The 7 Basic Pricing Strategies
How to juggle time, competitors, packaging, value, and more
How much should you charge for your product or service? And how do you choose the correct strategy for your product or service? And what are basic pricing strategies?
We’re going to talk about the pricing itself another time, but now I would like to tell you about the seven most commonly use pricing strategies.
Pricing is a very important decision since it directly affects your marketing. And when done correctly, pricing could be a very good marketing strategy. Good pricing will also give you a big advantage over any competitor. Today I will share seven pricing strategies with you so you’ll know how to price your product or service.
You see, when you price things too low, you are not making any money. You will not have enough time to make money because of the sheer volume of customers you need to make a decent living.
And when you price things too high, you will not make any money since you will not have any customers. It’s the fine balance you need in order to grow your business and make a healthy living.
1. Price to Your Competition
What happens a lot of times is that businesses simply add up the prices of their three main competitors, and divide it by three to come up with an average. This works best in a market where customers are shopping for the best price, a commodity market, so to speak.
If you ask 5% or 10% more than your competitors, you might have difficulties getting customers unless you know how to differentiate yourself. Most of the time, you’ll be reacting to the pricing of your competitors. If other companies lower their prices, you lower your prices, and if they bump their prices, you bump yours. This makes your pricing strategy dependent on others, so try to differentiate yourself by offering something extra or by showcasing your unique abilities to solve the problems of the potential customer.
2. Price to Pay the Bills
Some call this strategy the break-even strategy, and what they mean by this is that your costs and overhead are covered but not much more. This might be good in the beginning when you are testing a new market, but please be careful when you use this strategy. You can use it, for example, to get a high volume of new customers, and then you’ll make more money on them by using after-sales, the follow-up.
3. Price to Time
This strategy might be the most-used model to price products or services. You might charge per hour, per day, or maybe per week. You ask yourself how much time you’ll be spending on a particular task or project, and then you charge accordingly. Let’s say you ask $25 per hour and you need 100 hours to finish a task, so you will charge $2,500 for this project. The more time you spend on a project, the more money you’ll earn.
This is a common trend since the economy started to shift from being a job economy towards being a skills economy, where customers like to charge for your results rather than your skills. But there is a problem with this if you still use the Price for Time strategy since there will always be a conflict of interest. What do I mean by that?
Let’s pretend for a second you charge $50 an hour for what you do, and a project will take you ten hours. So you’ll bill them $500, which is fine. But let’s say can you can do the project in eight hours. Be honest, are you going to charge them ten hours? Even if you could get it done in eight hours, would you do it?
Because let’s face it, the longer it takes you, the more money you make. The customer, on the other hand, wants to have things done as fast as possible. So how does that work? This way, there will always be a conflict of interest between you and the customer.
There was a time that this type of pricing worked, but in this new economy of paying for results, I believe there is no place anymore for this strategy.
“No fee is too high for success and almost any fee is too high for failure” — Dan Lok
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Should you not be rewarded more when you can finish the project in five hours instead of ten? And why would the customer have to pay because you need to drag out the project in order to make a decent living? For me, that does not make sense.
4. Price to Cost Plus
This pricing model is very popular in the construction business, and it seems very logical at first. Let’s say a build will cost $1 million in materials, etc. The company will then add a 10% or 15% markup for the labor involved. A lot of different industries use this model, but there is a common problem with it.
By using this pricing model, the customer pays more since this model is based on spending more money. When you work as a contractor and you know a project will cost $1 million including all the materials and labor, you are putting your markup on top of that (15%) to get a total price for the customer.
Let’s pretend that there are new materials that are cheaper, better, and overall more cost-effective. Let’s say you can get the project done for $900 thousand. Most contractors will ask themselves, “Do I really want to do this project for $900 thousand instead of a million since I’ll be making less money?” It is in the contractor’s best interest to spend as much money as possible. But for the customer, on the other hand, things are different.
For the customer, it’s true that the more money you spend on materials and labor, the more money they’ll have to pay. For you as the contractor, this is a good thing. But the customer will not be happy about it. This is another great example of a conflict of interest.
To get rid of this problem and be more results-focused, you can have bonuses for the contractor when the project is cheaper than the first estimate. You can have a bonus when the project is done before the deadline. This way, the contractor is sure to receive the mark-up, but there will be a bonus when the overall project will be cheaper for the customer. Do you have experience with this technique: on-time or early= $$?
5. Price to the Package
This strategy works by creating an offer, a package. Let’s say the value of the package $10,000. If you are only charging your customers $1,000, they are only paying a fraction of what the package is worth.
The package will become irresistible, and it’s relatively easy to increase the value of the package when you want to raise the price of the package.
Several famous entrepreneurs use the 1:10 rule. This means that they are selling a package that is worth ten times more than what they are asking for it. A customer gets ten times the value they pay. This way of pricing is great if your product or service is digital.
Focus on showcasing the complete value of your package, and show them how much money they make with your package. And then make the asking price 50% of that value. This way, your offer looks very attractive because it’s easy for them to see the value.
6. Price to Position
This strategy is based on your position within the marketplace. If you are the leading expert, you can charge a lot more money. A lot of people understand how it is to sell lots of products, but how do you position yourself as the go-to brand? How do people know you’re the expert on whatever it is you do?
When you understand basic supply and demand, you are ahead of many competitors. Ask yourself how you can create more demand for what you do. After you’ve done that, you want to restrict the supply.
This all comes down to not flooding the market with your product or service. It’s better to keep the price higher by making sure the demand stays higher than the supply, just as the diamond market does.
7. Price to Value
My favorite. When I’m paying for results, I am more than happy to pay a premium because I know what’s in it for me. I do not care about time, I do not care about effort, I care about results. I care about what it brings me.
If you price to value, there will not be a ceiling to your income. An example is running a consultancy firm. Charging a certain amount per hour does not make much sense since the clients’ success or failure has nothing to do with you.
No matter if they get results from your efforts or not, you still get the same amount of money. Which is not good because the rewards are not distributed equally.
Let’s say you go to a business and you say, “I can help you get more sales or revenue because I’m the expert on these things.” You then say, “I will double your revenue or your sales in the next two years by putting certain systems in place. That extra revenue that I have been able to gain for you, the growth you would not have without me, out of that extra revenue, would you be comfortable paying me a small amount, let’s say 5%?”
By having a conversation like this, the values of you and your customer will be the same. They line up since you both want the same thing. By using this tactic, you show every customer that you only care about the result. You get paid by the value you bring to their time, and, by working smart, you might be able to get the results in just a few hours a week. Who knows?
You can even connect several customers when you believe they are a good match. Your income might grow even more by doing this. Do you see how thinking like this changes the way you look at things? It changes the way you deliver value.
Depending on the situation, I change my pricing strategy. Sometimes I get paid $75 per hour, which is fine. Sometimes I barely break even because I know that this customer will provide me with income in the future. And sometimes I make a combination of different tactics. But what I want to tell you is that you need to take your time on this. Don’t try to rush this: Think about the different strategies and be strategic.
Please comment below with which pricing model you use and which business you’re in.