How to create a pricing strategy that actually works 🤑

Here's how you can immediately build a pricing strategy in 3 easy steps (the same one I use with my clients):

It's simple:

Price point +  Billing cycle + Gating model

1. Price Point = the amount of money you're charging (eg. Freemium, $100, $1500, $50,000, etc)
2. Billing Cycle = one-time or recurring (monthly, every 6 months, annually, etc)
3. Gating Model = Innumerable models, but here are some examples:

• Usage-gated (eg. # of API calls)
• Seat-gated (2 users vs 5 users)
• Speed-gated (20Mbps vs 40Mbps)
• Feature-gated (Ability to edit Tweets with Twitter Blue vs no edit feature)

Digging into each of these 3 layers:

PRICE POINT 💲

The three starting points for picking a Price Point are: (a.) competition, (b.) cost of production and (c.) value.

• (a.) Competition = You pretty much follow the pricing of your direct competitors. Often used for commodities where there is little to no differentiation between your product and theirs (eg. coal, apples, cotton). You can differentiate via positioning (eg. Sunkist-branded oranges vs "regular" oranges), but a bit too complicated for this post.
• (b.) Cost of Production = You come up with a price point price around what it cost you to make your product. You can price below (eg. as a loss-leader) or above, but you begin with Cost of Goods (COGS) as an initial starting point and price relatively tightly around it.
• (c.) Value-based pricing = Price point which your buyer is willing to pay, based solely on the end value your product will deliver to them. The highest leverage form of picking a Price Point and often used for software and information products. For example, if I wrote a little 3-page pamphlet that taught you how to make $2 million within 30 days guaranteed, I bet you would easily pay me $50,000 for it - even if the booklet took me just 30 minutes to write. Another form of value-based pricing is charging by percentage of improvement: pay me 20% of every $1,000,000 I make you.

When I work with clients, I like to use Value-based pricing with their offer given that there's theoretically no ceiling to it (generally speaking).

The general rule of thumb is: the more value (that is RELEVANT to your buyer) you can bundle together, the more you can charge.

The way to do this is via offer stacking - piling on as much value as possible and charging accordingly for different levels of value, functionality and support offered by your different price point tiers (eg. Basic vs Pro vs Premium).

Again, the key thing to keep in mind is: stacking value that is RELEVANT to your would-be buyer. If you were a dentist, you would not pitch toddler wisdom teeth extraction services to parents (the economic buyers) with preschool-aged kids.

BILLING CYCLE 📆

Pretty self-explanatory - choose how often to charge your buyer.

Is it freemium (LinkedIn, Twitter, etc) or a one-off charge (eg. a pair of shoes, carton of eggs)?

Or recurring (eg. monthly Netflix subscription, annual Dropbox subscription, etc)?

GATING MODEL 📱

How do you gate your product into different tiers?

Do you separate different tiers by the number of active users? For eg. Basic Tier gives access to 2 users while the Pro Tier accommodates 4 users.

Or maybe you do it by usage - for eg. Basic = transcribe 1,000 words while Pro = transcribes 5,000 words.

Or it could be by speed - get download speeds of 20 Mbps vs speeds of 35Mbps

You can mix and match your gating model.

For example:

Basic Tier = 2 users, download speeds of 20Mbps/user, daily API calls of 300

vs

Pro Tier = 4 users, download speeds of 35Mbps/user, daily API calls of 800

Feel free to mix ad infinitum different gating models to create creative and profitable options.

PUTTING IT ALL TOGETHER 💹

Add Price Point + Billing Cycle + Gating Model to get your pricing strategy.

Example:

1. Basic Tier = Freemium, 2 users, download speeds of 20Mbps per user, daily API calls of 300
2. Pro Tier = $50/mo, 4 users, download speeds of 35Mbps per user, daily API calls of 800
3. Deluxe Tier = $75/mo, 10 users, download speeds of 55Mbps per user, daily API calls of 1200, free 1-to-1 technical support and annual training for their team

And that's it! The 3 simple steps to a high-level pricing strategy you can use right away.

Originally published at https://www.richmondwong.com