Creating an Effective Pricing Structure: A Comprehensive Guide

Main pricing structure types

Tiered pricing might be one of the most pricing structures but there are actually far more options than just this one. Let’s look at some of the available types and how companies might be using those in practice.

Tiered pricing

Tiered pricing divides the product or service offerings into separate tiers, each with its distinct features and prices. The higher the tier, the more benefits the user can get - but the price is also higher. This pricing structure helps users choose the option that best fits their requirements and budget, with the added benefit that they can quickly scale up or down.

Example

A company offering a project management tool has three tiers available. he lowest tier is $10 a month and only has a few management features available, plus the number of projects users can add is also limited. The professional tier is priced at $30 a month, and besides unlimited projects, a few advanced collaboration features are added. The highest, Enterprise tier, is priced at $60/month, it includes advanced reporting tools, priority customer support, and additional storage space.

Bundle pricing

Bundle pricing combines two or more standalone products or services and offers them at a lower price than if customers want to buy those separately. Offering those is a nice way to encourage users to spend more money in exchange for getting the products or services they need all at once. 

Example

A business software suite might include separate CRM, email marketing, and sales analytics tools. Instead of selling them separately, the company could offer a “Business Growth Suite” which integrates all three tools at a price lower than purchasing each individually.

Freemium

Freemium is a hybrid pricing model combining “free” and “premium” models. Users can access the core functionalities of the software for free but are required to pay for advanced features or additional capabilities. Freemium is a common way in which SaaS businesses try to attract users, hoping they’ll find the platform valuable and eventually move to the paid version.

Example 

A graphic design SaaS platform could offer free access to basic design tools and templates. For features like high-resolution exporting, access to a premium assets library or advanced editing tools, users would need to upgrade to a paid account though.

Pay-as-you-go pricing

Cloud computing and SaaS brands often also use the “pay-as-you-go” pricing model, where customers are billed based on their actual monthly consumption or usage rather than paying a fixed monthly fee. The biggest benefit of this model is that it’s incredibly flexible - if a customer needs more resources in a given month, they will pay more. But when their usage drops, so will their bills.

Example

For a cloud computing service it might make more sense to bill users based on the computing power or storage they used rather than use a flat-fee pricing. If a customer needs to temporarily increase the resources (let’s say, server usage due to increased website traffic), this structure will allow them to use as much as they need to handle the increased traffic and then automatically lower their usage when they no longer need it. 

Volume-based pricing

Here, the unit price reduces as the volume of purchases increases, offering a bulk discount to the users. This is an excellent method to incentivize customers to buy or use the product or service more, as they can save money on higher volumes. 

Example

Email marketing service might charge 10 cents per email for the first 1,000 emails. Beyond that, the price could drop to 8 cents per email for volumes between 1,001 and 10,000 and then keep dropping by 1 cent for every 20,000 emails sent.

Subscription pricing

Vast majority of brands from dozens of industries now have a subscription plan where users pay a recurring fee to access a product or service - typically either monthly or annually. Zuora research even found that businesses using subscription model are growing 4.6x faster than companies from the S&P 500! For users, subscriptions are incredibly convenient as they don’t have to search and buy a given product or service every month plus they can stop using the service at any time they want.   

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For businesses meanwhile, subscriptions give them a predictable revenue stream, especially if they can incentivize users to buy the annual subscription (for example, with special discounts).

Example

A digital accounting software platform might offer its users access to its tools for a flat fee of $30 a month. If the user pays for the entire year in advance meanwhile, the price drops to $23 a month.

How to set up a pricing structure

So how can you choose which models would fit your business and product best? What you need here is doing thorough research on both your own costs but also your audience and competition to see which option would make the most sense for your product. To put you on the right track, here are some steps to create a robust pricing structure.

Research your costs

To set a realistic and profitable price (or prices) for your product or service, you first have to find and add together all expenses related to it. And we don’t only mean adding direct costs like raw materials, resources, or labor costs. You need to think wider: utilities, rent for the space you’re using, marketing costs, and even the small, often-overlooked expenses like packaging should be included.

Once you know your total costs, you’re in a much better position to determine a price that covers these costs and brings in a profit.

Analyze your audience and competition

If you want to bring people to your brand, then it’s essential to know who they are, what they might be using your product, and what are their buying habits. The more you know about them, the easier it will be to determine how much they are willing to pay and pricing structure they might find the most appealing

Alongside this, observe your competitors. What are they charging for similar products or services? How does their pricing structure look like? Are they offering discounts or special offers? If you can understand both your audience’s preferences and your competitors’ tactics, you can price your own products in a way that attracts customers and gives you a competitive advantage.

Consider the value

Gauging how much your product or service is worth to potential customers can also help you pinpoint the right price and structure you should use.

Imagine you are selling a business automation tool that can save a company a lot of money, let’s say $10,000 a year. If you charge them $1,000 for it, they might see it as a great deal because they’re saving much more than they’re spending.  But, if the same tool would only save them $ 1,500 a year and you still charge $1,000, they might think it’s too expensive. 

So, the price you set should also reflect how much value your customers can get from your product.

Estimate the base price points

With a good grasp on your costs, customer preferences, and the price difference between your product and competitors you can set a base price for your product or service. This base price should, at the very least, cover your costs and give you a little profit. You can treat it as a starting point for calculating and adjusting the final price or prices at which you will offer your product or services.

Keep pricing transparent

No matter what structure or pricing models you pick, it’s vital that you keep the pricing simple. A good pricing structure boosts customer trust and encourages customers to purchase your products. With too many options meanwhile potential users might get overwhelmed and leave. Plus, with an easy to understand pricing, you’ll also avoid many of the issues that might come from users misunderstanding the prices and then getting upset with the price they have to pay.

Monitor and optimize

The market, customer preferences, and your own business goals can change over time. So it’s essential that you keep an eye on how your pricing structure impacts your sales and if there is anything you should optimize. Maybe you need to adjust because of increased costs, or perhaps a competitor has entered the scene with aggressive pricing. It’s high time to review and update your pricing. 

And if you need someone to lend you a hand with creating, modifying, or updating your pricing structure, you can count on us at Valueships. From pricing strategy consulting to finding where the true value of your product or service lies, we’ll help your business stand out. 

Leave your contact details and a short description of your needs using the form on our website, and we’ll schedule a meeting to talk more about your goals.  

Conclusion

A simple and clear pricing structure can help your users or customers understand what they can gain by picking your product - and this way, boost your sales. To create one though, you’ll need to do your homework first - consider your costs and goals, gauge how much customers are willing to pay, and what competitors charge. Remember, the goal is to offer attractive prices that also allow the business to make money. So, when building a pricing structure, always think about both the company’s needs but also what’s best for the customers.

FAQ Section

1. What is a pricing strategy, and how does it impact a company's market share and customer perception?

A pricing strategy refers to a company's approach to setting the cost of its products or services, taking into account factors like production costs, market demand, competitor pricing, and overall business goals. The chosen pricing strategy significantly impacts a company's market share and customer perception by influencing how potential buyers view the product's value compared to alternatives. For example, premium pricing can position a product as high-quality or luxury, attracting customers willing to pay a higher price for perceived better value, potentially increasing market share in a niche segment. Conversely, economy pricing aims to attract price-sensitive customers by offering lower prices, focusing on volume sales rather than high margins.

2. How do pricing structures like penetration pricing and price skimming work to capture market share or maximize profits?

Penetration pricing and price skimming are two contrasting pricing structures designed with specific market entry goals in mind. Penetration pricing involves setting a low price for a new product to attract customers quickly, capture a significant market share, and establish a strong presence in a competitive market. The low price point encourages rapid adoption by price-sensitive customers, with the potential for prices to increase once a loyal customer base is established.

Price skimming, on the other hand, sets a higher price initially when a new product is launched, targeting customers willing to pay a premium for innovative or unique features. Over time, as the market saturation increases and competitors enter the market, the price is gradually lowered. This strategy aims to maximize profits from each segment of the market, starting with those least price sensitive and moving towards more price-sensitive customers.

3. What is dynamic pricing, and in what industries is this pricing strategy most effectively used?

Dynamic pricing is a flexible pricing strategy where prices are adjusted in real time based on market demand, competitor prices, inventory levels, and customer behavior. This strategy is most effectively used in industries with fluctuating demand patterns and relatively fixed capacity, such as airlines, hospitality, and e-commerce. For example, airline tickets and hotel rooms may become more expensive as availability decreases and demand increases closer to the date of use. Dynamic pricing allows businesses to maximize revenue by capturing the highest price customers are willing to pay at any given moment.

4. Can you explain the concept of psychological pricing and how it influences consumer buying behavior?

Psychological pricing is a strategy that leverages human psychology to encourage purchases, based on the premise that certain prices have a psychological impact on consumers. A common example is setting prices just below a round number, such as $9.99 instead of $10.00, making the price appear significantly lower in the eyes of the consumer. This approach plays on the consumer's emotional response to pricing, making products seem more affordable or offering a better value, which can influence buying behavior by increasing the likelihood of a purchase.

5. How does value-based pricing differ from other pricing strategies, and why is it considered effective for building long-term customer relationships?

Value-based pricing differs from other pricing strategies by setting prices primarily based on the perceived or estimated value of a product or service to the customer, rather than on production costs or market price standards. This strategy involves understanding the customers' needs, preferences, and how they value the product's benefits. By aligning the price with the value customers place on the product, businesses can justify higher price points for products or services that offer unique benefits or solve specific problems effectively.

Value-based pricing is considered effective for building long-term customer relationships because it focuses on delivering and communicating value, leading to higher customer satisfaction and loyalty. Customers are more likely to feel that they are getting their money's worth and continue patronizing a brand that they perceive as offering superior value, supporting sustainable business growth.

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