In my experience, there are five ways to price a product or service:
- Premium pricing – top of the market
- Bargain pricing – bottom of the market
- Prime + 2 pricing – prebuilt-in margin
- Total cost of ownership pricing – the cost plus overhead
- Competitive pricing – based on competitors and customer needs
Determining which of these to use depends on a variety of variables including the company’s business model, industry standards and what competitors are doing—to name a few. However, when we were determining the pricing model for ChoiceStream’s advanced targeting optimization technology, we carefully weighed the pros and cons of each of the above pricing options and came to the following conclusions.
Premium Pricing: Higher than your costs? No – As a startup, ChoiceStream has not yet reached scale, so our current costs do not reflect what the market will bear for pricing. This is important because our product is very sensitive to scale due to the fact that many of our costs are fixed. Additionally, our competitors, who have been in market longer, are offering scale-based prices, which we must match.
Bargain Pricing: Lower than competitors? Not necessarily – As a startup you may want to beat your competitors on price, but must be careful not to establish a race to the bottom in the industry. At ChoiceStream we do not try to beat our competitors on price, but we do strive to be the best value. In reality we need to compete on more than just price, so that is a tactic we’ve avoided. Furthermore, we offer a premium solution supported by a full range of premium services that more than justify our prices.
Prime + 2 Pricing: Higher than your planned costs at scale? Not always – You should establish a price list that will eventually allow you a reasonable margin, but you may want to drop below that to win some key customers. We’ve established our price list to allow an equitable margin, but we cut straight to the bone to win some key customers. First, because these customers either commit to volumes that make their business worthwhile or they have the potential to do so once we prove ourselves. Second, because well-known and respected brands are worth their weight in marketing gold. We consider their non-cash value when determining their discount.
Total Cost of Ownership Pricing: Determine pricing in the context of TCO? Absolutely – The purchase price of some products represents nearly 100% of the total cost of ownership (that is the cost to purchase, maintain, insure, and operate a product). On the other hand, the price of some products may be 5% or less of the total cost of ownership. The lower the percentage, the less effect your pricing has on the purchase decision. In these cases, you may find that very low prices don’t help sales and very high prices don’t hinder them. If this is true, mark it up. When we establish pricing at ChoiceStream for our advertising solution, we consider all ancillary costs that the buyer must incur when we deliver; including such things as building ads, ad serving fees, and ad safety fees.
Competitive Pricing: Research price points? Absolutely – It is always a good idea to ask as many potential customers as you can what they would pay for your product or service. When asking, try to simulate as closely as possible the conditions under which your customers will see your actual offers. We’ve made it a common practice asking clients and prospects what they normally pay for solutions like ours. We also check out competitors to determine the range of prices in the market, but we are careful to account for differences in quality, bundles and features.
In reality, different pricing models will work better for different companies. There is no single easy solution, but typically creating your own hybrid of these five types will be the end solution.