. Pay what you want – The very scary approach of leaving the price completely up to the customer after the service has been received.
These are just a few of the pricing models available for consideration. Getting your price right is the single best thing you can do for your business’s profitability.