Pricing– it’s something a lot of business owners struggle to get right. It’s part art, part science, and part hit or miss. But when used to your advantage, pricing is a valuable tool for innovating your business model. Innovation creates value for customers, businesses and society. It replaces tired, outmoded models with new, more imaginative solutions to customer needs and problems.
Out of crisis often comes opportunity for change. Some of the most successful businesses were born out of the 2008 Financial Crisis: Uber, AirBnb, Groupon, Whatsapp. The Great Depression also saw the rise of companies like Disney, and during the Panic of 1975, Bill Gates founded Microsoft, proving that economic downturn can be a driver of innovation and change.
But innovation doesn’t have to be complicated. In fact, the most successful business models are often the most simple, because they directly address a customer need or problem.
Adapting your business model can be a great way to reinvent your business and even disrupt your industry. Back in 2001, Apple changed the face of the music industry with the launch of their iconic iPod and iTunes platform. They were the first company to offer a digital marketplace for music at such a vast scale, with songs available from all five major record labels. Apple also reimagined an industry by offering a portable music player that worked solely in conjunction with this new digital marketplace.
Innovation can be as simple as altering your pricing model.
Pivoting from a model where you collect money annually to a subscription-based service can create huge benefits for your customer and your business. You’ll have a more stable source of income flowing in every month, which makes it easier to plan, forecast and manage your cash flow, and your customers will have the ease of money coming directly out of their account automatically.
Why is pricing so important?
While it’s often overlooked, pricing can be a huge indicator of value for your business. Potential customers will subconsciously evaluate your products or services based on their cost alone. For example, when buying a pair of shoes, we’ll often deem an expensive, designer pair as ‘better value’ than a cheaper pair of shoes from a highstreet brand. This is based solely on the price of each product alone, which we also use to determine the worthiness of the brand. So, it’s worth keeping in mind that pricing can be a massive indicator of quality, not only for your products, your services and your business, but for your brand too.
Pricing is a key tool for giving you a competitive edge.
Whether you decide to charge more or less for your products and services can help to differentiate you from your competitors. Put your prices up and this signals a premium, bespoke or high-value product or service. Adversely, put your prices too low and this might suggest to potential customers that you have a poorer quality product or service. However, keeping costs down could also work to your advantage if your value proposition is based on minimizing costs for your customers. With budget airlines like Ryanair, customers come to them specifically for a good deal and for the benefits of flying at a lower cost.
A good pricing model should consider what your customer base is looking for. Ask yourself, are your customers coming to you for the cost benefits of a good deal, or are they willing to pay more for your product/service because of it’s high quality and the value it creates for them?
Whether you choose a value-driven or cost-driven model is entirely up to you, but it should ultimately come down to your customers, the value you create for them and what they are truly willing to pay for.
Pricing and costing
Before you decide on a pricing model, you’ll need to know how much each individual product or service costs to produce. By keeping track of all your costs using something like Google Sheets or Excel, you’ll be able to calculate a price that generates your business a good profit. It goes without saying but ideally, you want to keep your costs as low as possible.
How are your customers currently paying, and is there a way they would rather pay? What value are they paying for– cost-driven or value-driven? With these questions in mind, here’s some of the most common pricing strategies to help you innovate and improve your pricing model.
Competitive pricing model
This is a value-based model where your pricing is based on what your competitors are charging for a similar product or service. Competitors’ prices are used as a benchmark for your own products and services. With thorough research into competitor markets, this model enables you to price above, below or the same amount as your competition. It can be used on its own or in conjunction with other pricing strategies to help you stay ahead of the curve.
Value-based pricing primarily focuses on the customer and their perception of value. Ask yourself, for what value are your customers truly paying for? With extensive research into the target audience, greater market, and product specifications, value-based pricing can be a hugely flexible model which supports your brand image. The insights and customer data collected from value-based pricing can also help you deliver outstanding levels of customer service, so you can stand out in your industry.
Hourly pricing model
Usually used by creatives and freelancers, this is a fairly straightforward model in which you charge for your time, usually by determining an hourly or daily rate. Whilst it’s fairly easy to calculate and to estimate costs, this model does require good data, which means carefully tracking your time and expenses.
Project based pricing
This is one of the most common pricing models in which you charge a flat fee for a project, regardless of time or cost. This model works well for service providers who want to invoice their clients based on their expertise rather than their time. It can also be used in conjunction with an hourly-based model to help you generate a reasonable figure.
Subscription based pricing
With this model, customers pay for a service or product on a regular basis, with payments typically collected automatically. We’ve seen a massive shift towards subscription-based pricing in the last few years, led by giants like Adobe, Apple and Microsoft. It’s also common in the FinTech industry, used by leading accounting software companies such as Xero and FreeAgent. So why the sudden shift to a subscription-based model? Stability– you can charge your customers via direct debit. This is easier for the customer as payment is automatically collected each month, and it’s also better for your business. You’ll have a steady stream of income each month and more predictable cash flow without the hassle of ever chasing late payments.
Pricing is often part art, part science and there’s no one-size-fits-all model. Whilst a blend of different strategies can work well together, whatever pricing strategy you ultimately choose, remember to consider your costs and what value your customers are truly willing to pay for. With a good grasp of your costs and what your customer base is looking for, you’ll be able to innovate your pricing model to provide even more value and stand out from your competitors.
Want to know about pricing your products or services? We can help! We love helping businesses thrive and embrace new ways of working. Whether you’re looking to reevaluate your pricing strategy, get help with finance, or innovate another area of your business model, our inbox is always open!