Choosing the best Pricing Model
Which pricing model best suits a business model depends among other factors upon the level of product awareness amongst the target customers.
For consumer a simple pricing model and the opportunity to test the product or service before its purchase is very important.
The freemium model provides a basic product or service for free but charges a premium for value-added features. This pricing model is attractive for risk averse consumers because it allows them to test a product or service without risk. If they if they find it valuable they have the option to purchase more advanced features.
In this pricing model, the user is charged a fee per transaction. Unlike in a subscription model where consumers pay regardless of their use, the transaction model reduces the risk for consumers because they only pay for what they use.
The mobile operators revolutionized the pricing model for telephone service by switching from a contract-based monthly subscription model to a pre-paid pricing model on a ‘pay as you go’ basis. This model continues to be largely responsible for the rapid growth of mobile services among low-income consumers. A variation of the transaction model is the revenue-share model, where instead of a per-transaction fee, a percentage of overall revenues is charged. This applies only for B2B transactions though.
Market maker model:
This model is usually driven by an established, big company, with a presence in the target market it can take the financial risk of creating a new product and is looking to increase loyalty amongst its existing client base. This model reduces risk for companies by utilizing existing resources to launch a new product that will ultimately benefit their original product. This is not the space for small entrepreneurial companies. This model has the following features:
- It introduces a new product to a market by using the company’s brand recognition so that it “makes” the market for a product that previously as not available in the market.
- It leverages off an existing product/service.
- It offers loyal customers free products but with the option of value-added services through a transaction (pricing) model.
How to choose the best pricing model?
If… then choose the following pricing model…and consider the following approach:
If you need to prove the benefits of the product/ service
If basic information feature can be offered for free and thus attract new customers, while higher value or transaction- related services can be charged.
… choose the freemium model and consider the following approach:
- Evaluate how much time your customers need to appreciate the benefits of your product (such as a day, week or month) in order to determine the optimal timeframe for a free trial.
- Resarch whether third parties might be willing to pay for or subsidize the service/product on behalf of the customer.
- Evaluate whether you can offer new customers free support for installing new products or services in order to lower the entry barrier and costs of switching.
If consumers already undrestand the benefits of the service and just want to access it…
if you can provide your service on a pay-per-use basis…
if there are any innovative business models that allow your high-value product to be supplied on a per use basis to save customer investment cost-for example, by allowing it to be rented or by having another business offer its use..
…choose the Transaction Model and consider the following approach:
- Consider the appropriatte “use” units (for axample, time-based, per user, per transaction etc) to build your pricing on.
- If you offer a B2B product/service, avaluate whether it makes business sense to accept a small percentage of the revenue of your client as payment in order to build trust and demonstrate that you tie your clients’ success to yours.
- Consider if you can retreive your product in case of nonpayment or faud.
if you are not a market maker yourself (that is you do not have an existing persence in the market with other products or services) but would like to introduce a new service or product on a large scale…
…then choose the following pricing model and consider the following approach:
Identify which complementary partners could ‘make’ your product or services as a part of their offerings. since this kind of partnership creates large dependencies be sure to closely evaluate potential parners and carefully consider:
- Size of overlap of target markets
- Degree of consumer trust in partner brand
- Marketing capabilities of partner
- Distribution model and reach of partner
Once a partner has been found, you will need to negotiate what revenue share your company is willing to invest in the partnership. collect sufficient information to ensure that you have a realistic view of your negociation power.
Written by: Ibtihel Hamraoui