I also refer to these as the pricing bag of tricks because they represent some of the broad range of solutions that can be applied to the problems and opportunities encountered as the manager of pricing.
Package pricing (aka bundle pricing) – Combining multiple products into a single offering with one price. This pricing strategy should be used to higher average order value (AOV). It is particularly useful if you can identify a standard set of needs that all customers or a subset of them consistently need. If your gross margins are high, applying a bundle discount to the package will likely make financial sense.
Value based pricing – Pricing based on the value that product creates for the user or customer instead of the cost to produce the product. Value based prices are better at estimating achievable high prices than cost-plus pricing which inherently anchors on the low end. Value based pricing is useful as a standalone pricing methodology if you have no direct competition and useful in combination with other pricing strategies when competition exists.
Prestige pricing – Pricing products at a deliberately high price point in order to benefit from the natural association in consumers’ minds between price and quality. Veblen goods, or goods that receive more demand as the price increases, are the purest examples of prestige pricing. Super-premium brands like Ferrari or McKinsey & Associates consulting company are examples. Use prestige pricing when price elasticity is low and a higher price point will help your product stand out.
Price skimming – Introducing prices at high initial price points and progressively lowering the price to access lower-end segments of the market sequentially. Price skimming is an effective form of price discrimination that leverages the typical technology adoption lifecycle by tapping early adopters who are most enthusiastic for the new offering with a very high price and progressing from tech enthusiasts all the way to the luddites who are forced to adopt the product because it has completely replaced its predecessor who aren’t willing to pay any premium at all. Use price skimming for products that have a passionate early adopter set and the potential to be adopted by the wider market.
Dynamic pricing – Constantly adjusting price as supply and demand fluctuate. Airlines are an excellent example. Airlines use this pricing strategy in an effort to achieve the highest prices possible while balancing the need to sell tickets before the plane leaves the tarmac and unsold seats are worthless and maximizing the price per seat. As the date of the flight gets nearer, if seats are not bought, the price will drop. However, as seats are purchased, the price goes up. This same basic “dynamic” is at work in programmatic ad buying platforms and elsewhere in the tech industry. This model is becoming increasingly common due to the increasing digitalization of industry data and purchases processes thanks to the internet and algorithmic pricing methods becoming easier to manage from a technical perspective.
Odd even pricing – This is literally the decision to make your price end in odd numbers or even. It doesn’t matter, but psychological pricing does.
Psychological pricing – The effect of ending the price 99 does in fact still work in consumer and SMB settings, however round numbers are viewed as simpler and can be a better fit with products or ecommerce sites that aim for a simple, clean aesthetic or are marketed as customer-friendly. For example, Warby Parker avoids the old-school 99 pricing tactic entirely by pricing their core offering at $95.00 versus Target who prices nearly everything with an amount ending in “.99” whereas Apple splits the difference by typically ending prices with round dollars but ending in either $49 or $99. Your choice. Just be aware of the message it sends.
Pay as you use model (aka pay as you go) – This model changes two variables that normally work differently in pricing. First, payment is in arrears instead of in advance. Second, the customer only pays for what they use as opposed to buying a block of usage that comes with a cap. There are no caps in this model. This model has become more popular in software as more SaaS and microservice products have been built and marketed to developers on platforms like Amazon Web Services (AWS). Pay as you use has a few distinct advantages. It’s great for conversion without using sales people because there is no commitment (which is important when being distributed by AWS, Azure, etc.). This model is also helpful when you don’t want to raise attention to how much customers are paying for your service as they start relying on your product to the extent that they’re racking up a huge bill and cannot effectively leave because of how thoroughly it’s integrated into your business or software stack. Again, see AWS as the best example(s) of this ever.
Contract length – The meaning is pretty self-explanatory, but the reasons why it’s important are slightly less obvious. Longer contracts guarantee recurring revenue for a longer period of time, which is inherently good, but it’s especially helpful during recessions. Longer contracts guarantee a higher customer lifetime value through longevity which helps pay back customer acquisition cost (LTV/CAC). For enterprise software firms, these terms can be anywhere from 1-5+ years. For SMB focused companies, this usually takes the form of monthly vs annual subscriptions in which the amount of the contract is paid upfront, so the longer contract not only stretches out lifetime value but also helps the company’s cashflow by pulling forward an additional 11 months of payments.
Service Level Agreement (SLA) – The SLA is in place to guarantee things like timely delivery or service uptime. Companies typically have a standard set of SLAs for most customers and will bend the rules to provide higher SLAs for key large customers. Larger companies have higher standards for purchasing and are tougher negotiators, whether it’s their legal team or vendor managers, so this is part and parcel with moving upmarket in an industry. However, keep in mind that these SLAs have value to the customer, so you should find ways to charge for these higher or custom SLAs.
Cancellation / opt out terms – Cancellation terms are trouble. Try to avoid giving customers this right at all costs. Giving a customer an opt-out within the contract term is gives them power over the implementation. It renders the contract a one-way agreement as well as ensures that your customer success and implementation teams will have a nightmare of a time supporting the customer while they dangle the right to walk away over their heads.
Marketing discounts (case studies, references) – As a member of the marketing team, I’m obviously biased, but giving one-time discounts for cooperation in producing case studies or acting as references for potential new customers is one of the only way to get willing participants for these high value activities. It’s also a way to leverage discounting that would likely be occurring anyway. Now you can give a discount to a customer that may have needed it to convert to purchase without destroying value because the customer believes they received the discount because of the case study and the company has extracted value effectively for nothing.
Volume based pricing (aka metrics based pricing) – Instead of selling access to a service that will be used more by a large company at the same flat, this pricing strategy pegs the price paid to how much the product is used. This is a great way to price closer to a company’s willingness to pay, because big companies have big usage and therefore pay more It also maintain gross margins because increased usage that drives up your infrastructure cost (read AWS bill) comes with a price to the customer.
Value metrics – These are the usage numbers that are measured to determine pricing. Choosing the best value metrics is an incredibly important task. Your product may have multiple metrics simultaneously. For example, your email software may cap customers at 10 emails in a month, 1,000 contacts, and 1 user login, and to increase any of these metrics, they’ll need to upgrade to a higher tier of your product or buy a block of them a-la-carte.
Feature teeth – Feature teeth are the best. They are the features users want, and will need to upgrade to a higher tier of the product in order to get them. Feature teeth and value metrics are the two factors that drive upgrades for software products, so you should put a lot of focus on them both.
Land and expand – This is an aggressive form of using price growth to drive revenue growth. Land and expand is the pricing and sales strategy of closing new customers with a very low starting price with the intention of using pricing levers like value metrics to force customers to upgrade later.
Transparency – Transparency is an important element of pricing strategy. Do you post your price list on your website for all of your customers and competitors to see? Most enterprise software companies do not. A prospect’s desire to know the price is frequently leveraged to get them to fill out a contact form. If you sell through channel partners instead of or in addition to your own sales team, your ability to be transparent will be limited in order to give your partners the flexibility to set their own price. However, keep in mind that you won’t be able to keep your price list to yourself. Even an NDA won’t keep it from slipping into your competitors’ hands or keep pricing information from being shared between customers.
Upselling – Upselling is the simple strategy of convincing prospectsto trade up into more expensive core product offerings and add-ons. It is sometimes conflated with cross-selling.
Cross-selling – Cross-selling is selling different products to your existing customer base. Cross-selling is an excellent way to drive revenue growth through price growth and is always the most efficient way to acquire customers for new products.
Captive product pricing – This is the reason that a printer cartridge seemingly costs more than a whole printer. Hewlett Packard discounts the printer to below cost, in order to get you to buy one for your home or office, in exchange for the opportunity to rip you off once a year for the next decade when it runs out of ink. This is also known as the razor and blades model because that product famously creates the same effect. It is effective, but your customers won’t love you for it. Seller beware.