Basic Pricing Concepts
Pricing Concepts
Cost Based Pricing
Competitor Based Pricing
Inventory Based Pricing
Surge Based Pricing
Freemium Pricing
Bundle/Kitted Pricing
Value Based Pricing
1. Cost Based Pricing
Cost Based Pricing is a pricing methodology of applying certain percentage(s) on top of the unit cost of a product or category. Often it is quite simple to achieve and, due to this reason, perhaps the most prevalent form of pricing for MSMEs, typically driven from finance or accounting departments stating ROI or inflation indexing requirements. However, in more complex business setups subject to various dynamic forces such as cost allocations, demand shifts, contract negotiations and competitive landscapes the consequences of not getting the adequate cost plus strategy (i.e., percentage(s) timing and integration) right can be difficult to discern and far reaching.
2. Competitor Based Pricing
Competitor Based Pricing is a pricing methodology of identifying a set of competitors and setting prices using indices of where the business thinks its products or service offerings sits along that competitor range. This approach needs to consider how closely or far away matched the competitors’ business in terms of set-up, operational capabilities and market proposition is to its own. Further, businesses need to consider if the product range or services being indexed are like-for-like or similar but variant on certain dimensions and what impacts these may have on its price indexation of the competitive range. The business will endeavor to maintain the index profile for its range or categories which is maximizing top line and/or bottom line (the greater need of that time) and further identify the correct indexations for categories as and when required. This approach is often driven by marketing and product teams who develop market propositions of where products sit within the competitor range in the market.
3. Inventory Based Pricing
Inventory Based Pricing is a pricing methodology of pricing products based on the combination of current inventory levels, their sales and depletion rates and inbound inventory dates and amounts. It works by rotating stock in the warehouse and effectively clearing slow moving stock, slowing down fast moving stock and generating greater gross margins and cashflows compensating for any ‘out of stock’ situations. It works by pricing up products which are selling fast and likely to become out of stock before the next container that may be arriving after stock out period. Vice versa if a product is slow selling then that product’s price is reduced to induce a faster sales rates and depletion rate to move stock before the next container of that stock which may be arriving relatively soon. This methodology is often used by start ups to generate cashflows, penetrate the market and manage warehousing and supplier payments within their means.
4. Surge Based Pricing
Surge Based Pricing is a pricing methodology of measuring or predicting the demand (similar to Inventory Based Pricing, however, inventory levels not an essential prerequisite for Surge Based Pricing) and pricing on premium based on demand levels. The business can maintain or even reduce its stock levels for the periods where demand is the highest or relatively higher and rely on pricing power to generate incremental revenue and gross margins. Often this pricing methodology is seen in service industries such as ride share application fares, airline fares, holiday and cruise fares, concert and sports/events ticketing. There is a sophisticated but rational element of the product or service being required for that period, usually based on demand and availability for the period of time and region, where the purchaser may not be able to receive the same service again for that same period of time and region hence a premium is applied.
5. Freemium Pricing
Freemium Pricing is a pricing methodology of providing certain products, services or categories free on purchase or subscription. Often as a standalone or part of a differentiated subscription service allows the purchaser to access a product or service if conditions are met for the purchase or subscription. Recent times have seen successful start ups such as Canva and Amazon Prime using this freemium pricing to penetrate the market during its initial growth phase and/or consolidate its customer base by growing verticals by allowing members to access free shipping and vertical services prior to any price increase on subscriptions.
6. Bundle/Kitted Pricing
Bundle/Kitted Pricing is a pricing methodology of providing benefits or cheaper per unit prices on a bundle, combination of products or order thresholds. This normally relies on customer perception of obtaining benefits or a cheaper unit price on purchasing bundles or kitted products or services rather than individual products or services. Prices are differentiated and usually the single unit price is an implied anchor price from which additional spend, further units or selected kitted products or service offer further benefits.
7. Value Based Pricing
Value Based Pricing is a pricing methodology of providing differentiated pricing to customers based on the perceived value to the customer of the products and services on offer. The products must range in value parameters and have logical increaments aligning with the increased value being provided to customers. Customers provide feedback through their willingness to pay with sales data acting as a proxy of what the market is responding as its willingness to pay for the value provided by the product or service with each product and service logically differentiated with features and specifications that potentially provide value to customers.