One of the major decisions that startups have to contend with is how to price their products or services. This decision is crucial since it will determine your cash and funding needs, market position, brand image and, ultimately, your survival in the long term. Your pricing or revenue model should be suitable for the customers and market you are targeting. It should also take into consideration the strategies used by your competitors.
Here are some of the most common pricing models used by startups:
See also: How to Compete on Price
1. The ‘Freemium’ model
This is where you offer a free version of your product with limited features, in the hope that customers will pay for the premium version with advanced functionality. The ‘Freemium’ model is especially used by software companies such as Dropbox and LinkedIn. The catch with this pricing model is to convince users to spend some money in order to enjoy more value. However, make sure your pricing is related to the perceived value of the service you are offering.
2. Free product or service accompanied with paid services
This is a pricing model where customers are allowed to download a product for free, but are required to pay a fee for extra services. Such services could be installation, maintenance, customization, training or consulting. This model is suitable for startups which use free software as a marketing tool.
3. Offering a free product or service, but generating money from advertising
This is a model which is popular with social apps such as Pinterest, Twitter and Facebook. People are allowed to use the service for free with the hope of making money through advertising. In this case, the user is actually the product which you are selling to the advertiser. This model requires a lot of marketing in order to accumulate a critical mass of users. Advertisers will only put their money where they are guaranteed maximum views.
4. Value model
This model involves pricing your product in proportion to the value it offers customers. The value could be that it saves customers installation, upgrade, storage or maintenance costs in the long term. The value could also be in terms of time saved, that the product allows you to do more in less time. The key to success with value-based pricing is to convince customers that your product actually offers more value than other options available.
5. Volume or tiered pricing
Tiered pricing is suitable for products which are bought in different quantities. This model is especially common with companies which sell goods on a wholesale basis. For example, you could offer a 10% discount when someone buys 200+ units and 20% discount when 400+ units are ordered. The ‘buy 5 and get 6 free’ strategy could be categorized under volume pricing.
6. Market pricing
Market pricing is ideal for competitive markets where prices are mainly determined by supply and demand, as well as costs such as sales taxes and shipping. With this kind of pricing model, you are more likely to succeed if you have a strong reputation, have a user-friendly return policy or can promise faster delivery. Prices will keep fluctuating due to supply and demand, which means that you will have to continue making adjustments.
See also: 6 Ways to Price Your Own Product
What pricing models do you use for your products and services? Please share with us in the comments section below.