Pricing is a powerful tool for conveying value and driving conversions. Businesses must employ strong pricing strategies. For small businesses, value-based pricing models can be a compelling way to structure their pricing to prioritize consumer flexibility and help them earn more revenue.
Understanding Pricing and Value
Pricing is based on value. Creating value is essential to improving revenue. Companies achieve this by making their products and services more helpful and desirable. For example, if you add relevant features and cultivate a recognizable brand identity, you can expect demand for your product to increase and customers to justify a higher price point.
Why is Pricing Correctly Important?
Pricing correctly requires tact and understanding your client base to maximize earning potential. Not every customer wants the same thing, so each customer should receive individualized pricing consideration. This emphasizes the importance of a constantly evolving strategy that meets customer needs.
To make informed decisions about pricing you should conduct extensive research and familiarize yourself with your costs, customer preferences, and the market’s state. Appropriate pricing allows more people to purchase from you, which could net a bigger profit than higher pricing. To nail your price points, itโs up to you to cater to the delicate balance between profit and customer satisfaction.
Exploring Alternative Pricing Models
Pricing models are the methods by which companies decide on the price of their products. Most retailers use a cost-plus pricing model, a fixed rate, or hourly pricing. These are static and donโt take perceived value into account.
One of the most accessible options for small businesses is to offer money-saving options. These options offer flexibility and a lower threshold for entry, which can mean more conversions. There are several of these models that you can explore, which may better fit your goals.
Value-Based Pricing
This model focuses on setting a dynamic rate based on the value you offer customers rather than a static rate. How much you charge directly correlates to what a buyer is willing to pay.
As a business, you can apply this principle by creating favorable situations that make your product more valuable. Imagine being at a concert where a bottle of water is five dollars. Outside the venue, a vending machine offers the same bottle of water for only one dollar. If a customer isn’t able to leave the venue, they may be willing to pay the increased price.
This, in turn, makes the water more valuable, meaning that you can justify raising prices under a value-based pricing model. By valuing your work relative to the buyer, you increase your earning potential.
Subscription Services
This pricing model features a recurring fee payment structure that gives consumers access to your product. Subscriptions are great if your product is software or a content-sharing service.
Most companies will choose a flat rate that grants unlimited access to all content. However, as you develop your client base, you may realize they have distinct habits. This is when a usage-based or tiered model comes in handy. It allows your customers to choose the specific features they want from your subscription service at a discounted price, lowering the barrier to entry.
Subscription models can be reassuring, as you know you have an ongoing income source. The downside to subscriptions is that consumers may want to avoid the cumulative cost of their ongoing subscriptions, leading them to discontinue the subscriptions they find least valuable. Youโll have to consistently make your service worth the subscription.
Pay What You Can
The other side of value-based pricing can be downsizing your price expectation as a trade-off for accessibility. Pay-what-you-can models allow the consumer to price the goods themselves.
This system works great for products that donโt have a high production cost or when getting your product out there is the most important thing. The downside is that some consumers wonโt earnestly pay what they think your product is worth, so youโll lose out on some valuable revenue.
Penetration Pricing
Penetration pricing is another model that uses low pricing to attract customers. The strategy involves offering a special rate upon market entry much lower than the standard price, which will drive buyers to you. This uptick in customers can improve your brand recognition, which adds value. Over time, you can raise prices to capitalize on your client base and reputation.
This strategy shakes up the market and can spark attention to your business. On the other hand, upfront capital is required to offset your initial losses.
Want to Improve Your Small Business? Matcha Can Help
A strong pricing model and a flexible strategy will give your small business a leg up on the competition. But, understanding the pros and cons of each type of pricing model can be difficult. You might want someone to guide you through the intricacies of developing your pricing strategy, and if so, Matcha is here to help with all your business needs.
