Video: Types of Pricing ModelsCopy

Here we will discuss the types of pricing models.

https://youtu.be/LWZXLYxrjFo

TRANSCRIPT

One more thing I want to talk about when we think about revenue, before we move on to what you do with all these assumptions is pricing. I think pricing can be a really hard thing to think about. Often people ask this question of you know what do I; How do I price my product?

There are three ways to think about pricing models; the simplest model in pricing is something called cost plus. You basically figure out like what it is going to take for you to produce your product whether that’s a physical product or a service and you add a little bit on top some margin. So, you know that usually cost plus pricing is used for commodities. quite frankly like you know I’ve got this example of milk uh and you basically have some you know cost and then what’s the markup. You basically price it to make a little bit of money that’s um probably not uh the way you’re going to be thinking about for your pricing, because, typically you’re probably not offering kind of a commodity.

So, then you really want to think about the two other kind of critical pricing models so the second one is a competitor based pricing. What you do is you look at you know what are your competitors pricing for a higher value item and you use that as a reference. One of the things that that can help you do is sort of you know position your product in similar ways, you know, if you’re like slightly higher quality product relative to what’s on the market you can price your product sort of near where your competitors are. It may be that at that price in the beginning you’re actually not making money your cost is higher than the product price but the idea is that as you get volume and scale you know you’ll be able to um be able to make money so you know competitive based pricing is often just looking at what’s kind of what the market will bear.

The other way to think about this is sort of value-based pricing and it’s really in order to do value-based pricing you really have to understand your customers and what they value and what they’re willing to pay. Oftentimes, you can learn that um by talking to them although asking people what they will pay for a product is pretty useless, research shows. So, instead really thinking about trying to do some initial tests in the market at different prices and sort of see what customers think about and sort of how they value your product so those are the different ways in which you can think about your pricing.