Choosing Your Pricing Model

Figuring out the right pricing for your startup is a challenging, yet crucial, part of building a successful company. The way you price your product or service can make or break your startup.
Pricing is a balancing act that involves psychology, art and science. You must price high enough to make a profit and low enough to attract customers. Understanding the different pricing strategies and best practices can help you find the approach, and ultimately the prices, right for your business.

“Pricing is both art and science.” 

General Pricing Methods

There are many methods of establishing prices available to you:

  • Value-based Pricing. Value-based pricing is based on the dollar value their products provide to customers. These businesses then set their price below the amount of value customers get from using their products. This approach charges customers a fraction of the incremental value created by the product or a fraction of the costs saved by the product. This is often seen in ad tech or any type of optimization technology (e.g., increase conversions by 50% and take 10% of the gain).
  • Cost-plus Pricing. Cost-plus pricing is based on determining the exact costs of creating your product and charging some price higher than those costs – also known as “marking up.” Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained. It’s very common in commodity or nearly-commodity industries, where customers know the prices of the components used to provide the service. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product.
  • Competitive Pricing. Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another. Competition based pricing works well in markets where the price and value of a particular type of product are well established.
  • Demand Pricing. Used by companies that sell their product through a variety of sources at differing prices based on demand.

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