- foundhers
- Posts
- Craft a Winning Pricing Strategy
Craft a Winning Pricing Strategy
August 2024
Erin Martell
August 28, 2024
Whether you’re pouring your heart into a full-time wellness business or balancing a side hustle while working in the corporate world, one thing is clear: your pricing strategy is crucial. It’s the foundation for your business’s long-term success. Done right, it can propel your business forward. Done wrong, it can stall your progress and limit your potential.
But don’t worry—understanding and implementing an effective pricing strategy isn’t as daunting as it might seem. I’m here to walk you through it, step by step:
If you find this helpful, I’d be so grateful if you’d share this newsletter with others 🙏. Together, we can help launch and scale 100 wellness businesses, starting with yours!
WELLNESS BUSINESS TIPS
CRAFT A WINNING PRICING STRATEGY
👯♀️Spot the difference
First, let’s clear up a common confusion: the difference between a revenue model and a pricing strategy. Your revenue model defines how your business generates income and should align with your business’s nature and target audience. Ideally, it remains consistent throughout the lifecycle of your business.
🧩One to many
Your pricing strategy, on the other hand, determines how you price your products or services within that revenue model. It’s more dynamic and should evolve as your business grows. Think of it like this: for every revenue model, there are multiple pricing strategies you can employ to meet your business objectives.
📚Case study
For example, imagine you own a CRM software for fitness companies called Schedulefit. Your revenue model might be a B2B annual subscription. How much you charge and how you structure this pricing is where your pricing strategy comes into play.
Common pricing strategies
So, what are the different types of pricing strategies you can use, and which strategy is right for your business? Here are five main types to consider:
Value-Based Pricing: Aligns prices with customer value. This strategy sets prices based on a customer’s “willingness to pay,” which is determined by their perceived value of your product or service.
Best for established brands with differentiation.
Challenging for startups.
Cost-Plus Pricing: Ensuring cost coverage with a standard markup. With this approach, you start by determining your desired net profit margin, then use your costs to back into that margin by adjusting the price.
Best for mature markets, commoditized products and small businesses looking to simplify pricing decisions.
Too simplistic for highly competitive markets, premium brands, and businesses with high fixed costs but low marginal costs.
Competitive Pricing: Adjusts prices based on competitor data. This strategy involves benchmarking competitors’ pricing and adjusting your prices regularly based on competitor data, sales trends, and customer demand.
Best for highly saturated or competitive markets, value-based brands, high volume, and thin margin businesses.
Not ideal for niche businesses, companies with strong brand value, or innovative products.
Penetration Pricing: Starts with lower prices to gain market share. This strategy helps you establish a foothold by offering lower prices when you initially go to market.
Best for new entrants and fragmented markets.
Risky for established market leaders, durable goods with long product life cycles.
Skimming Pricing: High prices initially, lowering over time. The goal is to generate the highest possible profit in the shortest time rather than maximizing sales. This strategy suits startups with early adopters who are willing to pay more for new products. It also allows you to segment customers by willingness to pay, which can help you transition to value-based pricing as brand awareness grows.
Best for innovative companies or early entrants. Pharma companies, for example, often use it to recoup development costs before generics enter the market.
Worst for: Price-sensitive markets, products with short lifecycles. This can also backfire in highly competitive markets.
Implement your pricing strategy
📅Where to start
Startups should begin with Cost-Plus Pricing, Penetration Pricing, or Skimming Pricing based on your market, product type, and other business characteristics. Then, outline what benchmarks will trigger shifts in your pricing strategy as you grow.
📚Back to Schedulefit
Now, let’s apply what we’ve learned to define a pricing strategy for our software company, Schedulefit. Suppose the market for fitness customer resource management software is highly saturated with large competitors like Mindbody and Glofox. You differentiate in the market through real-time reporting analytics, but you don’t yet have the brand awareness to leverage this in a competitive pricing strategy.
You decide to go to market with a penetration pricing strategy to gain a foothold in the saturated market. Your competitors charge $49 per employee per month on an annual contract, so you enter the market at break-even, or $19 per employee per month. Once you reach 1% penetration of your target market, you plan to shift to a competitive pricing strategy at $49 per employee per month.
🗺️Delivering a price point
Remember, the price point is just one aspect of the pricing strategy. In this case, the second aspect is a per-seat license fee. Down the road, you might decide to shift the price point delivery method to a tiered annual licensing fee for small, medium and enterprise fitness companies. This example highlights how your pricing strategy can dynamically change without impacting other key business operations.
Pivot pricing strategies as your business grows
🌀Diversifying revenue
As your organization scales, your pricing strategies become more complex due to the one-to-many relationship between a revenue model and its pricing strategies. For example, after a business is past its early stages (Series A and later), it may begin to diversify its revenue streams. Each of these revenue streams may, in turn, have different pricing strategies.
For this reason, it’s important to be thoughtful about your overall business model, including your revenue model and potential pricing strategies, from the start so that you can remain agile as you scale.
Reply