5 pricing models and how to find the right one

Determining prices for your products and services can be a difficult task. If your prices are too high, you’ll miss out on sales. If they’re too low, you’ll lose revenue and profit. But you don’t have to resort to guesswork to price your products. There are pricing models and strategies that you can employ to discover the best prices for both your customers and your company.

A pricing model is how your pricing strategy is presented to your customers. It is basically a detailed design for executing your pricing strategy.

Although they are intertwined, pricing strategies and pricing models are two different concepts. However, both are necessary to provide your customers with effective pricing.

A pricing model is the way in which you implement your pricing strategy. There are several types of pricing models to choose from. Bearing your pricing strategy in mind, your model should consider how it relates to your buyer personas, whether you will offer multiple plans and which features are offered at each level.

Your business may use a variety of pricing models for different products or use more than one model to maximise profits. We will discuss some of the most common models in a moment.

A pricing strategy is your high-level plan for setting the best prices for your products and services, bearing in mind production cost, your customers’ perception of the product’s value, the type of product and whether you’re selling a product or a service. The pricing strategy that you choose may vary from one product to the next and it will probably change over time.

Pricing strategies include:

Pricing is a key factor in many purchasing decisions. By choosing the right pricing model, you will convey a sense of value to your customers. ‘Cheap’ may mean a lower price or it could indicate poorly made products. Consumers associate low prices with low quality. Make sure your pricing model reflects the value of your products.

Here’s where balance comes in. If your price is too high, potential customers won’t be willing to pay. Your ideal price is a price which customers are willing to pay, which conveys value and convinces them to purchase your product rather than one of your competitors’ products.

The consequences of a weak pricing model include giving the impression that your product does not offer high value, making potential customers feel uncertain about committing to a purchase and targeting the wrong customers for the selected pricing model.

The right pricing model portrays value, convinces customers to buy and gives them confidence that they are making the right decision in opting to buy from you. Remember that effective pricing builds trust with your customers as it supports your business goals. 

Choosing the right pricing is critical for driving value for consumers. For example, with tiered pricing, customers can choose the tier that provides them with the most benefits for their specific needs. This allows businesses to gain customers who perceive value at different price points. 

Before you can establish a pricing strategy or choose a pricing model, you need to establish a foundation for your pricing decisions. A price optimisation study is the best way to find the best price point for a product or service.

Discover what customers perceive to be an acceptable price for your product, what price point is too high and the optimal price range. Expert researchers will help to design and analyse your pricing study, considering only the highest-quality data and removing low-quality respondents from the data set.

There isn’t a way to choose a pricing strategy without conducting market research on your competitors. You need to know their offerings, strengths and weaknesses, and pricing. You’ll use this data to decide whether you’ll beat your competitors’ prices or value as you enter the market. 

Look at both direct competitors, who sell exactly the same product as you, and indirect competitors, who sell a comparable alternative product.

Find out how much customers are willing to pay at different price points, purchase frequency, predicted churn and predicted customer lifetime value.

Your research will help you determine what will appeal to your customers in the long run. 

Here are a few pricing strategies to research:

There are many pricing models that you can choose from. Here, we discuss five of the most common models and when to use them.

The freemium (a combination of the words ‘free’ and ‘premium’) pricing model involves offering a free version of your product with opportunities to upsell your customers to a paid version. Some freemium services offer incentives for referring customers.

A great example of the freemium pricing strategy is Spotify. You can listen to music and podcasts free of charge, but you have to endure ad breaks, the audio quality is only basic and you can only stream songs in shuffle mode. Premium paid plans include ad-free listening, offline play options and multiple accounts at a discounted price. Some customers are satisfied with the free tier, but many have upgraded.

Another example of freemium pricing is the free trial. Many streaming services offer short (e.g. seven- or 14-day) free trials so that customers can watch their programming. Customers can do nothing in addition to this and must either pay for continued service use or cancel before their free trial expires.

The main purpose of the freemium model is to attract new customers, usually to a digital product. Your product must appeal to mass markets: it should be easy to understand and offer an excellent user experience. You must also be able to balance your resources until your initial freemium customers upgrade. And you need to be able to analyse your data accurately to assess which features should be offered free and which should be restricted to premium users.

Tiered subscriptions offer customers multiple options and flexibility depending on their needs. Going back to our Spotify example, there are five subscription tiers. The first tier is free, which is why we discussed it as a freemium model. There are then successive tiers for individual users, duos, families of up to six accounts and heavily discounted student plans.

Tiered pricing appeals to a wider, more diverse range of customers. It is usually associated with digital services that can be customised to meet the needs of a range of target markets. 

In a flat-rate subscription model, users pay a set price on a regular basis. This is also known as fixed pricing. Basically, this model offers a single product with a fixed set of features at a set price each billing cycle. For example, if your company offers a product management tool, you may charge $125 per month for unlimited projects. 

Flat-rate subscriptions work best for products with limited features and one buyer persona.  

In the bulk pricing model, the price decreases as the volume of goods or services increases. This is also known as volume pricing. It is straightforward and simple to understand. It encourages large orders by offering higher discounts for higher volume purchases. For example, stock image businesses use volume pricing for their downloadable digital products. Users can choose packages based on the number of images and videos that they want to download. 

Bulk pricing is most often used in business-to-business (B2B) sales and wholesale.

In the market pricing model, the price of the product fluctuates according to supply and demand. This means that you need to know how much competitors are charging for similar products so that you can align your price with theirs. This model is linked to the product lifecycle and does not consider the customer. It is based solely on your competitors and market saturation.

Examples of market pricing include the automotive industry, smartphones and streaming services. 

You should use market pricing when your product is comparable to your competitors’ products. This gives you an accurate price point to work with. You’ll have to position your product as having superior value in order to remain competitive.

Your ideal pricing model is dependent on the type of product that you’re selling, how much your customers are willing to pay and what value your product offers. Choose the right pricing model to ensure sales success.

The basis for a good pricing strategy and pricing model is research. Start with pricing optimisation research from SurveyMonkey today to find out exactly how much your customers are willing to pay for your product.