Determing Business Model and Pricing Framework

Determining Business Model & Pricing Framework

Businesses spend a lot of time developing quantifiable value for their customers.  But typically spend a much smaller proportional amount of time trying to figure out how to capture the value that they create for their market. How do you make money off your value added solution?  Spending time selecting an innovative business models can see an enormous payback.

Key Factors in Defining your Business Model

There are many questions that can help you select your business model.  The bottom line to ask is “How much value does your solution provide to your customer, and when?”  Additional questions include:

  • What is the customer’s budget approval process and their capacity to pay? Would they prefer one-time charges (capital budget) or regular payments (operating budget)? Which ways of capturing value match up best?
  • How entrenched are their current standards and habits? Disruptive business models can make a lot of money. What units does the customer use to measure value? Can you align the customer’s value units with the business model units that you charge for?
  • What business models do your competitors use? How entrenched is the competition? Would a different business model provide better competitive advantage?
  • Will the business model increase or decrease friction (time, human touch) in the sales process, thereby increasing cost of customer acquisition?
  • If you’re using distributors, will the model work for them?
  • How do you optimize value, capture, and drive revenue growth over a length of time? “One and done” (single product) has significantly lower valuation. Recurring revenue has higher valuation and is typically more scalable.

A couple things to remember; it’s not easy to change the business model once implemented, so choose wisely.  Freemium is not a business model.  You don’t have a business until you have a paying customer.  The choice of unit that you charge can set you apart.  Different business models will work better for bootstrapping a startup with limited funding versus a startup with funding rounds.  There are many different types of business models to choose from.  Some examples include:

  • One time up front charge plus maintenance – most common
  • Cost plus – rewards progress, not activity
  • Hourly Rates – rewards activity, not progress
  • Subscription or leasing model – set payment on a selected timeframe
  • Licensing – incentivizes customers to find alternative solutions, must continuously innovate
  • Consumables – i.e., printers with high cost printer cartridges
  • Upsell with high margin products – cheap initial sell with low margin, upsell high margin add ons
  • Advertising – third party monetization for access to your demographics/community
  • Reselling data collected, or temporary access to it – data mining and monetizing the outcomes
  • Transaction Fee – % charge per transaction
  • Usage Based – i.e., household power meter and water meter
  • “Cell Phone” Plan – some type of customer service, low initial use, increases with more use
  • Parking Meter or Penalty Charges – i.e., credit card company late fees
  • Micro transactions – gaming strategy where you pay for certain solutions/tools at very low prices
  • Franchise – others build the network with your tools

Basic Pricing Concepts

Costs shouldn’t be a factor when determining the price for your product.  Pricing should be based on the value you provide your customer. Framing your price is crucial for creating the right consumer perspective. Pricing reflects the value of your product. A good rule of thumb is to charge the customer 20% of the value you create. Your ability to charge will be based on a number of factors including:

  • Strength of your Core will support commanding a premium price and giving fewer discounts
    • Proven maturity of your product through word of mouth and testimonies enables higher pricing, less discounts, and the ability to engage follow on markets
    • Understand the prices of your customer’s alternatives (from the customers perspective)
    • Be flexible for early testers and Lighthouse customers (influencing others)
    • It’s easier to drop the price than raise it. Set your price based on value and offer discounts in the early stages until product maturity and product market fit
    • Determining your pricing framework allows you to calculate customer lifetime value (LTV) and the profitability of your business

Thoughts to consider for pricing framework

When selecting your pricing framework, look at three different prices. The value you add to your customer will help you set your ceiling price.  Your cost of goods will help you to determine your floor or minimum price.  Pricing by your competition will help you determine your range of pricing.  Within this range select three options for good, better, and best.  Your ability to charge will be based on the factors listed above such as strength of your Core and proven maturity.  Think about this – a price increase of 1% can add as much as 11% to bottom line profits because the fixed costs are set.

Bringing it all together:

Invest time to select the best business model for capturing the value you create for your customer.  Innovative business models can reap great rewards and provide a competitive advantage.  Set your pricing based on value.  Provide discounts for early users and lighthouse customers but don’t change your price.  Price reflects the value of your solution.

Give us a call to learn more about Disciplined Entrepreneurship (2 Day Course) and how you can select the best business model and pricing framework for your business. For more information contact us by email: [email protected], or call (719) 337-4913.

Mike McCausland-Founder-CEO

Mike McCausland

Founder and CEO, Leadership Institute For Entrepreneurs