Pricing is Art: models vs strategies

Howdy! 👋 This winter, we're starting off a series about pricing as an art and science. The goal of these editorials is to help you evaluate and improve your current pricing models. Let's play some catch-up and see how pricing has progressed in the recent years! 

What we mean by "art"?

The main idea behind this whole series is to really drive home the point that nowadays pricing is a science. Just like project management, user interface design, typography, copywriting and many more areas of product & business development. International markets, fierce competition and complexity of running a business increased so much, that simply answering a question of "how much should I charge?" became a valid and hard question.

Imagine that you own a furniture company. Producing a sofa costs you $500. After adding taxes, warehouse & transport costs and some margin for your pockets (say, 10%) you get a decent idea of how much you can charge to turn a profit and not go bankrupt. All peachy.

Thins become exponentially harder in IT, though. Let's say that you have sacrificed a year of your free time to develop a tool that others find useful. It's a SaaS tool available in the browser. You don't have much in the way of costs in the traditional sense - hosting is cheap as hell. However, this did cost you quite a bit of time and you want to make further development sustainable. If you match most advice available online, you will have plans ranging from $1 to $50 per plan. But what if you have only 10 initial customers? $500 pre-tax is nowhere near sustaining a full business, and running side-gigs after main job may tire you and result in severe burnout.

Similar dilemmas are fueling the growing pricing scene, invoking lengthy discussions, mathematical models and scientific studies. The end result is similar to advice on perfect Instagram posts - while there are no golden bullets that fit everyone, clear best practices that are proved to work have been established.

It all started in the skies.

Pricing science originates from the 1980s, specifically airline industry.  It followed the rapid deregulation of mass air cargo transport and initially concerned yield management. Airlines face massive costs and any imperfections in their pricing result in many Dollars lost. The methods developed by the founding fathers of modern pricing quickly spread to other industries, and after entering enterprise software (mainly B2B applications), now invades small-scale players, agencies and startups as well.

Pricing models and strategies

A pricing models differs from a pricing strategy. Models are used to balance revenue and spending. Strategies are what you use to achieve your goals.

Common modern pricing models

(What you actually sell and why)

Freemium - supported by ads or donations

Flat rate - a single, set-in-stone price

Tiered plans - you all know what this is by now

Usage-based: tiers that change depending on how much the customer uses your product

Pay as you want - usually expressed as Patreon on coffee

Popular modern pricing strategies

(How much you want for it to gain market)

Penetration pricing-  used to enter new markets and sectors

Premium pricing - positioning as a premium brand

Price skimming - quick profits as long as market allows

Loss leader - extremely low pricing to grab attention & upsell other products

Captive - similar to above, but the core product is cheap as hell and you upsell upgrades to it

Economy - smallest margins possible

Bundle - offering only items grouped together

Bulk - price based on quantity

Market/Dynamic - prices changing depending on demand and market situation

Cost - calculating all costs and adding a set % margin on top

Value based - the hardest and most esoteric; you judge the value you provide and then price based on it.

Sometimes, you will encounter the above under different names. Most scientific sources agree on a core set that's essentially what we have just listed and it's a good starting point for us.

Homework #1

We strive to make this series somewhat interactive. At the end of each article we will ask you questions. When put together, they will form a basic but sufficient pricing audit - one that will give you a great idea if you feel confident about your current prices.

1. Which pricing model are you using?
2. What strategies are you employing?

Tip: write down your answers as further reference will be useful!

Stay tuned for the next installment 👋

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