What is it?: The demand-based pricing method uses levels of current general market demand, as opposed to customer-specific research, to determine pricing strategy. It’s the most responsive of the four methods we’ve looked at and the easiest to implement “on the run.”
With demand-based pricing, your product is set at several different prices, and the customer’s willingness to purchase it is measured at each one to determine a representative set price that’s not too high or too low. There are a few different ways of doing demand-based pricing:
- Skimming: Starting at a very high price and lowering gradually. Great if your product is appropriate for the Premium model and for establishing very healthy, early profit margins.
- Discrimination: Leveling different charges for your product based on different demands; for example, hiking or reducing an airplane or concert ticket price depending on the proximity of the event.
- Penetration: Starting at a very low price to increase market share and brand loyalty initially. Good if you have a lot of cash runway and need to build up that market share and know how to monetize that brand loyalty to offset the initial losses.
Pros: Demand-based pricing is a good way of assessing the lay of the market while still building revenue and customer knowledge (albeit indirectly). The different ways of approaching demand-based pricing make this a versatile pricing method appropriate for a number of business models.
Cons: Because the data is relatively less complete, the monetary price must be adjusted to compensate for non-monetary costs that will be involved in setting customer willingness to pay. For instance, if your product has a particularly high time- or convenience cost, WTP will be affected. Making these kinds of adjustments can be hard and lead to missed opportunities, particularly when the fluctuations of market demand are also taken into account.
Is it the pricing method for you?: For astute readers of market demand, the demand-based pricing method can prove a versatile route to success. It is not, however, the most stable among the available options.
The right pricing method encourages success. Pricing methods can be dizzying, but that’s because there are so many ways of positioning your product for success. You should choose your method based on your product - regardless of which method you choose, if you’ve chosen right, the results should be similar.
Secure more customers
Setting a price point that entices customers to buy is key to success. The right pricing method helps you aim your product towards the right customers and navigate around competitive products.
If you set the wrong price, you’ll be digging yourself out of a hole with every sale. Set a price that helps your business grow, even if it is higher/lower than you might initially be comfortable with.
Value your products
Your perfect price point will show customers that it is worth it to spend on your product, while at the same time providing extraordinary value. Perfecting that price point with a working pricing method has as much to do with your company’s vision as it has to do with your product as it is now. To make a success of your pricing strategy, make a success of your product/service.