7 Factors to Consider When Developing a Pricing Model That Works

by / ⠀Startup Advice / March 29, 2013

Pricing ModelA business’s pricing model must align with its revenue and business model. All aspects of your business are interdependent on each other and result in a cohesive strategy. Pricing a product or service is dependent on not only your costs, but your sales cycle, churn rate, desired market positioning, and numerous other factors that vary based on the industry and an individual owner’s point-of-view.

As such, let’s explore seven of the factors one should consider when establishing a pricing model:

1. Sales Strategy Formation

Having a structured sales process will result in organized outreach to qualified leads. Based on these interactions with your target audience, a business can continuously refine its sales pipeline to not only increase its closure rate, but also allow for it to properly project future cash flows and manage project timeframes based off of projected closing dates. After each interaction with a potential client a sales team should take notes and adjust its strategy for the next similar interaction. Continuously improving the sales process will provide feedback on the pricing model based on potential customer’s feedback and closure rates.

2. Projecting Sales Cycles

Understanding the average deal value and deal probability at each stage of a business’ pipeline allows for it to identify the number of prospects it needs to contact on a monthly basis to retain positive cash flow. Proper projections enable you to finance equipment and human capital (future monthly wages) – resulting in continuously growing business. Understanding a business’s sales cycle allows for an owner to determine how seasonality and other outside factors can be affected by a pricing model.

3. Pricing Strategies

Pricing strategies vary greatly depending on the industry, product or service, and desired market positioning of your business. With the shift from more traditional models to digital pricing strategies, businesses are now able to present the cost of a product or service to advertisers instead of directly to customers.

Whereas traditional models relied heavily on either the Cost of Goods Sold or Customer Perceived Value, modern pricing strategies can offer a product or service free for consumers, but monetize their audience by presenting targeted advertisements. Other methods include a tiered feature model, Freemium services, and many more.

4. Repeat Customers to Secure Monthly Revenue

All customers are divided into real, expected, and potential value. Each of these segments aligns with a customer as she is converted from a one-time shopper, to a repeat customer, to a highly valued brand advocate. Cultivating repeat customers with strong brand affinity increases the average customer’s Lifetime Value, and thus, future revenue. Tweaking a pricing model may motivate one-time or sporadic customers to become repeat customers – resulting in a longer customer lifetime and higher potential value.

5. Churn Rate and Cash Flow

If your business is one with a historically high customer churn rate (i.e. telecommunications), it will greatly affect how you price your product/service against competitors. However, if you are in a more stable industry (i.e. SaaS platforms), then playing with your pricing model over time can provide great insight as to the customer perceived value of your service. Regardless, Churn Rate is a primary factor in determining sales goalsprojecting cash flow, and managing business growth – all affected by your company’s pricing model.

6. Customer Acquisition Cost (CAC)

CAC is calculated by determining the ratio of total cost of sales (including labor, marketing, on boarding, and all related expenses) to the number of newly acquired customers during a given period of time. CAC should be monitored each quarter to ensure business stability, in addition to before and after any large initiatives to measure their effectiveness. A pricing model must both account for these costs when determining the value of your product or service, and understanding the effect of pricing on sales closure rates.

7. Inbound Sales Leads

Increasing inbound sales leads can minimize Customer Acquisition Costs (CAC). Inbound Sales leads are generated by referrals, organic site traffic, strategic press, word of mouth, white papers, networking, infographics, and the like. Creating a healthy inbound marketing channel will result in a reduced customer acquisition cost and more qualified prospects. As a result, a pricing model must be easily understood by inbound leads to maximize conversion rates.

A pricing model, like most of your internal business strategies, should be continuously monitored, analyzed, and tweaked to ensure positive results. Understanding these seven factors and your overall business health will lead to business gains.

Keith Petri is currently the SVP of Business Development at eDealya, which empowers brands and agencies to better understand, engage, and target their customers. He previously owned CNSLT.us & founded iGottaGuide. Educated in business, economics, and studio art with a strong passion for marketing and technology, Keith is currently based in New York and enjoys connecting with like-minded entrepreneurs. You can connect with him on Twitter @KeithEPetri.

Image Credit: Shutterstock.com

About The Author

Matt Wilson

Matt Wilson is Co-Founder of Under30Experiences, a travel company for young people ages 21-35. He is the original Co-founder of Under30CEO (Acquired 2016). Matt is the Host of the Live Different Podcast and has 50+ Five Star iTunes Ratings on Health, Fitness, Business and Travel. He brings a unique, uncensored approach to his interviews and writing. His work is published on Under30CEO.com, Forbes, Inc. Magazine, Huffington Post, Reuters, and many others. Matt hosts yoga and fitness retreats in his free time and buys all his food from an organic farm in the jungle of Costa Rica where he lives. He is a shareholder of the Green Bay Packers.