Featured Whistler Question newspaper column, June 27, 2017: Choosing the Right Pricing Model for Your Business
This Biz Strategies column from a couple weeks ago touted the importance of pricing products and services at rates attractive to your ideal clients while still making you a profit (read it here). Sounds easy, doesn’t it?
Two Basic Methods of Pricing
There are two basic methods for pricing products and services: cost-plus and value-based. What method you use depends on your type of business, what influences your customers to buy and the nature of your competition.
Cost-plus pricing takes the cost of producing your product or service and adds an amount that you need to make a profit – usually a percentage of the cost. It’s generally more suited to businesses dealing with large volumes or which operate in markets dominated by competition on price.
Value-based pricing focuses on the price you believe customers are willing to pay, based on the benefits your business offers them. This pricing method depends on the strength of the benefits you can prove you offer to customers.
Different Pricing Models
However, it goes beyond just setting prices and in fact, should involve choosing a pricing model so both parties benefit. Your client should feel they received value, and you should feel that you made the profit that you deserve.
Following are some pricing models that are commonly used in the business world.
Fixed fee. A set price is established for the entire project and also presents the opportunity to collect the fee in installments for longer projects rather than waiting until completion for payment. Clients often like this pricing model because they know what they are getting, without surprises. The danger for providers is that there is limited recourse if the project gets bigger or the scope changes in some way. Should the scope grow too much, providers should be prepared to renegotiate.
Time for money. There are two models that fall under the time for money option. First, agreeing on a set rate (could be hourly, daily or monthly) to deliver services at a predetermined amount of time. The second model also has a quoted set rate but without constraints on the amount of time it takes to complete the project. Providers usually like this because it prevents problems should the scope of the job change. However, clients are sometimes nervous because it leaves the clock open to project overruns and takes away control.
Retainer Fees. A provider charges a set amount for an ongoing period of time to provide a certain service. For example, a consultant may manage the Human Resources process for a company and charge either a monthly or quarterly fee.
Value bundles. Offering a combination of services or products in one package gives the buyer greater value for less money and the seller receives more profit for less marketing effort.
Loss-leader pricing. This pricing model is designed to get people in the door by offering products at a low price point, with a goal to up-sell them on other products at higher prices.
Low or Economy Pricing. This strategy positions you as a low cost provider, meaning that you always offer the lowest prices to differentiate yourself.
High End Pricing. This is when you do the opposite of low pricing, and price your services at an elite level to establish yourself at the high end of the market.
Pricing is a key element in determining the profitability of your business so research your competition, know how much your target market is willing to pay and understand the decision-making process they use when purchasing.
At Lighthouse Visionary Strategies, Cathy Goddard offers business and life coaching, workshops and the popular Whistler Open Forum Speaker Series. She is founder of Lighthouse Mentor Network, a mentor program nominated for Small Business BC Awards for 5 consecutive years. Cathy writes this column for the Whistler Question newspaper.