What is a pricing structure?

Pricing Structure: A business’s pricing system tells you how and why they charge their prices. It’s an essential part of a company’s overall plan because it affects how much money it makes and how the market sees its products.

The most important factors that affect how a business sets its prices are

• What kind of stuff or services do they provide?
• The audience and how much money they have to spend
• Sensitivity to price
• Competition in the business world
• Structure of costs
• The goals and aims of marketing
• Stage of growth for the company

New companies that want to enter most industries use a transparent pricing system as a guide. As an example, most SaaS businesses use a mix of tiered, flat-rate, and usage-based pricing.

This structure works great for these businesses because it helps them make as much money as possible without lowering the quality of their service. Customers know what this method does and are ready to pay for it, which is the primary goal of any pricing method.

Synonyms

• Pricing method
• Pricing plan
• Pricing strategy

What Is the Difference Between Pricing Structure and Pricing Strategy?

A pricing structure and a pricing plan differ in what they cover and how they are used in a business model.

• In business, a pricing system is how prices are set or organized. It’s about setting prices for different goods and services, and it can include models like flat rates, tiered pricing, pay-per-use, group pricing, and psychological pricing.
• For example, users pay a set amount for a product in a flat-rate pricing structure. However, in a tiered pricing structure, prices vary based on features or how often the product is used.
• Pricing structures are often chosen based on the type of product or service, what the customer wants, and how the business works. It has more to do with the “how” of pricing or how prices are shown and grouped for customers.
• A pricing plan covers more ground. Pricing strategy is how a business decides on prices and changes them to meet its financial goals. It means considering competition, company positioning, market demand, and the cost of goods sold.
• Pricing decisions are usually based on the company’s bigger goals, like making as much money as possible, getting a more significant market share, or presenting the brand in a certain way. Cost-plus, value-based, competition-based, and dynamic pricing are some examples.
• Some words that mean the same thing are used (these are all called pricing systems). On the other hand, if we talk about a pricing plan, it’s more about the “why” behind price decisions or why a specific price point is picked based on different internal and external factors.

How Pricing Structures Can Help You Make More Money

Pricing systems are essential for different businesses because they help them make money while being competitive and giving customers what they think they want. Businesses use a variety of pricing systems in a planned way to stay ahead of the competition.

• Companies that want to get a more significant share of a new market often use entry pricing, which means they lower prices to get there quickly.
• Companies that make new goods might use price skimming, which means they initially set prices high and then slowly lower them.
• Businesses in areas with a lot of competition may use competition pricing, which means they set their prices based on their competitors’ charges.
• When a company has many goods, it often uses product line pricing, which means it charges various amounts for each product based on its features and value.
• When you set prices at $9.99 instead of $10, you’re playing with how customers think about prices to make items look cheaper.
• The higher price makes the goods seem more valuable and expensive.
• Businesses with many different customers can negotiate different prices with each one, especially for essential clients or large-scale deployments.
• Businesses can target cheap and high-end customers with a tiered pricing system in which different features or services are available at different prices.
• In the SaaS and service businesses, each user pays a set price. In usage-based pricing, however, users are charged based on how much they use the service or product.

Each way of setting prices has benefits that can improve it in some business situations. Businesses can make more money and give their customers more value by carefully choosing and putting in place the proper structure.

How to Figure Out the Prices Your Business Will Charge

Strategic pricing has effects on more than just your bottom line. It also changes how people think about the business and their involvement with it.

Here are the steps you need to take to figure out how to price your business:

Get your work done.

• The first thing you should do is do research.
• Who do you want to reach?
• How do they see their value?
• The competition
• Shopping malls
• Local laws and rules for the company
• Costs of production
• Rent, taxes, and wages
• Costs of advertising and sales

All of this information changes how you set your prices. Make a plan of all your costs, your competitors’ prices, the market’s needs, and how your customers will see your goods.

That’s how you figure out how to place your product and, by extension, how to price it.

Set the goals for your success.

After getting your studies in order, you need to decide how you will measure how well your sales are going. Will you look at how many people signed up for a contract or how many units were sold? Should the number of sales be more critical than the top-line revenue?

Allow me to give you some examples of business metrics:

• How much money was made?
• The average amount of an order
• The value of a customer over their lifetime
• Gross margin of profit

It would be best if you looked at all of these. But if you want to evaluate your pricing system correctly, you should look at all of these from the point of view of how much your products cost.

You use a tiered system because you sell a B2B SaaS subscription. To see how successful each tier is compared to the others and the business, you would look at how much each tier makes from membership sales.

Choose a starting price.

Every pricing plan has a base price, whether a flat rate for a product or the first price in a tiered plan. This helps customers understand how your prices work as a whole. It also gives you a starting point for all the other parts of your strategy. You can use it to see how different price points work, decide when and how much to discount, and make other significant choices.

Most of the time, your starting price should cover your production and overhead costs while still giving you room to make a profit. It also helps you decide how to set your prices. Your tiers should be based on the value of features and level of service since different customers will value your goods differently.

Make a price model.

Your success measures and base price should work together to help you decide on the next pricing level. It’s the last thing you must do to determine the best pricing plan for your business. Here is where you decide how to get more customers and grow your business.

This includes planned price changes throughout the year and considers how different outside factors may affect your business. Let’s say you run a store that sells swimwear and beachwear. You always look your best in the summer.

Of course, lowering your prices from April to June makes no sense. People are waiting in line to buy new clothes for spring and summer. But as fall comes, fewer warm places will be to enjoy the beach. You put your spring/summer line on sale at that time. Some customers think they’re getting a good deal, and your stock would have been sitting there otherwise.

Every business plans for events like this to happen ahead of time. To get the best cost deal, you should plan your production at least six months ahead. In the next step, you’ll keep an eye on sales and change your prices based on how well they did in the past.

In this step, things would be different for a membership business. People connect to software platforms all year, so there is less of a seasonal effect. However, it would be best if you still thought about usage-based factors.

For example, letting customers add others to their accounts would bring in extra money without losing a whole customer. For a $30-a-month plan, you could add someone for an extra $10-a-month fee.

You can go about your complete pricing plan in a million different ways. The end mix of different pricing strategies (and the number you choose) should be the most effective for sales and marketing and have the highest possible profit.

Try out different prices and ways of doing things.

There is a 100% chance that you won’t get it right the first time. The “perfect” price for anything changes constantly, so you’ll probably never find it. People won’t know how they feel about your prices until you put them on the market.

Customers today are used to changeable pricing, which means that prices change based on demand, the time of year, or other factors. Just think about how Amazon’s prices change every ten minutes.

Once you’ve set your prices, use the measurements you set at the beginning to judge how well your product is doing. Get sales data from the last month or three months to set a standard. Over time, change your prices based on what you learn about what works and what doesn’t.

Of course, watch out here—people who subscribe like things to stay the same. And B2C buyers probably won’t care if your product costs more if they can get it for 50% less the next time they shop. There is a fine line between determining what your customers will pay and giving them regular value when you test prices.

Different ways to set prices

Price Based on Cost

The cost-plus pricing method is one of the easiest ways to set prices. It’s easy to understand:

Costs of production plus profit goal equals the final price

It’s simple to figure out, but it doesn’t always show what a product is worth, which can cause it to be priced too high or too low. You won’t know how much your product is worth to people if you only look at how much it costs.

Pricing based on value

Value-based pricing tries to figure out how much people are willing to pay for a product based on how valuable they think it is. This pricing structure takes into account the value of the goods as a whole:

• How well a tool helps people solve their problems
• How good the product is
• What makes it different from other products on the market
• Accurate customer data on how much they are ready to pay

Value-based pricing comes in two primary forms: reasonable and value-added.

You’re getting good value when you set a “fair” price, which could be high or low. Amazon is an excellent example of a business that could charge more but doesn’t because it wants to save money and pass that savings on to the customer. Luxury airlines, on the other hand, have users who are happy to pay more because they think the experience is better overall.

Adding more services (i.e., more value) to a package and charging more is called value-added price. A software business might get more people to choose a higher level, for instance, if they offer “white-glove” support. These people might pick that tier just for the dedicated help, even if they don’t need all the extra features.

Pricing based on usage

Customers who like to pay for what they use will like usage-based pricing models because they match costs with how much a customer uses.

Subscription-based businesses often use this way of setting prices and usually have different levels with different benefits and limits on how much you can use them. A company might offer a basic plan with 100 GB of storage for $10 a month and then charge an extra $5 for every 50 GB afterward.

Another popular usage-based model is pricing based on the number of users. This is often seen with software platforms. Each user will be charged, no matter how much they use the goods. A business could offer a $15-a-month plan for five people and charge an extra $ 5 a month for each user after that.

Skimming on prices

This method successfully recovers development costs and maximizes profits over a product’s lifecycle. Price skimming means putting a new product on the market at a high price and lowering it over time. This is especially helpful in fields with a lot of competition or technology that changes quickly.

This pricing system can help you quickly recoup your costs, which is helpful if you’ve spent a lot of money on research and development. Early adopters ready to pay more for the newest and best product can also be used against it.

On the other hand, the high prices may turn off customers who care about prices or feel like they’re being ripped off. Planning how quickly to lower prices over time is also essential because you don’t want to lose too much money.

Pricing for Penetration

Price stealing is not the same as penetration pricing. Companies use this strategy by offering their product cheaply to get people to buy it and quickly gain market share. The plan is to get a base in the market and then raise prices slowly over time.

If you have a new product or are entering a market with a lot of competition, this approach might help. That way, you can quickly enter the market and get price-conscious users. That plan can help you get enough orders on a site like Amazon to change the algorithm in your favor.

Changing Prices

Dynamic pricing is a newer way of setting prices that uses computers to constantly change prices based on things like market demand and other outside factors. Online stores do this all the time, as you can see when the prices of some items change throughout the day.

There is an idea behind changeable pricing that each customer should always get the best deal. This method can help you make the most money, but you need modern technology and data analytics to make it work.

Prices That Change

There are a lot of different kinds of variable prices. Here are some of the most common:

• Price spikes (Uber costs more when demand is high)
• Pricing based on location (gas stations charging more in rural places, for example)
• Pricing based on time (prices for afternoon movies vs. prices for evening movies)
• Seasonal prices (for example, journey costs are higher during the busiest vacation times).
• Custom pricing (prices for enterprise and custom goods and services are usually based on quotes)
• “Pay what you want” (this is how some media outlets and organizations work)

It might not work well for all products, but it works well for businesses where demand and sales are affected by outside forces.

Pricing with Freemium

Many SaaS companies use freemium as part of their pricing models because it can help them get leads and show their worth. To get people to buy its product, the company gives away a basic version for free (or a free trial time).

The idea is that after they see how useful the product is, they’ll be more likely to switch to a paid plan with more features or functions. People who use the product for free become more interested in it, which helps keep them as customers.

Bundle Prices

Bundle pricing, where several items are sold at a discount, makes people more likely to buy more. This raises both the total number of sales and the average order value. This can also be used as a value-add pricing strategy, which means that extra services or goods are sold along with the main product at a higher price.

This method works well for businesses that sell goods or services that go together, raising the value of each item in the bundle. It’s also an excellent way to sell more products to people who are only interested in one. You’re also getting more market share if a rival also sells the product that goes well with yours.

Pricing based on psychology

People often buy things based on their feelings instead of what makes the most sense, which is why psychological pricing works. This includes plans such as

• Putting a “charm price” (a number that is just below a round number) on it to make it pricey
• Giving savings on items whose prices end in specific numbers, like $0.99 or $0.95
• “Anchoring” by showing a higher price first, which makes the lower price look better in comparison
• Making people feel rushed by using words like “sale” or “limited time offer.”

These strategies may seem like they are meant to trick people, but they can work to boost sales and make customers think the product is more valuable. In addition, they give the customer value by letting them decide what to buy faster and with more confidence.

Pricing for Subscriptions

Any mix of these pricing schemes could be called “subscription-based pricing,” as long as the company’s primary source of income is recurring revenue.

There are many different ways that subscription-based pricing can look, but most of the time, payments are made monthly or annually. Some companies that use it are B2B SaaS providers and subscription-based services like Netflix and Spotify.

Pricing is based on time.

When you buy something at a particular time, the price changes. This is called time-based pricing. This happens a lot in the travel industry, where prices for flights and hotels tend to go up as the departure date gets closer.

Lowering prices during certain times can also encourage people to buy during slower periods. For instance, a restaurant might price its lunch specials cheaper than its dinner specials to bring in more people who probably wouldn’t have gone there otherwise.

Geographical Prices

Geographic pricing allows online stores to set different prices for each country, area, or city. What a customer is ready to pay for a product may change based on where they live, how much shipping costs, taxes, and cultural differences.

This way of localizing prices is constructive when looking at foreign markets, where prices might be different because of different currencies and living costs. But for it to make financial sense, companies need to be able to take advantage of economies of scale and have strong transportation networks in place.

Price for Loss Leaders

When a business sells its goods at a loss, it does so to get more customers or sell other things. Big shops use loss leader prices to get people to come in and buy things, to turn those customers into loyal customers who buy other things at regular prices.

Big businesses are the only ones who can use this method. Most small businesses can’t afford to lose money by selling a product that doesn’t make them money unless they’ve planned for it.

Price Odd-Even

Some prices are set to end in either an odd or an even number. This is called odd-even pricing. Some people think that things with odd numbers (like $9.99 vs. $10) are cheaper than things with even numbers.

Even though this might not seem important, studies have shown that it can change how customers buy things. Stores often use this approach, especially for items that cost slightly more than similar items from other stores.

Leading the way in cost

There is a link between cost leadership and loss leadership in that both involve selling goods for less than competitors. In cost leadership, on the other hand, the goal is to still make money by running your business efficiently and keeping costs low.

Premium Prices

Businesses charge more for their goods or services than their competitors when they use the premium pricing approach. This is generally done when a business has special features or high-quality goods that make the higher price worth it.

A brand’s high prices can also give off an air of exclusivity and wealth, making customers feel like they are getting something extraordinary when they buy from that brand. Part of the customer’s value comes from the fact that they think they’re paying too much for it, whether they are or not.

Anchor Prices

Anchor pricing, also called “anchoring,” is a way for businesses to set prices where they put several things close to each other to give buyers a starting point. We remember the first number because it comes before the second one. We then use that number as a starting point to determine how much the product is worth.

Anchoring can draw attention to an item with a cheaper or higher price. If you want to sell an item for $200, you might put it next to an item that costs $400 that is similar. The shopper would then compare your item to the more expensive one and think your item is a good deal.

Auction Prices

In an open market, bids are what determine prices in auction pricing, a type of dynamic pricing. Not only is this used in actual sales, but it’s also in online markets like eBay and Amazon.

The person ready to pay the most for an item sets the price in this model, not the seller. By putting buyers against each other, sellers might be able to make more money.

Everyday Low Prices, or EDLP

When companies use EDLP as a pricing strategy, they keep their prices low all the time and don’t have many sales or discounts. People may trust you more because they know they’re getting the best price without waiting for a sale. Price changes are also more accessible for both the business and the customer.

Taking care of complicated pricing structures

Problems to solve

When businesses have to deal with complicated pricing systems, they often face these five big problems:

• Price mistakes and inconsistencies happen because price data is spread out and not coordinated.
• Giving customers a choice of prices based on features, user groups, or product quality complicates things because you need to know a lot about them.
• Not having integrated software solutions forces people to do things by hand, leading to mistakes and taking time.
• If prices aren’t changed fast enough when market conditions change, it can lead to price inefficiencies that hurt revenue.
• Regular checks of pricing structures are needed to make sure prices are correct and stop money from leaking out.
• It takes a lot of resources to set up and maintain dynamic pricing systems.

Technology and machine control

Technology and automation are essential for helping businesses handle complicated pricing systems more quickly and correctly.

Three main bases make this possible:

• Configure, price, and quote (CPQ) software makes it easier to make correct quotes for customers and send them to them quickly. It also works with pricing information to ensure that all quotes and sales outlets are consistent.
• Businesses can find the best price for their goods by looking at market trends, competitor prices, and how customers act using pricing optimization software.
• DevOps software uses advanced formulas and machine learning to find the best prices based on supply and demand, as well as the actions of competitors, all in real time.
• Businesses can set up and handle recurring pricing models with subscription management software. This software supports flat-rate subscription plans, usage-based pricing, and tiered pricing.
• Billing software is excellent for service-based companies that have to deal with complicated pricing models like project-based billing and hourly rates.

Some tools work with each other, and you should know about them. For example, CPQ can be connected to billing software to make invoices automatically from the price information.