A close-up of two people's hands and arms. One set, dressed in a white-and-blue-striped shirt, is operating a smartphone. The other, dressed in a blue checkered shirt, is using a pen to point at papers covered with charts.
Your pricing model can depend on your industry, your desired amount of cash flow, and the demand your products have. — Getty Images/Kubra Cavus

Pricing your product or service is both an art and a science. On one hand, you want to price your offering low enough to entice customers to make a purchase. On the other hand, you want to ensure you’re covering your costs — and then some.

There are three different things to consider when you determine your pricing: the pricing model that will help you find the balance of value and revenue; the pricing strategy that will help your business grow; and the pricing tactics that will help you fine-tune your price per item. As you consider how to price your items, start by learning about these common pricing models.

Flat-rate pricing

Flat-rate pricing is the least complicated pricing model on this list. It is simply a single product, with a single set of features, offered for a single price. Flat-rate pricing is uncomplicated and everyone sees the same offer. This makes your sales team’s job easy, with a clearly defined and easy-to-communicate value proposition.

However, flat-rate pricing is blunt: There’s no nuance or flexibility to your offer. Either someone wants your product or service at that price point, or they don’t. This dichotomy can make it difficult to extract more value from certain users. You’ll charge the same to a small business as a large enterprise that has more resources, for example.

Pay-as-you-go pricing

Pay-as-you-go or usage-based pricing sets the price based on how much of the product or service a customer uses. The more the customer uses, the higher their bill will be.

This pricing model is a great option for businesses that have volatile demand. Because price scales alongside usage, it makes sense to correlate your charges accordingly. Customers see this pricing as appealing because they can control how much they spend and there are no large upfront commitments that a customer needs to make. For your business, there’s no risk that someone takes unfair advantage of your fixed price.

The downside of pay-as-you-go pricing is that it can be hard to forecast revenue and customer costs. Billing amounts may vary dramatically from month to month, so you must be careful to manage your cash flow accordingly.

Price per user is an extremely common pricing model for software companies.

Tiered pricing

Tiered pricing offers multiple packages with different combinations of features offered at different price points. This pricing model suits many types of businesses, including streaming services (music or video), software-as-a-service (SaaS), apps, video or mobile games, e-commerce clothing retailers, food delivery companies, and companies that sell other consumer goods.

[Read more: What are Tiered Pricing Models?]

With tiered pricing, you can create tailored packages to meet the needs of different buyer personas. This allows you to maximize the revenue possible from each type of customer, from a premium user to someone on a tight budget. There’s also a clear path to upsell; when someone outgrows their current package, there’s an upgrade to the next price point available.

Price per user

Price per user is an extremely common pricing model for software companies. You charge a fixed monthly or annual price for each person using the product or service. Like the pay-as-you-go model, this enables customers to pay only for what they need. However, it’s a more predictable pricing model than usage pricing — users are more stable than demand.

Subscription and membership models

Price per user is a model that falls under the subscription or membership-based approach to pricing. A subscription business pricing model prices the offering to drive revenue and satisfy its customers’ needs. For example, meal delivery services, streaming video services, and news websites are all considered subscription or membership models.

[Read more: 4 Subscription Pricing Models for Small Businesses]

Creating a subscription or membership pricing model involves evaluating your competitors, looking at what drives the most revenue for your organization, and considering your customers’ needs along with your product offerings. With the right incentive, sales tactics, and price point, this sales model can optimize your profit margin.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published April 12, 2022