Today we review the different types of pricing models for software. Pricing models are complex decisions there are a lot if intertwined factors at play such as strategy, customer etc. Let's use this blog post to come up to speed with at least a few.
First, give it away for free and make money on advertising. Facebook, Twitter and PInterest follow this model. It requires deep pockets and is very hard to measure. There is said to be a critical mass required for this model to succeed.
Second, Free product bundled with paid services model. Red Hat Linux follows this model. Customers pay subscription fees if they want support or other services from the service offerimgs. A positive benefit of this model is that this generates cash flow although on the flip side it turns investors away
Third pricing model is Freemium model. Dropbox and linkedin offer just enough products for free to gain regular audience and then convert them for paid services. The pricing has to be a function of the perceived incremental value. This is typically made with simple conversion factors so the equation may look like 10000 more at 10$ each.
Next is the cost based model where the product is sold at two to five times the cost incurred.multiples are used because the middlemen in the distribution channels as well as the end retailers work with fixed markup? This is the most common method for entering into existing distributions.
Value model is another. This articulates the value of the offering be it monetary or otherwise. In all these cases the value has to be perceived as compelling.
Portfolio pricing expands on this by offering a variety of products and services. There more mix and match possible now.
Tiered or volume pricing is used if the product is purchased in different types of quantities by different users?
Market pricing is another model which is used in highly competitive and minimally differentiated markets. Strong players like Amazon for instance can ask and get a premium based on better services or better timeliness of services. However businesses have to watch out for not competing themselves away.
Feature pricing is another example of pricing model where the pricing starts from a baseline of features or a bare bone version. This model often suffers from a lot of customer complaints.
Another extension of a pricing model based on reusability is razor and blade model.
Here the base component us sold cheaply or even given away and the consumable portion is charged as used or more often. To be able to provide the base units, there must be a deep pocket to begin with.
Generally speaking complex pricing models can get more and more complex but the right use of metrics and simpler conversions can overcome the shortcomings of overly simplistic model.
Courtesy Cayenne Consulting blog
First, give it away for free and make money on advertising. Facebook, Twitter and PInterest follow this model. It requires deep pockets and is very hard to measure. There is said to be a critical mass required for this model to succeed.
Second, Free product bundled with paid services model. Red Hat Linux follows this model. Customers pay subscription fees if they want support or other services from the service offerimgs. A positive benefit of this model is that this generates cash flow although on the flip side it turns investors away
Third pricing model is Freemium model. Dropbox and linkedin offer just enough products for free to gain regular audience and then convert them for paid services. The pricing has to be a function of the perceived incremental value. This is typically made with simple conversion factors so the equation may look like 10000 more at 10$ each.
Next is the cost based model where the product is sold at two to five times the cost incurred.multiples are used because the middlemen in the distribution channels as well as the end retailers work with fixed markup? This is the most common method for entering into existing distributions.
Value model is another. This articulates the value of the offering be it monetary or otherwise. In all these cases the value has to be perceived as compelling.
Portfolio pricing expands on this by offering a variety of products and services. There more mix and match possible now.
Tiered or volume pricing is used if the product is purchased in different types of quantities by different users?
Market pricing is another model which is used in highly competitive and minimally differentiated markets. Strong players like Amazon for instance can ask and get a premium based on better services or better timeliness of services. However businesses have to watch out for not competing themselves away.
Feature pricing is another example of pricing model where the pricing starts from a baseline of features or a bare bone version. This model often suffers from a lot of customer complaints.
Another extension of a pricing model based on reusability is razor and blade model.
Here the base component us sold cheaply or even given away and the consumable portion is charged as used or more often. To be able to provide the base units, there must be a deep pocket to begin with.
Generally speaking complex pricing models can get more and more complex but the right use of metrics and simpler conversions can overcome the shortcomings of overly simplistic model.
Courtesy Cayenne Consulting blog
No comments:
Post a Comment