The three pricing models

- All right, so let's take a look at some pricing models that you can use out there and apply to your business. There are three basic pricing models that I want to introduce to you. First is cost-based pricing. Cost-based pricing simply says there's a normal margin that everybody in the industry, or everybody in that product segment operates on. So basically it's just cost plus a certain margin, equals what your profit is going to be. The next one is market-based pricing. Market-based pricing says we're going to take a look at the competition, we're going to see the general range of pricing that the competition is charging. You're going to have to fall somewhere within that range, right? It can be on the lower end or the high end of the range, or right in the middle, but you do have to be within that range. Now, the third one, the one that I love the most, is value-based pricing. Value-based pricing basically says that we're going to price it based on what a customer is willing to pay. So you have the most control over this. This is also the most profitable one as well. This is the one we're going to focus on, but I actually want to really understand all three of them. You might be forced into using one of the models just because the industry does, or a certain product or service that you're offering requires you to kind of focus in on one model versus the other. So we're going to take a look at some of the characteristics of these different pricing models. Cost-based pricing. The thing about cost-based pricing is that it tends to be where there is a lot of competition in the marketplace and little differentiation. Generally speaking, these are commodity-based products, so you don't have a lot of wiggle room. There's not a lot of imagination within cost-based pricing that you can come up with, unless you can differentiate, which we'll talk about. Now, in market-based pricing you get a little bit more flexibility, you can bring in more elements. You get an opportunity to differentiate more, but you're still operating, like I said, within that range of acceptability. Now, generally speaking, there's a decent amount of competition in this particular market, when we look at market-based pricing. A lot of times it's seasonal fluctuations, so you might see prices at hotels go up during a certain holiday season, and then dip down. And the market kind of moves along with that. So there will be fluctuations potentially in pricing under certain circumstances, in certain industries. And the other thing is that I generally see that market-based pricing, service businesses use market-based pricing when we're looking at that. So keep in mind, you don't have to use market-based pricing if you're a service business, but generally they fall under that category. We're going to try to break you out of that category and get you to the third one, right? Value-based pricing. Value-based pricing says it's really hard to compare. It's hard to compare products. They tend to be more unique, or the offering tends to be more unique. It tends to be bundled or packaged nicely, so when you add one thing to another thing, you add on something, all of a sudden you get a new product or a new service that looks different than everybody else. So there's lots of differentiation in value-based pricing as well. So, we're going to look at some of the different characteristics and what applies best to your business in just a bit.