Identifying the pricing model for your business’ products and services can be one of the most crucial items in your business plan. This is because the pricing model is interdependent with other business areas that influence the cost, opportunities, and risks inherent in your business providing its products and services.

Building a pricing model without taking into consideration these overlapping domains and functions can result in lost opportunities at best and lost customers and business at worst. Building a pricing model that takes into these relationships can help strengthen your business model as well as create a potential competitive advantage in the market. Additional competitive advantages can be realized by evaluating each of the overlapping domains, functions, and competencies for opportunities to increase efficiency, productivity, and quality.

The domains that should be included in your business’ efforts to build a pricing model will depend on its product/service offerings, market & industry, as well as the business’ unique goals. The pricing models used to build growth in a new market may be different than those used in an existing and competitive market. The former may emphasize premium pricing for solutions not already available in the marketplace where the latter may focus on pursuing cost leadership in order to undermine existing competitors.

The business’ pricing model, and goals, are not determined in isolation of the market but are instead developed with an understanding of the business environment. This includes both internal and external factors that can influence the business’ success. The following Pricing Model Canvas includes four domains that need to be developed in order for the business to be successful. Building out these four domains is not a solution for bad services or poorly designed products but can help the business build a pricing model that is aligned with the business’ market & industry opportunities.

Pricing Model Canvas

Domain #1: Market Research

Market research is essential to understanding the business industry & market opportunities, customer problems, how your business offerings compares to its competitor’s product & service offerings, and what areas to growth. The best market research drills down to understanding the unique market opportunities & threats for each of the business’ unique product/service offerings.

Domain #2: Competitive Advantage

Identifying the business’ competitive advantage is essential to building the brand, activating new customers, and expanding market share. The competitive advantage can be achieved in product/service costs (internal & external), differentiation from competitor’s offerings (better quality, etc.), includes strategies that limit competitors ability to offer the same product/services, or alliances that help expand on the continuum of product/services ‘values’ offered. The business can emphasize one of these areas or pursue all of them (and more) across their different product/service lines.

Domain #3: Business Model Value Chain

Identifying the business model is essential to consistently being able to execute the business’ strategies, plans, resources, and goals. The type of business model used will depend on the business’ market & industry, product & service offerings, as well as competencies & abilities. These in turn inform the business and help it to pursue its goals within its target market and industry.

The business is tasked with the need to identify, evaluate, and strengthen its key business areas that help deliver value across the business environment. The value chain will differ depending on market & industry but the following are often included when building a competitive pricing model: Marketing & Sales; Accounting; Human Resources; Production; Logistics; Research & Development; and IT Technologies. The amount of emphasis placed on any one of these domains/functional areas will depend on the business’ model and product/service offerings, etc.

Domain #4: Pricing Model

As mentioned earlier the pricing model is not developed in isolation. Many overlapping factors need to be taken into consideration including the domains discussed above (Business Model Value Chain, Market Research, & Competitive Advantage, etc.) in order for the pricing model to be sustainable, relevant, and viable.

Pricing Model Canvas

Each product/service may fall in different areas across the pricing spectrum. Typically this reflects different ‘values’ being pursued in each individual product/service’s cost (to build), delivery (includes vendors, storage, etc.), promotion (includes marketing, trade shows, print advertising, etc.), positioning (see Canvas for more details), and price (to the customer). Business’ that are able to offer products/services across the pricing continuum are often providing more advanced and quality offerings as the price increases.

Higher end pricing will also typically include more functionality although this is not always the case. There are examples of higher end pricing being used to position the product/service offering as a prestigious and status building item (if purchased). The pricing model available to each business will depend on its product/service offerings as well as the market & industry it which it operates.

Conclusions

There is no one-size-fits-all price model for businesses to sell their product/service offerings. The determination of how to price the business’ offerings will depend on its business environment, offerings, and the opportunities available to it. Some businesses are better ready to take advantage of ‘first mover’ opportunities where other businesses prefer to ‘wait and see’ before moving forward. These preferences alongside the other considerations decide what goals the business will pursue and what pricing models will help them get there.

How is your business identifying the value if its product/service offerings? Leave your comments below.

References:

Lewis, J. (n.d.). Four Methods of Competitive Advantages. Retrieved September 24, 2016, from http://smallbusiness.chron.com/four-methods-competitive-advantages-32344.html

The Marketing Mix. (n.d.). Retrieved September 24, 2016, from http://www.learnmarketing.net/price.htm

Read more: Is Strategic Pricing Dead?