Pricing models serve as an easy way to analyse market data where you can apply its outcomes in the decision-making processes. Marketing leaders determine product pricing strategies by using business pricing models that can illustrate and provide appropriate predictions of different pricing effects on different market conditions.
A pricing model is a theoretically acclaimed method that helps in standardising the product prices or service rates of a business based on deriving a result that stands in the best interest of the company's growth and profitability. These models are generated by attaining an accurate understanding of a business and the key factors that affect its workflow. You can gain a better understanding of pricing models by joining a sales and marketing leadership program.
What is a Pricing Model?
A pricing model refers to the different methods used by marketers and organisation leaders to generate the correct price limit for their products or services. These models are created after considering numerous substantial factors that impact the profitability of a business, like:
- The cost price of the products or the maintenance costs of a service
- Customer feedback of the products including the consumer's perception of the service and its value
- Type of the business and its workflow, which can vary from personal services to retail goods.
A successful pricing model can help a business maximise revenue generation, while the strategies behind the model can keep changing over time and might vary from one product or service or another. You can become a Chief Business Officer if you want to work in marketing and learn more about pricing and other business strategies.
Types of Pricing Models
In general, there are four pricing approaches that are used by brands to establish an appropriate price limit for their services or products, namely:
- Cost-based pricing models
- Value-based pricing frameworks
- Competitive pricing models
- Dynamic pricing
The different strategies in pricing emphasise different sections of a business model by choosing separate pricing models for different services or products. The seven most commonly used pricing models can be enlisted as follows:
- Cost Plus Pricing: It is relatively simpler when you calculate the total cost and this model has powerful outcomes.
- Value-Pricing Models: It analyses customer feedback and measures the value of the products accordingly.
- Hourly Pricing Models: This method is primarily used in services rather than products, and typically requires more documentation than the other methods.
- Fixed Pricing: It involves setting a fixed price for a time period or individual contracts.
- Equity Pricing: This model depends on accepting equity or stocks for the business.
- Performance-Based Pricing: It relies on the performance of the service or the product to determine its pricing standards.
- Retainer Pricing Models: It is a planning model that fixes the price through discussion with the customers before starting with the service.
Importance of Pricing in Business Models
Pricing models are used to compete with fellow organisations, improve the market shares of a business and create new forms of gaining revenue. They can be used by different sectors of business marketers, ranging from branded organisations to small start-ups. Primary factors that present the importance of using pricing models in businesses can be categorised into five sections.
Pre-established pricing ranges can directly affect the profit margin of a business, where higher prices generate higher profit margins per unit. However, placing illogically high pricing limits can lead to lower volumes in sales followed by a complete wipeout of the profit.
Pricing models have an obvious impact on the sales volumes of a business. Considering the effects of price elasticity, an increase in price might cause a momentary fall in sale volumes, which gets balanced with overall high-profit margins due to higher prices. A sudden reduction in the prices can similarly increase sales, but the profit margin depends on its consistency and proportions.
Positioning the Business
The pricing models help consumers to develop an overview of the business by creating a perceived value of its services or products. It affects the brand value and market image of the business, where high pricing denotes a higher quality. Offering sales and discounts can send out bargain and sale invitations to the customers, while rebates and closeouts might convey a message of poor sale volumes.
Competing with Shares in Marketing
The prices set by a business directly affect its marketing position by generating competition from fellow organisations and impacting its share volumes in the market.
Building a Customer Base
Pricing models of a business assist in framing its consumer base, where loyal customers with long-term business relations might evolve through appropriate price ranges.
Factors to Consider while Dealing with the Price Model Levels
There are a few aspects to consider while framing a business pricing model, such as
- Offerable plans or features for the consumers
- Relation between pricing models and the target audience
- Pricing per unit including different costing rates for different services or products
- Determining the quantity and pricing value of giveaways or discounts
- Customer expectations and behaviour
- Perception of price and quality also determines the expenditure
- Availability of alternatives to compete
- The differentiators in the business model
If you find passion in learning about business models, you can participate in a sales and marketing leadership program to expand your knowledge and skills.
Common Challenges of Introducing a New Price Model
Designing a pricing model needs to be data-driven, understandable, accurate in prioritising the important aspects and precise in aligning the business to generate profitable outcomes. Some of the commonly faced challenges while generating a pricing model are:
- Pressure of customer reaction to changes in pricing and business alignment
- Innovating the value sources might create new delivery systems and alter the pricing.
- Changes in the expenditure and management models of a business are caused by supporting product-based growth.
- Data access to new pricing models has a better insight, creating immediate alerts on productivity issues that affect the workflow.
Pricing models are important in strategising businesses since it allows you to define the business valuation. It evaluates the pricing ranges creating positive engagement with the customers. The pricing model of a company reflects its cost, competition in the market and brand value. It also initiates planned growth and improves the profitability of the business.
You can become a Chief Business Officer by joining the executive program in sales and marketing leadership offered by Imarticus, where you can learn more about pricing models and business strategies.