When thinking about how to differentiate yourself from your competitors, pricing typically isn’t the first thing to come to mind. More often, you think about how your solution is different, how your brand sets you apart or even how your business is more convenient or easy to find.
But pricing is one of the 4 Ps too, and how you price your product or service doesn’t just impact your profitability — it impacts how you compare to competing solutions and how customers perceive you.
Pricing Strategy vs. Pricing Model
Your pricing model is dictated by your product. Your pricing strategy is based on the market your product is in. While there are some pricing models and strategies that won’t align, the two don’t have to be related at all.
Three companies could offer similar products but use completely different pricing models and strategies. For example, one could use a price skimming strategy with a flat rate model. Another could use a tiered pricing model with a penetration pricing strategy, and the third could use a freemium strategy with a pay-as-you-go model.
Your pricing model should be built around the core offering of your product or service, and your pricing strategy is based on how your product compares to your competitors and the demand for it.
6 Pricing Strategies for Your B2B Business
Price skimming is when you have a very high price that makes your product only accessible upmarket.
Price skimming is typically associated with luxury items and only works if you have a product or service that is highly valuable or perceived as highly valuable. Brands like Rolex, Mercedes-Benz and Louboutin use a price skimming model, and the high price reinforces their luxury perception.
Regardless of actual quality, a higher price can be associated with a higher value, so if you have a unique, innovative product or a valued brand, a price skimming strategy can be used to gain a higher profit from fewer sales.
A price skimming strategy does limit the market segments you can appeal to, so if you want to grow and expand your business over time, you’ll probably have to eventually incorporate other pricing strategies so you can sell downmarket.
For products, you could continue to use a price skimming strategy with new releases and lower the price of previous versions. Or product and service providers can offer “economy” versions of their solution to appeal downmarket.
However, if there is more demand for your solution than there is supply and you have brand equity, it is possible to grow while keeping your high price. For example, the marketing agency Ogilvy morphed a price skimming strategy into a prestige pricing strategy.
Penetration pricing is the opposite of price skimming. Instead of going to market with a high price, companies using a penetration pricing strategy have a low-priced solution in order to capture as much market share as possible.
For example, expense management software Expensify uses a penetration pricing model in combination with product-led growth. Their low price draws initial users, and then more users within a company will adopt the tool due to its functionality.
Penetration pricing only works if the solution can achieve economies of scale since high volume has to compensate for the low per-unit price. Or, penetration pricing can be used only as part of the go-to-market strategy in hopes of gaining brand loyalty that’ll last when the price eventually rises.
Freemium is a portmanteau of “free” and “premium,” and a freemium business model involves offering a free version of your product or service and then upselling users into a paid version.
The music streaming platform Spotify uses this model, offering a free version that allows users to listen to music, but if they want to download files to listen to offline, skip songs unlimitedly or adjust their audio quality, they have to upgrade to a paid account.
Freemium can be a part of your go-to-market, or it can be used to break into new markets or introduce new products.
Slack used a freemium model from the start and has had unprecedented success with a 30% conversion rate. Freemium worked well for Slack because they were able to delight users with their free version while still providing additional useful features in the upgraded paid product.
Conversely, HubSpot did not start out using a freemium strategy. They started as a paid marketing automation tool, but as they’ve expanded their product offering into the marketing, sales and service growth suite, they’ve added freemium features like their CRM.
A price discrimination strategy is when you set a different price for the same product based on the market status of the buyer.
For example, movie theaters sell discounted tickets for children and seniors. Even though their tickets cost less, people in those demographics can see the same movies and sit in the same seats as customers paying full-price for their tickets. The purchased experience is the same, but the price is different based on their demographics.
In B2B, you typically see price discrimination used for startups. HubSpot and Drift are both examples of software that offer their product at a heavy discount to startup companies. This enables companies who would not otherwise be able to afford those tools access, and then as the startups grow, they’ll have developed a loyalty to those tools and be willing to pay more.
This strategy does require having a way to segment your buyers based on market status and then verify that status before a sale is finalized.
Value-based pricing is a strategy that uses the value customer’s gain from the product or service as the basis for the cost, ignoring the cost of production.
This strategy works well when your product or service is innovative and can’t be easily swapped with an alternative.
The early year’s of iPhones are a great example of this: the cost to manufacture the phones are significantly less than the market price, but because none of the existing smartphones at the time had a similar functionality, Apple was able to set a high price and establish what the “value” of touch screen smartphones was.
Value-based pricing can also be used when your product or service is significantly better than alternatives that can accomplish the same function.
For example, the true cost of production for software development is really minimum wage for the developer plus the cost of the equipment and software involved in the development process. However, app programmers are paid more than that because they have a highly desirable skill set and hiring someone else to do the work is more effective and efficient than learning to code and trying to create an app by yourself.
A time-based pricing strategy is typically used by companies whose product or service has high-seasonality or last-minute purchases.
Airlines exemplify this: it’s more expensive to book flights during peak seasons and cheaper if you’re traveling during off-seasons. Additionally, the closer you book to the travel date, the more expensive the ticket will be.
For time-based pricing to work, you need to have a system in place tracking the factors at play and adjusting prices accordingly, especially if buyers can make a purchase without talking to sales.
For example, a transcription service can charge more for a same-day transcription than it does for transcribing a document within a week. Because of the immediate turnaround, the price is higher.
Or, if you try to hire service during a high-demand time for that service, they can charge more even if you hire them well in advance. An accounting firm can charge more for work done during tax season then they can at other times because of the high demand for accounting work at that time of year.
Once you’ve chosen your pricing strategy, the next step is to pick a pricing model based on your product or service.
Neither your pricing strategy or pricing model are set in stone, and as your product shifts, your pricing model can change, and likewise if your market positioning changes, so can your pricing strategy.
Topics: Demand Generation