It can be a tedious process to figure out the right pricing model for your goods and services. If you set your prices too high, you’ll miss out on potentially important sales. If you set them too low, you’ll miss out on an above-average profit. But pricing doesn’t have to be an uncertain shot in the dark.
There are a plethora of pricing models and techniques that will assist you in better understanding how to set the best prices for your target demographic and revenue goals.
Today we are covering the four primary pricing models to implement to achieve your sales targets:
Value-Based Pricing Model
This is a customer-centric pricing technique that allows companies to charge for goods or services at a cost that they believe their consumers are willing to pay. Companies who use value pricing base their prices on their consumers’ perceptions of how much a good or service is worth.
The advantages of using a value-based pricing model are:
- You can start at a higher price point right away if consumers are willing to pay more for your goods.
- Knowing how much your customers are willing to pay for your services will help you figure out what you need to do to improve your product or service.
- Value-based pricing will assist you in further creating, tweaking, and optimizing your offerings. The more value you have, the more likely your customers are to pay.
A Fixed Fee Model
A fixed cost pricing model is one that ensures a fixed budget for a product regardless of time or cost. A fixed price model’s main benefit is that it helps the customer to prepare and set an exact budget.
The advantages of implementing a fixed fee pricing model are:
- Completing the project within an established budget and terms.
- Requiring minimal customer supervision.
- Ideally suited to small and medium-scale projects.
- Guiding the service provider to be as effective and productive as possible.
Time and Material Model
Time and Material is a commonly used term in a contract for construction, product production, or any other type of work in which the company decides to pay the contractor depending on the time spent by the contractor’s staff and subcontractors doing the work. It also covers the materials used in the construction, plus the contractor’s markup on the materials used, regardless of how much work is performed.
The advantages of using a Time and material pricing model are:
- The budget is flexible and negotiable, as well as a low risk for all parties.
- Opportunity to pay in installments and only for work done.
- Perfect for large and long-term projects that can’t predict the end product based on the initial stages.
- The ability to discuss requirements and improvements at any stage of the project.
Milestone Driven Pricing Model
In this type of pricing model the service provider bills the customer when they perform a particular scope of work over a specified period of time, reaching a predefined milestone. The customer would then pay the service provider a sum based on the amount of time spent and the results obtained for the specified milestone.
The advantages of going with a milestone pricing model are:
- Paying for performance. The customer just pays for the functionality that is actually provided to them.
- Monitor the outcome. The client is now in charge of approving each milestone.
- When a client receives a piece of work for review, most companies can provide them with a checklist to use. This checklist helps them determine whether something is working properly.
To summarise, before making a decision, do your homework on the different pricing techniques, just as you would for everything else in the industry. Before you adopt a strategy or a combination of several pricing strategies, weigh the benefits and drawbacks of each approach to determine which would work best for your business.