Every business needs a pricing model (aka ‘pricing strategy’) to generate revenue and disrupt their industry, but don’t let the name fool you — there’s a lot more involved than just pricing. Whether you’re a brand new startup or evolving your company to stay competitive, it’s important to select a business pricing model that makes the most sense for your objectives.
Let’s take a look at what exactly is a pricing model as well as the advantages and disadvantages of four popular pricing strategies for service-based businesses to see if one of them is right for you.
What is a Business Pricing Model?
A pricing model encompasses all of the methods that businesses use to set the best price for their products or services. It takes into account many considerations like costs, market conditions, competitors, margins, and consumers.
The “best” pricing model for your business will depend on your objective. For example, you can set a price that allows you to maximize profit margins. Or, you may decide to sacrifice profit margins to maintain your hold on market share to ward off competitors.
Whatever your goal, your pricing shouldn’t be too exorbitant that customers won’t do business with you, but not too low that you’re unable to cover expenses.
Value-Based Pricing Model
Value-based pricing is when a business charges a service at a rate they believe customers are willing to pay rather than calculating production costs and applying a standard markup. Essentially, the business evaluates the perceived value of its service and sets the price.
Advantages
You can command higher price points as long as customers feel as though they’re receiving an excellent “value” for the service. It also increases the perceived value of your brand and builds customer loyalty.
Disadvantages
It’s harder to set pricing because the perceived value is subjective. Unless there’s something special about your service, justifying a higher price point is tricky due to the abundance of options.
Premium Pricing Model
Premium pricing sets the price higher than competitors to make the service seem more exclusive or high-end. It’s similar to value-based pricing in that it depends on favorable perceptions rather than the actual cost. However, premium pricing is about prestige rather than value.
Advantages
Customers will perceive your service to be of better quality compared to your competitors due to the higher price. It makes your service into a status symbol, which promotes brand differentiation and enhances brand perception.
Disadvantages
It’s difficult to implement and requires more investment to build a premium image. Additionally, if consumers are price-sensitive and have other options to purchase similar services, the pricing strategy won’t work.
Subscription Pricing Model
Subscription pricing is where a customer pays a subscription to have access to a service. It was initially developed by newspapers and magazines, but you can find many companies and websites nowadays using subscriptions for recurring revenue.
Advantages
It generates a predictable revenue stream and reduces uncertainty. Customers find subscriptions to be convenient by saving them time and money. It also builds loyalty as customers become attached to using the service.
Disadvantages
There’s a constant need to provide value and improve the service to keep subscribers. Plus, the cost for customers accrues over time, so they end up paying more than what the cost of a single purchase would have been.
Freemium Pricing Model
Freemium pricing, a combination of the words “free” and “premium,” is when a business offers a free version of their service and charges a fee to upgrade or get full access to features. This pricing model is popular in SaaS companies for attracting and converting potential paying users.
Advantages
Free trials or limited memberships offer a glimpse into the service, building trust with potential customers before purchase. The pricing model allows startups to grow their user base without spending on costly advertising or a traditional salesforce.
Disadvantages
Conversion rates can be low as some free users will never convert. Additionally, support for freemium users can be expensive and cut into the profit margin. The premium price can also seem expensive to free users if the value of the full-version service isn’t made clear.
The Right Pricing Model for Your Business
Every pricing model will have pros and cons, which is why it’s crucial to understand your objective and research different strategies to match the right pricing model to your service-based business. Once you have a pricing strategy, next you’ll need marketing strategies to achieve your goals.
Schedule a call with Mavericks Marketing today to explore our marketing solutions so your business can disrupt your industry!
