How Your Pricing Model Can Make or Break Your Startup



Pricing a product or a service is one of the hardest decisions to make in a startup. Proper business pricing enables you to define your product or service better, distinguish your brand, and earn credibility as well as long-term business viability. The pricing model you pick is the determinant in attaining your business and financial goals.

So, how do you price your products or services? There are several types of product pricing models to assist you in pricing your products effectively, as follows:

1. Pay for the service, but the product is free:

In this model, you give away your product for free to clients and then they are charged for customization, training, installation, or other services related to the product itself. The model in itself is good, but you need to be aware of the marketing costs and risks involved in a services business offering tangible products at the same time.

2. “Freemium” Model:

This is another effective way of pricing your product; well-established services like LinkedIn, Ever Note, as well as several other Internet offerings use it quite successfully for their business. In this model, the basic services are offered free of charge while any additional premium service is available at an extra cost. This model requires an individual or a company to invest significantly in order to provide those basic services for free to its end users.

3. Cost-based Model:

This is one of the traditional models of product pricing. In the model, you set the selling price at 2-5 times the cost of the product. For commodity products, the margin needs to be about 10%. It also works efficiently with new technology which reduces further cost and provides an opportunity to get ahead of your competitors.

4. Portfolio Pricing:

The model is significant in cases where you have multiple services and products, each having a different utility value and cost. Here, your goal is to use a portfolio to make money, since the services and products have high and low markups depending on lock-in, competition, loyal customers and value delivered. This method needs expert management to be successful. It reduces the risks associated with non-diversification of the product/service prices.

5. Trial Subscription:

Here, you provide the customers with the product or service to test their satisfaction level with the same, before allowing them to pay depending on if they are satisfied or not. The main advantage of this model is that it builds customers satisfaction as well as product/service loyalty. This pricing model reduces the upgrades cost as well, since the customers themselves are involved in the day-to-day development of the product.

6. Volume or Tiered Pricing:

In product environments with huge number of people having similar pricing approaches, this is the best pricing model since it allows you to have a common price that enhances your product homogeneity. The method also enhances the product image and loyalty among your customers, and also reduces the overhead costs during marketing.

7. Ad-supported Pricing Model:

This method allows you to get revenue from your service or product through the direct process of advertising through the product. Cost-effective, and provides benefits to both the users (who get to use the product for free) and the advertisers (who get to display their wares in the form of ads, to the users.)

8. Value Model:

This model allows you to charge a value proportionate to the service that your product offers to the client’s needs. This means that the higher the quality, the higher the product price. This method enhances the comparative pricing of competitive products or services since it allows customers to choose products depending on the value they derive from the services.

9. Competitive Positioning:

Pricing sometimes tends to be competitive in the heavily saturated environments, no matter the volume or cost. This model emphasizes how to pull in customers through the areas of low pricing, where the level of competition is low. Competing based on price alone is not a good strategy for a lean-based startup.

In conclusion, pricing of a service or a product is one of the most important factors to look into, for any startup/business. A lot of emphasis should be given on how much effort, time as well as resources you need to put in place to “get it right”. Perfect product pricing measures ensures business growth, customer loyalty, reduced business expenses, less market research costs, less acquisition costs, among other benefits. In the end, a good product pricing ensures your business success through increased sales turnover, and expanded profits, which in turn, enables your company to grow proportionally in the process.

Photo Source: Poofy, Miong