Trusting your gut is not enough when it comes to setting prices for your services. Following a solid pricing model will allow you to remain competitive in the ever-evolving sales world. Read on to learn the ins and outs of the top 15 pricing models.
Setting prices can be tough, especially when you’re new to the game. You need to take many factors into account if you want your services to stay within an acceptable pricing range. This will bring in revenue while still remaining appealing to your clients. Taking the wrong approach could cause you to lose both money and sales.
A solid pricing model can help you simplify your pricing strategy while sticking to industry standards. Most successful organizations use either one or a mix of a couple of pricing models to bring in customers, drive sales, and render more profits.
Below, you’ll find 15 common pricing models that work for different types of independent businesses.
- Pricing model definition
- Keystone pricing
- Psychological pricing
- Value-based pricing
- Discount pricing
- Anchor pricing
- Competitive pricing
- Penetration pricing
- Bundle pricing
- Project-based pricing
- Hourly pricing
- Premium pricing
- Price skimming
- Freemium pricing
- Dynamic pricing
- How changes in price affect demand
- Set your prices the right way
Pricing model definition
In short, a pricing model is a method for determining how to price your services. Setting reasonable prices is one of the many ways, if not the most compelling way, in which you can attract more prospects and turn them into buying customers.
A rookie mistake when setting prices is to only have a look at what the competition is doing and play copycat without thinking of other factors. A competitive pricing strategy is a good place to start, and it may end up being the best option for your business. However, your pricing model of choice should align with numerous factors, including
- Revenue goals
- Marketing goals
- Product attributes
- Brand positioning
- Target audience
- Consumer demand
- Competitor pricing
- Economic trends
Taking all this into consideration will help you identify an appropriate price range for your services. Keep in mind that, while the best pricing model is meant to help you maximize your profit and revenue, you should always make sure you’re not accidentally overpricing your offering.
Top 15 common pricing models
Ready to start setting prices for your services? Here are the 15 more common pricing models used to price products and services for independent businesses.
1. Keystone pricing
In this model, you can determine your selling price by multiplying the wholesale cost of your offering by two. It is so simple to apply that it’s become the standard price model for numerous organizations across industries.
Keystone pricing is basically a 100% markup to get to the selling price, and it’s commonly used by retailers and eCommerce sellers. Once you’ve set your base selling price with this model, you can always incorporate discounts and promotions on certain products or services based on demand and competition.
2. Psychological pricing
This pricing strategy will trick your clients into thinking your services are priced lower than they actually should be. It often prompts people to make a favorable purchasing decision by giving them the sense they’re getting bang for their buck.
Psychological pricing is a textbook pricing strategy that you’ve probably seen in numerous places. It’s commonly used by retailers, discount chains, fast food restaurants, big box stores, and more, but it can also apply to service pricing.
Psychological pricing works by removing marginal cents and dollars to create the illusion of a lower price. A perfect example is making all your prices end in 99 cents, or pricing your services at $499 instead of $500. The reason this model works is that consumers are wired to pay more attention to the first digits in the price tag.
Pro Tip: Pricing high-value items with the psychology of pricing may decrease their perceived worth, so use it sparingly. If you’re an independent business owner that offers tiered packages, you’ll want to focus on the value behind your most expensive options.
3. Value-based pricing
Another common pricing model, especially with premium services, is basing prices on value. This is a customer-centric approach that revolves around what your clients believe your product is worth. It’s perfect if you sell unique services and products with exclusive characteristics that set them apart from similar offerings.
Value-based pricing requires you to fully understand your clients, their value system, and their demand. To gain this knowledge, you can conduct surveys and perform market research that will let you access your client’s psychology. Additionally, you can study industry trends and keep tabs on what the competition is doing.
4. Discount pricing
Here’s another effective model that could bring in more clients to your business. However, it’s also another one you won’t want to overdo if you’re not looking to lower the perceived worth of your services.
Discount pricing is all about selling products or services at a reduced price. You need to be careful when setting prices using this strategy to avoid negatively impacting your bottom line.
A great rule of thumb is to take your keystone price and apply a percent discount to it. This approach allows you to make some profit while still giving your clients a good deal.
5. Anchor pricing
Displaying your offering’s actual price alongside the discounted price is an excellent sales driver. It makes it seem less expensive and may encourage your clients to finalize a purchase. A different approach to this strategy is to display similar services together so that the most affordable one looks like a bargain.
6. Competitive pricing
Investigating your competition and how they’re pricing their services can help you set a good starting point to price yours. Although, there’s a lot more that comes into play when setting prices. Still, competitive pricing will help you stay within the standard pricing for your offering.
Using competitor prices as benchmarks lets you make sure you’re pricing your services at a fair range. It can help you decide where to apply discounts and promotions or empower you to price your services a bit higher if you feel what you offer has a greater value than similar offerings.
Pro tip: If you decide to use competitive pricing, try mixing this strategy with other models to maximize your profit.
7. Penetration pricing
When launching a new service, you can always price it at a very low price and increase it over time. This is called penetration pricing and is highly used to hook the consumer to a certain offering. Think of all the services you’ve purchased because of their irresistible introductory price. That’s penetration pricing at its finest.
This pricing model is excellent when selling subscription-based services or memberships. The below-average price will help you penetrate the market and encourage your clients to keep purchasing in the long run.
Another way to use this strategy is by offering a free sample of your service for first-time clients or providing them with a limited-time deal. This will help you get people to try your offering and fall in love with it, building customer loyalty and promoting repeat sales down the line.
8. Bundle pricing
Selling in bulk is another pricing strategy that can work great when pricing your offering. It will enable you to offer multiple services that are typically needed together for less than what your clients would pay for them individually.
The goal of bundle pricing is to increase transaction sizes and make clients feel like they walked away with a great deal. You can use this model year-round or make special service packages for specific holidays and special occasions.
9. Project-based pricing
Charging a flat fee for your services is a convenient service pricing model that will spare you many headaches. It will empower you to skip calculations for time-intensive jobs and create security in the minds of your clients.
Allowing people to know your prices upfront will also generate a sense of transparency, which customers will always appreciate. Additionally, it will give you more control over how much you can charge for any services with set parameters by empowering you to set your own conditions. For example, you could set a time limit and upcharge for any additional hours it might take you to complete a project.
10. Hourly pricing
When setting a fixed price per project is not possible, you can always resort to charging per hours worked. This offers you an effective solution when pricing creative services or highly variable ones.
11. Premium pricing
This pricing model allows you to artificially inflate your prices to create a sense of higher value. It’s typically used by the luxury industry but could be a great option for specialty services. Premium pricing requires you to understand your market and raise your prices based on market valuation.
Premium pricing helps you demonstrate the value of your offering and justifies the high price tag. It works better if you’re already an established brand, but it could also help you introduce yourself as such if you’re new to the market.
13. Price skimming
This pricing model is the opposite of penetration pricing. Price skimming refers to introducing a product or service with a high initial price and lowering it over time to attract more customers. It allows you to recoup your initial service-development investment. However, if you’re not careful, it could set an overpricing precedent for your brand.
Setting an initial rate and dropping it allows you to foster loyalty among your clients. It rewards those who make repeat purchases and creates an incentive to keep buying and earn a better rate.
Pro tip: Monitor your sales data to determine when demand for your service is decreasing to know when to lower your price.
14. Freemium pricing
This pricing model falls on the flip side of skimming pricing. It’s when you offer a free service that your clients can then enhance or upgrade when paying for premium add-ons and other VIP features. Freemium pricing is an excellent alternative for companies with membership-based services and subscription options, such as business coaches
Freemium pricing may help your business drive sales and lure clients with an offer they’ll struggle to reject. After all, who doesn’t like getting stuff done for free?
Once your clients get to know the most basic form of what you offer through a free trial, for example, they’ll be more likely to pay extra for added services. Conversion rates for freemium companies tend to fall between 2 and 5%.
15. Dynamic pricing
Sometimes, companies set different prices depending on the current market demands. This is known as dynamic pricing and is commonly used by the tourism, hospitality, entertainment, and transportation industries. Prices set using this scheme often fluctuate based on the season. For instance, if you’re a wedding planner, you can up your prices during the wedding season or offer discounts during the off-season.
Dynamic pricing can help you get maximum profits and capitalize on busy times when demand peaks. It will also allow you to create better bargains during off-season months to encourage more purchases.
How changes in price affect demand
An essential concept to grasp when deciding what price model works best for you is the price elasticity of demand. This determines how price dips and surges affect consumer demand for a specific product or service.
For example, if buyers would still make a purchase regardless of how high the price may get, the product or service is considered inelastic. Elastic products and services will always suffer from pricing fluctuations. Understanding the idea of price elasticity will enable you to identify whether your offering is vulnerable to price changes.
The more niche your service, the more likely you can raise your prices without receiving pushback.
Set and showcase your prices successfully
Setting prices using the right pricing model is a crucial part of business. It will enable you to boost your sales and create that much-needed revenue. Using a mix of pricing strategies is a proven way to maximize your profits. On the contrary, not following a strategy could have a negative impact on your overall sales and scare off your potential and existing clients.
Once you’ve established your prices, the next hurdle is communicating them effectively to potential clients. That’s where HoneyBook comes in. As an all-in-one clientflow platform, it offers all the tools you need to sell your services and book clients instantly. You can create custom, branded templates that include your pricing guide and dynamically populate an online contract and online invoice on the next pages. Once your client agrees with your pricing and value, help them move forward seamlessly. With online payment software built in, you have everything you need to book projects and move forward.