The Comprehensive Guide to Pricing Strategies and Models

Pricing has no textbook solution or magic formula. Different companies require different strategies and tactics. This guide offers an extensive collection of pricing strategies and models used across various industries, from B2B to B2C.

Pricing is the most powerful lever that significantly affects company margins, and it is one of the hardest things for any business to get right. Get it right and a business will thrive; get it wrong, and you risk causing permanent damage to it.

Today, there is a plethora of fancy pricing approaches, making it challenging to even navigate, let alone choose the right one. I liked the concept of “A Menu of Pricing Plans”, introduced by Rafi Mohammed, a renowned pricing strategy consultant and author, in the HBR article “Expand Your Pricing Paradigm”. He argued, that the art of designing an effective pricing strategy involves creatively combining various tactics to serve the largest possible customer base.

Inspired by this “menu” idea, I aimed to compile not only pricing models, but also pricing strategies in one place, and to expand the “menu”, with the goal of creating the most comprehensive guide on pricing strategies and models possible.

Therefore, in this article, you will find:

• The difference between a pricing strategy and a pricing model
• What a revenue model is
• The hierarchical framework of pricing: from approach to strategy
• The 3 basic pricing approaches
• A map of pricing strategies and models
• 16 pricing strategies
• 40 pricing models

But before continuing, take a look at the economic theory refresher, which focuses on the key components of the pricing theory: the law of supply and demand, elasticity, and how they inform pricing strategies.

Pricing Strategy vs. Pricing Model

Pricing strategies are often mentioned as synonymous with pricing models, but this is incorrect. Even professionals sometimes do not differentiate the two, referring to a pricing strategy when there is a pricing model, and vice versa. Let's be clear:

• Pricing strategy is the overall approach that defines how pricing will help achieve specific business objectives (e.g., market penetration, profitability, market share) and position the company in the market.
• Pricing model, on the other hand, is the specific mechanism or structure through which prices are charged to customers (e.g., subscription, pay-per-use, freemium).

Based on these definitions, a pricing strategy is broad and strategic, while a pricing model is more specific and operational, focusing on the technical aspects of how the price will be implemented and collected. The term "pricing model" can be used interchangeably with “pricing plan” (in the context of rates, fees, and charges) or “pricing tactics”.

In terms of application, a pricing strategy can involve various pricing models as part of its execution, and the same pricing model can be used in different strategies depending on the context.

To get a better sense of the difference, suppose a new software company launches a subscription-based productivity tool at an introductory price of $50 per month, significantly lower than competitors. The goal is to quickly attract a large number of customers and gain market share. Once the customer base is established, the company plans to gradually increase the price to $100 per month. In this case, the company is using a penetration pricing strategy and a subscription pricing model, where customers pay a recurring fee (e.g., monthly or annually) to access the software.

What Is a Revenue Model?

There is another term which is related to a pricing strategy and a pricing model: the revenue model. I noticed that in many sources it is defined as a strategy. Is it true that a revenue model can be used interchangeably with a pricing strategy? If not, what is the difference between a revenue model and a pricing model? Let’s get to the bottom of it.

Revenue model is a strategic framework which determines the fundamental ways the company makes money. It outlines the various sources of revenue for the company, describing how the business monetises its products or services.

The revenue model is part of a company’s overall business model and a key component of the pricing strategy, which may include different pricing models. In addition to pricing models, which determine how much customers are charged, the revenue model is composed of several other key components that collectively determine how a business generates and sustains its income:

• At the heart of the revenue model is the formulation of value proposition, which defines the unique value the company offers to its customers, driving demand and justifying the revenue streams.
• Revenue streams are at the core of the model, representing the various sources of income from which the company earns money (e.g., sales, subscriptions, licensing).
• These streams are supported by the revenue cycle, which outlines the timing and frequency of revenue generation — whether it's one-time transactions, recurring payments, or seasonal income.
• Scalability assesses the ability of the revenue model to grow and increase income without a corresponding rise in costs, ensuring long-term sustainability.
• Partnerships and alliances are collaborations that can enhance revenue generation, such as through joint ventures, distribution agreements, or co-branding.

The type of revenue model available to a company largely depends on the activities it performs. Types of revenue models include:

• Manufacturing: Manufacturing, contract manufacturing, licensing, outsourcing
• Trade: Royalties, agent representation, retail, consignment, subscriptions
• Service: Handling fees, sale of hours, sale of services, sale of events
• Online: Sale of advertising, affiliate marketing, online shop, lead generation, freemium
• Finance: Investment, leasing, financing, insurance, franchising, fundraising

Hierarchical Framework of Pricing

Now that it’s clear where the revenue model fits within the hierarchy of pricing, the relationship between pricing strategy, revenue model, and pricing model is as follows:

• Pricing strategy is the broadest concept, which includes all decisions about how a company takes to pricing, incorporating various pricing models.
• Revenue model is a more focused concept that defines how the business generates revenue, which may include different pricing models.
• Pricing model is a subset of the revenue model. It specifically deals with how prices are set for the products or services within the revenue-generating framework defined by the revenue model.

All of these pricing elements rely on three key inputs for pricing decisions: cost, competition, and customer value. When these three fundamental sources of information for developing any business strategy are placed at the core of a pricing strategy, they complete the hierarchical framework of pricing.

3 Basic Pricing Approaches

Cost, competition, and customer value are the cornerstones for three basic pricing approaches:

• 1. Cost-based pricing: involves setting the price of a product or service by adding a markup to the cost of producing it. Ensures that all costs are covered and a profit margin is included.
• 2. Competition-based pricing (also known as competitive pricing): involves setting the price of a product or service based primarily on what competitors are charging for similar offerings.
• 3. Value-based pricing: involves setting the price of a product or service based on the perceived value it provides to customers, rather than on cost or competitor prices.

To be precise, according to the definitions of pricing strategy and pricing model: cost-based pricing is primarily a pricing model, while competition-based and value-based pricing are considered pricing strategies. However, they are often referred to as pricing approaches because they each focus on one of the foundational elements of any pricing strategy — cost, competition, or customer value.

All these pricing approaches takes into account only one element, and does not consider the other two. If a company uses cost-based pricing or competitive pricing as its main approach, this can lead to lost sales or lower profits in the case of cost-based pricing, and to price wars in the case of competitive pricing.

Therefore, to avoid losses and be competitive in the market, companies typically consider all three inputs and determine the right price based on the acceptable range of prices. Customer value sets a price ceiling or a maximum price, while costs define the price floor or the minimum price. To calibrate the range in between, leaders take competitor prices into account before deciding on the price they will charge for a product or service.

A Map of Pricing Strategies and Models

16 Pricing Strategies

Market Positioning Strategies

1. Penetration Pricing

Penetration pricing is a strategy where a company sets a low initial price for a new product or service to quickly attract customers and gain market share. This strategy is particularly useful for entering a crowded market, introducing a new product, or when economies of scale can reduce production costs as sales volume increases. It's also effective in price-sensitive markets.

Example: When Netflix first launched its streaming service, it offered low subscription prices compared to traditional cable TV and other entertainment options. The goal was to attract a large number of subscribers quickly and establish a strong market presence. Over time, as the service gained popularity and loyalty, Netflix gradually increased its subscription prices.

2. Skimming Pricing

Skimming pricing is a strategy where a company sets a high initial price for a new or innovative product to maximise revenue from early adopters, then gradually lowers the price over time. This strategy is ideal for products that are innovative, have little initial competition, or appeal to a segment of the market that values exclusivity. It’s common in technology industries, such as consumer electronics, where early adopters are willing to pay more for the latest products.

Example: Apple often uses a skimming pricing strategy when launching new iPhone models. They set the initial price very high to target early adopters and those willing to pay a premium for the latest technology. As the product lifecycle progresses and new models are introduced, Apple lowers the prices of older models to attract more price-sensitive customers.

3. Premium Pricing

Premium pricing is a strategy where a company sets a high price for its product or service to convey quality, exclusivity, or luxury. This strategy works best for products that offer unique benefits, exceptional quality, or strong brand loyalty. It’s also effective when targeting affluent customers who value exclusivity or when the brand image is associated with luxury.

Example: Rolex is known for its premium pricing strategy. The brand sets high prices for its luxury watches, which are marketed as symbols of status, quality, and exclusivity. This pricing strategy aligns with Rolex’s brand image and the perceived value of its products among consumers.

4. Loss Leader Pricing

Loss leader pricing is a strategy where a company sets the price of a product below its cost to attract customers, with the expectation that they will purchase additional, more profitable products or services.

Example: Amazon has used loss leader pricing with its Kindle e-readers. The company sold Kindle devices at a very low margin, or even at a loss, to encourage customers to buy the devices. The strategy was to make money from the sale of e-books and other digital content purchased through the Kindle ecosystem. This approach helped Amazon dominate the e-reader market and create a steady revenue stream from digital content sales.

Segmentation-Based Strategies

5. Price Differentiation

Price differentiation, also known as product differentiation pricing, is a strategy where a company offers slightly different versions of a product or service at different price points. These variations could be in terms of features, quality, branding, or service levels. The idea is to match the price with the perceived value of each version to different customer groups.

Example: Airlines commonly use price differentiation by charging different prices for the same flight based on factors like booking time, class of service (economy, business, first class), and flexibility of the ticket (refundable vs. non-refundable). For example, a business traveler booking a last-minute flight might pay significantly more than a leisure traveler who booked months in advance, even though they are on the same flight.

6. Price Discrimination

Price discrimination is a strategy where a company charges different prices to different customers for the same product or service based on factors such as customer characteristics, purchase volume, or purchase timing. It’s common in industries like travel, entertainment, and utilities.

There are three types of price discrimination:

• First-degree price discrimination means charging each customer the maximum they are willing to pay.
• Second-degree price discrimination offers different prices based on the quantity purchased (e.g., bulk discounts).
• Third-degree price discrimination is charging different prices to different customer groups based on observable characteristics (e.g., student discounts, senior discounts, geographic pricing).

Example: Adobe Creative Cloud offers different pricing tiers based on customer type, such as students, educators, businesses, and individual consumers. Students and educators typically receive significant discounts compared to business customers for the same software suite. This is an example of third-degree price discrimination, where different groups of consumers are charged different prices based on their willingness or ability to pay.

Discount and Incentive Strategies

7. Discount Pricing

Discount pricing is a strategy where a company reduces the price of its products or services to encourage sales. This strategy can take several forms, including volume discounts, seasonal discounts, coupons, and rebates. It is effective for attracting price-sensitive customers, clearing out inventory, increasing short-term sales, or incentivising bulk purchases.

Example: Retailers like Walmart use discount pricing extensively during Black Friday sales. They offer significant discounts on a wide range of products, from electronics to home goods, to attract customers and drive high sales volumes. These discounts are often heavily advertised and create a sense of urgency, encouraging customers to purchase immediately.

8. Loyalty Pricing

Loyalty pricing is a strategy where a company provides regular customers with exclusive discounts, rewards, or points that can be redeemed for discounts on future purchases. The goal is to encourage repeat business by making loyal customers feel valued.

Example: Starbucks uses loyalty pricing through its Starbucks Rewards program. Members earn stars for each purchase, which can then be redeemed for free drinks or food items. The program also offers personalised offers, such as double star days or special discounts on favorite items, based on individual purchasing habits. This strategy encourages repeat business and rewards loyal customers with special pricing.

This strategy is often part of a broader loyalty program. It is ideal for businesses that rely on repeat customers, such as retail, hospitality, and subscription services.

9. Sympathetic Pricing

Sympathetic pricing is a strategy where a company offers reduced prices or special discounts to specific customer groups who may be in challenging situations or are perceived as deserving of support. This could include discounts for students, seniors, veterans, or those affected by natural disasters.

Example: A software company offering discounts on its products to students or educational institutions.

This strategy not only helps those in need but also fosters goodwill and enhances the company’s reputation. It is effective when a company wants to demonstrate social responsibility, improve public relations, or support specific customer groups.

Sympathetic pricing is often used in times of crisis or as part of a corporate social responsibility (CSR) initiative.

Psychological Pricing

In classical economics, it is assumed that buyers and sellers act rationally and that price plays a role in purchase decisions only due to its impact on the customer’s budget. However, in reality, there are exceptions to this assumption related to irrational consumer behaviour. Some economists and psychologists, who later became Nobel Prize winners, noticed these phenomena, and the results of their studies and research gave rise to the separate economics school — behavioural economics — in the late 1970s. Behavioural economics, in turn, facilitated the development of behavioural pricing and psychological pricing strategies.

Psychological pricing leverages the psychological impact of pricing on consumer behaviour. The idea is to set prices in a way that influences how customers perceive the value of a product or service, often encouraging them to make a purchase. It is effective across a wide range of industries and is particularly useful in retail, e-commerce, and hospitality.

Psychological pricing involves the following strategic methods:

• Prestige pricing
• Anchor pricing
• Decoy pricing
• Charm pricing
• Price ending
• Product bundling
• Neuro-pricing

10. Prestige Pricing

In 1898 the American economist and sociologist Thorstein Veblen revealed that prices signal status and social prestige and therefore offer the buyer an additional level of psychological utility. In economics, this is now referred to as the Veblen or “snob” effect, meaning that price itself becomes an indicator of the quality and exclusivity of luxury goods. The demand curve for such products has an upward slope, contrary to the typical downward slope described by the law of demand.

Prestige pricing involves setting prices higher to convey a sense of luxury, quality, or exclusivity. Higher prices can signal higher value and quality, making the product more appealing to status-conscious consumers. If the price is not perceived as prestigious enough, such consumers may refuse to make the purchase.

Example: Delvaux, a Belgian manufacturer of exclusive handbags, raised prices significantly in conjunction with a repositioning of the brand. Unit sales raised sharply, as consumers now viewed the product as a viable alternative to Louis Vuitton.

11. Anchor Pricing

Behavioural economics shows that people rely heavily on the first piece of information they receive when making decisions. Customers also have a hard time assessing value in isolation and rely on comparisons. In psychological pricing, presenting a higher-priced item first can make other items seem more affordable by comparison. The “anchor price” serves as a reference point, influencing the customer's perception of the value of the product.

Example: When Apple introduces a new iPhone model, it often presents the highest-end model first, which serves as the anchor price. For instance, if the top-tier iPhone is priced at $1,499, this sets a high reference point in the minds of consumers. When they see the lower-tier models priced at $999 or $1,099, these prices seem more reasonable in comparison, even though they are still high. The initial high anchor price makes the other models feel like a better deal, influencing the consumer's perception of value.

12. Decoy Pricing

Economists have found that consumers change their preferences between price options when a third option is intentionally less attractive. Decoy pricing, also known as the asymmetrical dominance effect, involves introducing a higher-priced or less attractive option (the "decoy") to steer customers toward a more moderately priced option. The decoy is typically priced to make the other options seem more reasonable or desirable by comparison.

This method is based on so called the Goldilocks principle. It is named by analogy to the children's story "Goldilocks and the Three Bears", in which a young girl named Goldilocks tastes three different bowls of porridge and finds she prefers porridge that is neither too hot nor too cold but has just the right temperature.

The less a buyer knows objectively about the quality of the products and prices in an assortment, the stronger the pull of the “magic of the middle” will be.

Example: Offering three subscription plans: $10/month (limited features), $20/month (most features), and $50/month (all features, but with some extras most users may not needs). The $50 option makes the $20 option seem like better value.

13. Charm Pricing

Charm pricing, also known as odd-even pricing, involves setting a price just below a round number, typically ending in .99 or .95. The strategy leverages the fact that consumers tend to focus on the leftmost digits, making the price seem lower than it actually is.

The goal is to make the price appear significantly lower in the consumer's mind, increasing the likelihood of purchase by creating the perception of a better deal.

Example: Pricing a product at $49.99 instead of $50.00 to make it seem like it costs "forty-something" rather than "fifty.”

14. Price Ending

Similar to charm pricing, price ending also refers to the specific digits used at the end of a price, which can influence consumer perception, but it is a broader strategy. Price ending plays on the perception that prices ending in 9 or 5 are bargains and the final digits of a price can be .99, .95, .50, or .00.

Different price endings can create different impressions. For example, .99 might suggest a bargain, while .00 could convey quality or simplicity. The choice of price ending can align with brand positioning or the intended consumer response.

Example: Using $99.99 to suggest a deal and $100 to convey simplicity or premium quality.

15. Product Bundling

Product bundling is a strategy where a company sells multiple products or services together as a package at a combined price. This encourages customers to buy more than they might have otherwise, increases the perceived value, and can help move less popular products. It’s common in retail, software, and services industries.

There are different bundling methods:

• Pure bundling: Customers can only buy the products as a bundle, not individually.
• Mixed bundling: Customers have the option to buy the bundle at a discounted price or purchase each item separately.
• Leader bundling: A popular or high-demand product is bundled with other products to increase the overall sale.

Example: McDonald’s uses product bundling with its Value Meals, where a burger, fries, and a drink are offered together at a price lower than if each item were purchased separately. This bundling strategy encourages customers to buy more items and increases the perceived value of the purchase. It also simplifies the decision-making process for customers, making it more likely they will opt for the bundled meal rather than ordering individual items.

16. Neuro-Pricing

Neuro-pricing is an advanced psychological pricing strategy that leverages insights from neuroscience to optimise pricing. It involves understanding how the brain processes price information and using this knowledge to set prices in a way that maximises consumer appeal and decision-making.

One of the findings in neuro-pricing research is that price information activates the brain’s pain center. This makes the goal of neuro-pricing to identify pricing structures that trigger positive emotional responses or reduce the pain of paying, ultimately leading to higher sales.

Example: Offering a subscription service at $9.99 per month rather than $120 per year upfront means structuring pricing to minimise the psychological pain associated with spending money, such as by using smaller, frequent payments instead of a large lump sum.

🚨 Using brain research for marketing and pricing is ethically sensitive territory. That’s why its findings should be taken into account but applied with caution.

40 Pricing Models

Usage-Based Pricing Models

1. Unlimited or All-Inclusive Plans

Unlimited or all-inclusive plans are pricing models where customers pay a fixed price for the plan and can then use the product or service as much as they want without worrying about additional costs. This model appeals to heavy users who value the predictability and freedom of unlimited access.

Example: The Hyatt Zilara (adults-only) and Hyatt Ziva (family-friendly) resorts provide a comprehensive all-inclusive experience where guests can enjoy a wide range of services and activities without worrying about extra costs. Meals, drinks, activities, and entertainment — are covered in the initial cost.

This model works well in industries where usage varies widely among customers, such as hospitality, telecommunications (unlimited data plans), entertainment (streaming services).

2. À la Carte or Unbundled Pricing

À la carte or unbundled pricing is a model where products or services are sold individually rather than as part of a package. Instead of offering products or services as part of a bundle, the company provides a menu of options, each with its own price. Customers select the items they need, which gives them more control over their spending and ensures they’re only paying for what they value.

Example: Ryanair, a well-known low-cost airline, uses an unbundled pricing model where the base fare covers only the seat and basic transportation from point A to point B. All additional services and amenities—such as checked baggage, seat selection, priority boarding, in-flight meals, and even printing a boarding pass at the airport—are offered at an additional cost. This allows passengers to pay only for the services they want or need, making it a clear example of à la carte pricing.

This model is effective when customers value flexibility and want to avoid paying for features they don’t need. It’s common in industries like hospitality, airlines, telecommunications, and software.

3. Pay-as-You-Go

Pay-as-you-go (PAYG) or metered pricing is a model where customers are charged based on their actual usage of a product or service: the more they use, the more they pay. It aligns the cost directly with the value received, making it fairer for customers with varying levels of usage.

Example: Amazon Web Services (AWS) uses a pay-as-you-go pricing model for its cloud computing services. Customers pay based on the actual usage of computing power, storage, and other services, rather than a fixed fee. This means customers are charged for the exact amount of resources they consume, making it a flexible and cost-effective solution for businesses with varying needs.

This usage-based model is ideal for services where usage can vary significantly between customers, such as utilities, cloud computing, telecommunications, and car rentals.

4. Per-User Pricing

The per-user or per-seat pricing model charges customers based on the number of users or seats that will access the product or service. This model is scalable, making it suitable for businesses of all sizes.

Example: Microsoft 365 (formerly Office 365) uses a per-seat pricing model for its software subscriptions. Businesses pay a subscription fee for each user or seat that has access to the Microsoft 365 suite of applications.

This model is common in software-as-a-service (SaaS) offerings where pricing is based on the number of users who need access to the service.

5. Micro-Billing

Micro-billing or pricing by unconventional time increments involves charging customers in small, often unconventional increments, such as by the minute, second, or even millisecond, rather than by larger, more traditional units. The company sets a price based on tiny increments of usage, allowing customers to pay precisely for what they use without any wastage.

Example: Zipcar, a car-sharing service, allows users to rent vehicles by the hour or by the day, rather than the traditional car rental model, which often requires a minimum rental period of a full day.

This model is ideal for digital services where usage can be precisely measured and where customers benefit from paying only for what they use, such as cloud computing, telecommunications, and streaming services.

6. Split Usage, Leasing, and Rentals

This model involves charging customers for the temporary use or leasing of a product or service rather than selling it outright. Customers pay a fee to use a product or service for a specific period. In the case of split usage, costs are shared between users based on usage or a predetermined agreement. Leasing and rentals provide temporary access, with the option to renew or purchase later.

Example: WeWork provides flexible office spaces that businesses and individuals can rent. The pricing model typically involves a base fee for access to a workspace, with the option to pay for additional services or amenities as needed. Customers can choose from different levels of access, such as renting a dedicated desk, a private office, or a hot desk in a shared space.

This model is effective in industries like automotive (car rentals), real estate (leasing), and office space (co-working spaces).

Time-Based Pricing Models

7. Off-Peak Pricing

Off-peak pricing is a model where lower prices are offered during periods of low demand to encourage more sales or usage during these times (a day, week, or month).

Companies identify times when demand for their product or service is typically lower (off-peak periods) and reduce prices to attract more customers. This can help smooth out demand, reduce idle capacity, and increase overall sales.

Example: A gym might offer discounted membership rates for those who use the facility during off-peak hours, such as midday on weekdays.

Off-peak pricing is effective in industries where demand fluctuates throughout the day, week, or season. It’s commonly used in transportation, hospitality, and fitness industries.

8. Seasonal Pricing

Seasonal pricing typically deals with longer periods, such as months or seasons, where demand changes due to factors like holidays, weather, or cultural trends.

Businesses may increase prices during peak seasons when demand is high (e.g., summer for beach resorts or winter for ski equipment) and lower prices during off-peak seasons to attract customers when demand is lower.

Example: Clothing stores often use seasonal pricing by marking up prices at the start of a season (e.g., winter coats in the fall) and then offering discounts or sales at the end of the season to clear out inventory.

This model is commonly used in industries like retail, travel, and hospitality, where consumer demand fluctuates significantly throughout the year.

9. Progressive Pricing

Progressive pricing is a strategy where prices change based on timing or customer actions, often increasing as the event or product release date approaches, or decreasing for early buyers.

The most common types progressive pricing are:

• Early bird pricing: Offering a lower price for customers who purchase early, encouraging early commitment and sales.
  • Example: A conference offering discounted tickets for early registrants before a certain date.
• Last day pricing: Offering lower prices as the event date or product availability period comes to an end, aiming to sell remaining inventory or fill seats.
  • Example: A theater offering discounted tickets on the day of the show to sell out remaining seats.

Progressive pricing is often used for events, ticket sales, limited-time offers, or product launches where timing is crucial. It’s effective for driving early sales, managing demand, and maximizing revenue over time.

Adaptive Pricing Models

10. Auctions

An auction is a dynamic pricing model where the price of a product or service is determined through a competitive bidding process among potential buyers. The final price is typically set by the highest bid, although different types of auctions may have varying rules.

Types of auctions:

• English auction: The most common type, where bidders openly bid against each other, and the price increases until no higher bids are made. The highest bidder wins and pays the final bid amount.
  • Example: Traditional auction houses like Sotheby’s use English auctions for selling art and collectibles.
• Dutch auction: The auctioneer starts with a high price that is gradually lowered until a bidder accepts the current price. The first bidder to accept the price wins the auction.
  • Example: Dutch auctions are often used in flower markets in the Netherlands.
• Sealed-bid auction: Bidders submit their bids in sealed envelopes, so no one knows what others are bidding. The highest (or lowest, depending on the auction type) bid wins.
  • Example: Government contracts are often awarded through sealed-bid auctions.
• Reverse auction: Typically used by buyers rather than sellers, where the roles are reversed. Sellers compete by lowering their prices to win the buyer’s business.
  • Example: Procurement departments in large companies may use reverse auctions to get the best prices from suppliers.

Auctions are ideal for selling unique or rare items where the value is subjective and can vary significantly among buyers. They are also used when the seller wants to maximise the price based on buyer interest.

11. Pay-What-You-Want

In Pay-What-You-Want or PWYW model, the customer is allowed to pay any amount they choose for a product or service, including nothing at all. The seller sets no minimum price, although sometimes a "suggested price" or a minimum price to cover costs might be indicated.

Example #1: In 2007, the band Radiohead released their album "In Rainbows" using a PWYW model, allowing fans to download the album and pay whatever they wanted. This experiment drew significant attention and demonstrated the potential of participative pricing in the music industry.

Example #2: Wikipedia, the free online encyclopedia, operates on a donation-based model where users can contribute any amount they wish to support the platform. While access to Wikipedia is free for all users, the platform regularly solicits donations, allowing users to pay what they feel is appropriate.

PWYW is often used in situations where the seller wants to generate goodwill, test market pricing, or encourage customer engagement. It’s common in creative industries (e.g., music, art), hospitality (e.g., restaurants), and digital goods (e.g., software, ebooks).

12. Name-Your-Own-Price

In Name-Your-Own-Price or NYOP model, the customer proposes a price they are willing to pay, and the seller can choose to accept, reject, or counter the offer. This model is often used in negotiations or auction-style settings where there is flexibility in pricing.

Example: Priceline.com, an online travel agency, popularised the NYOP model in the late 1990s and early 2000s. This model allowed customers to bid on flights, hotel rooms, and car rentals by naming the price they were willing to pay. Priceline would then search its inventory of unsold travel products and, if a supplier was willing to accept the customer's bid, the transaction would be completed at the named price.

NYOP is particularly useful in industries with perishable inventory (e.g., hotel rooms, airline seats) or where there’s flexibility in pricing. It’s also effective when the seller wants to offload excess inventory without publicly lowering prices.

13. Dynamic Pricing

Dynamic pricing, also referred to as surge pricing, is a model where the price of a product or service is continuously adjusted based on real-time supply and demand, market conditions, or customer behaviour.

Companies use algorithms and data analysis to change prices in response to various factors such as customer demand, competitor pricing, time of day, seasonality, or even individual customer profiles. This allows businesses to maximise revenue by charging higher prices when demand is strong and lowering prices when demand is weaker.

Examples:

• Airline ticket prices are a classic example of dynamic pricing. The cost of a flight can change multiple times a day based on factors like the number of seats available, the time remaining until departure, and the level of demand for that particular route.
• Online retailers like Amazon frequently adjust prices throughout the day based on factors such as inventory levels, competitor prices, and customer activity.
• Ride-sharing companies like Uber use dynamic pricing, where fares increase during peak times, such as during a large event or bad weather, when many people are seeking rides.

Dynamic pricing is particularly effective in industries where demand fluctuates frequently, such as e-commerce, travel, hospitality, and entertainment.

Dynamic pricing can be implemented through various methods, and the most common are:

• Manual adjustments
• Rule-based algorithms
• Real-time market data integration
• AI-based pricing

Artificial-Intelligence based pricing or AI-based pricing is a specialised form of dynamic pricing that uses artificial intelligence and machine learning to automatically adjust prices based on vast amounts of data, including customer behaviour, market trends, demand forecasts, and more.

AI-based pricing systems consider factors such as inventory levels, customer demographics, purchase history, seasonality, and even social media trends. The AI then recommends or automatically implements price changes to maximise revenue, profit, or market share. Such systems can continuously learn and adapt, making highly accurate and predictive pricing decisions in real-time.

Hybrid Pricing

14. Two-Part Tariff

The two-part tariff is a pricing model that involves charging customers in two distinct components: a fixed fee and a variable fee based on usage. This model is often used when the seller wants to cover fixed costs through the entry fee and charge per unit of consumption to align with the usage levels of different customers.

Example: The SBB Halbtax Card is a solid example of this model, where customers pay an upfront fixed fee for the Halbtax Card and then benefit from reduced fares (50%) on subsequent travel. This combination allows Swiss Federal Railways (SBB) to cater to frequent travellers by providing cost savings while ensuring a base level of revenue through the annual card fee.

Two-part tariff is commonly used in industries where there are significant fixed costs to cover and where customer usage can vary widely. When implemented effectively, it can optimise revenue, attract a broad customer base, and offer flexibility to customers.

15. Tiered Pricing

Tiered pricing is a model where a product or service is offered at multiple price points, each corresponding to a different level of features, usage, or service, with higher tiers offering more comprehensive or premium features. Customers can choose the tier that best fits their needs and budget, with the option to upgrade or downgrade as their requirements change.

Example: LinkedIn offers a variety of premium subscription plans tailored to different user needs, such as job seekers, professionals, salespeople, and recruiters. Each plan is priced at different levels, with higher tiers offering more features and benefits:

• LinkedIn Premium Career → approximately $29.99 per month
• LinkedIn Premium Business → approximately $59.99 per month

Tiered pricing is effective when there’s a diverse customer base with varying needs and willingness to pay. It’s commonly used in software, telecommunications, cloud services, and other industries where customers may require different levels of service or usage.

Budget-Conscious Models

16. Buy Now Pay Later

Buy Now Pay Later or BNPL is a pricing model that allows customers to purchase a product or service immediately but defer payment over time. The payment is typically split into equal instalments, often interest-free, spread over a set period. These instalments can be weekly, bi-weekly, or monthly, depending on the provider. The BNPL provider usually pays the merchant upfront, and the customer then repays the BNPL provider over time.

Example: Companies like PayPal Credit, Klarna, Afterpay, and Affirm offer BNPL services that allow customers to split their payments for online purchases into smaller, more manageable instalments. Customers can use PayPal Credit to purchase Apple products, spreading the cost of expensive items like iPhones and MacBooks.

BNPL is popular in e-commerce, retail, and sectors where large purchases might deter customers due to the upfront cost. It’s particularly appealing to younger consumers who may prefer to manage cash flow without using credit cards.

17. Future Options

Future options pricing allows customers to secure the right to purchase a product or service at a later date, often at a predetermined price.

A customer pays a fee (called a premium) to secure an option that allows them to buy a product or service at a future date, typically at a set price. This provides the customer with the flexibility to make a purchase in the future, hedging against price increases or taking advantage of potential discounts.

Example: Hopper is a fintech travel app that offers customers the ability to "freeze" prices on flights and hotels for a set period, providing them with the flexibility to purchase later at a potentially lower price. Example scenario:

• A traveler finds a flight from New York to Paris for $600 but isn’t ready to book. Hopper offers them the option to freeze that price for a week for a $20 fee. If the traveler decides to book within the week and the price has risen to $700, Hopper allows them to purchase the flight at the original $600 price, covering the $100 difference.

Future options are commonly used in financial markets (e.g., stock options), real estate, and industries where prices are volatile or where customers want to secure favourable terms for future purchases.

18. Capped or Flat Rates

A flat-rate or capped pricing model charges customers a fixed price for a product or service, regardless of usage or other variables. This model offers predictability and simplicity, with a cap on the maximum amount a customer can be charged.

• In a flat-rate model, customers pay a single, fixed fee for a product or service. This can apply to unlimited usage or access within certain parameters.
• In a capped model, the customer pays a flat rate up to a certain usage level, after which additional charges may apply.

Example: Many mobile phone plans offer flat-rate pricing for unlimited calls and texts, while data usage might be capped, with extra charges for exceeding the data limit.

This model is ideal for services where customers value simplicity and predictability in pricing, such as utilities, telecommunications, and subscription services. It’s also used in scenarios where businesses want to avoid the complexity of variable pricing.

19. Freemium

The freemium pricing model offers a basic version of a product or service for free while charging for premium features, functionality, or additional services. This model is commonly used in digital products, especially software and apps.

Customers can access the basic version of the product or service at no cost. The free version is typically limited in features, storage, or functionality, with the option to upgrade to a paid version that offers more comprehensive features or benefits. The idea is to attract a large user base with the free offering and then convert a portion of those users into paying customers.

Example: LinkedIn offers basic version of their services for free, with paid plans that provide additional features and enhanced capabilities.

This model works well for digital products where the cost of providing the free version is low, and where the premium features are compelling enough to convert free users into paying customers. It’s particularly effective in the software, app, and online services industries.

Payment Structure Models

20. Prepayment

Prepayment is a pricing model where customers pay for a product or service in advance, before receiving it. This can be used to secure a booking, reserve a service, or lock in a purchase price. Prepayment can also be used as a way to mitigate risk for the provider by ensuring that the customer is committed before any resources are allocated.

Example: Travel bookings often require prepayment to secure a flight, hotel, or vacation package. Similarly, prepaid phone plans require customers to pay in advance for a certain amount of usage.

Prepayment is common in industries such as travel, events, subscription services, or custom-made products.

21. Initiation Fees

An initiation fee is a one-time charge that a customer pays when they first sign up for a service or membership. It is often used to cover the costs associated with setting up the account or providing initial access to the service.

When a customer joins a service, program, or membership, they are required to pay an initiation fee in addition to any ongoing charges (e.g., monthly or annual subscription fees). The initiation fee is typically charged only once at the beginning of the service and may be used to offset administrative costs, setup expenses, or initial access to exclusive benefits.

Example: Many gyms charge an initiation fee when a new member signs up, in addition to the regular monthly membership dues. Similarly, some credit card companies charge a one-time initiation fee when customers open a new account.

Initiation fees are frequently used in membership-based services (such as gyms, clubs, or subscription services) or where there are significant setup costs involved in onboarding a new customer.

22. Perpetual License

A perpetual license is a pricing model where the customer pays a one-time fee for the right to use a product, typically software, indefinitely. Once purchased, the customer can use the software for as long as they want without the need for recurring payments.

The customer pays a single, upfront fee to obtain a perpetual license for the software. This license grants them the right to use the software in perpetuity, often with the option to receive updates or support for an additional fee. However, the initial payment covers the core product indefinitely.

Example: Before transitioning to the subscription-based Adobe Creative Cloud, Adobe offered its software, like Photoshop, Illustrator, and InDesign, under a perpetual license model. Customers would pay a one-time fee to purchase the software, giving them the right to use that version indefinitely.

Perpetual licenses are often used in enterprise software, engineering tools, and specialised applications where customers prefer to make a one-time investment rather than committing to ongoing subscription fees.

23. Licensing

Licensing is a pricing model where a company grants a third party the rights to use its intellectual property (such as software, trademarks, patents, or other proprietary assets) in exchange for a fee or ongoing payments. The licensee (the third party) gains the legal right to use, sell, or distribute the licensed product or service under agreed terms.

The licensor (the owner of the intellectual property) enters into an agreement with the licensee, outlining the terms of use, duration, and payment structure. Licensing can be structured as a one-time fee, ongoing royalties, or a combination of both. The license can be exclusive (granted to a single licensee) or non-exclusive (granted to multiple licensees).

Example: Microsoft licenses its Windows operating system to hardware manufacturers (OEMs) and individual consumers. For OEMs, Microsoft charges a licensing fee to pre-install Windows on new computers. This is an example of pure licensing, where the software is not sold outright but is licensed for use under specific terms. The customer (in this case, the OEM or the end-user) does not own the software but has the right to use it according to the license agreement. Today, however, with products like Microsoft 365, Microsoft has largely shifted to a subscription model.

Licensing is commonly used in industries like software, media, entertainment, pharmaceuticals, and technology, where intellectual property rights need to be protected, and where it’s beneficial to allow others to use or distribute the product.

24. Subscriptions

The subscription pricing model involves charging customers a recurring fee (usually monthly or annually) to access a product or service.

Customers sign up for a subscription and agree to pay a regular fee in exchange for access to the product or service. The subscription can include various features or benefits, and the service is typically provided as long as the subscription remains active. Subscriptions often come with different plans that vary based on the level of access, features, or service provided.

Example: Streaming services like Netflix or Spotify use subscription models, where customers pay a monthly or annual fee for unlimited access to content for as long as the subscription is active.

This model is commonly used for services or products that offer ongoing value or require continuous access: media streaming, software, news publications, and fitness programs.

25. Royalties and Sales Commissions

Royalties and sales commissions are payment models where the licensor or principal earns a percentage of sales or revenue generated by a third party (licensee or salesperson) using or selling their product or service.

How it works:

• Royalties: The licensor receives a percentage of the revenue or profits generated from the use of their intellectual property, such as a book, software, patent, or music. Royalties are usually agreed upon as part of a licensing deal and are paid on a recurring basis, such as quarterly or annually.
  • Example: An author might receive a royalty of 10% on each book sold by the publisher.
• Sales Commissions: Salespeople or agents earn a commission based on the sales they generate. This is often a percentage of the sale price and can be structured as a one-time payment or ongoing payments, depending on the sales structure.
  • Example: A real estate agent might earn a 5% commission on the sale of a house.

Sales-Enhancing Models

26. Volume Discounts

Volume discounts are a pricing strategy where customers receive a lower per-unit price when they purchase larger quantities of a product. The idea is to incentivise bulk purchasing by offering a discount that increases as the quantity purchased goes up.

The discount is typically structured in tiers. For example, a business might offer a 5% discount for orders of 100 units, a 10% discount for 500 units, and a 15% discount for 1,000 units or more.

Example: A wholesaler might offer a discount to retailers who buy in bulk, such as a 10% discount on orders over 500 units. This encourages retailers to purchase more at once, increasing the wholesaler's sales volume.

Volume discounts are common in B2B sales, where businesses often need to buy large quantities of supplies or products.

27. Outcome-Based Pricing

Outcome-based pricing is a model where the price of a product or service is determined based on the results or outcomes it delivers, rather than a fixed fee or hourly rate.

The company and the customer agree on specific outcomes or performance metrics that define success. This could involve a percentage of the savings generated, a fee based on the level of improvement, or a share of the revenue created as a result of the service provided. The price is then tied to the achievement of these outcomes.

Example: A consulting firm might charge a company a fee that is a percentage of the cost savings achieved through the consultant's recommendations, rather than a flat consulting fee. Another example when some companies enter revenue-sharing agreements where the payment is tied to the revenue generated by using the product or service.

Outcome-based pricing is particularly effective in situations where there is a clear, measurable outcome that can be attributed to the product or service, and where the customer is looking for guaranteed results.

28. Rebates

A rebate is a pricing model where the customer pays the full price for a product upfront but is later refunded a portion of the purchase price. The rebate amount is usually advertised as part of the promotional campaign, and customers need to follow the specified process to claim it.

Example: A consumer electronics store might offer a $50 rebate on a $500 laptop. The customer pays $500 at checkout, but after submitting the necessary documentation, they receive $50 back, effectively reducing the cost of the laptop to $450.

Rebates are commonly used for higher-priced items like electronics, appliances, or automotive products.

29. Coupon Promotions

Coupons are a pricing model where customers are offered a discount on a product or service if they present a coupon at the time of purchase. Coupons can be distributed through various channels, including print, digital, or direct mail.

A coupon typically specifies a discount percentage or a fixed amount off the purchase price, and may also include conditions such as a minimum purchase amount or a specific product category.

Example: A grocery store might distribute a coupon offering $5 off a $50 purchase. Customers present the coupon at checkout to receive the discount, which encourages them to spend more to reach the $50 threshold.

Coupons can be used to attract new customers, encourage repeat business, or move excess inventory.

30. Buy One, Get One

"Buy One, Get One" or BOGO is a promotional pricing strategy where customers receive an additional product for free or at a discounted rate when they purchase one at full price:

• "Buy One, Get One Free" (BOGOF)
• "Buy One, Get One X% Off"

BOGO promotions encourage customers to purchase more by offering them extra value for their money. The "free" or discounted item is often of equal or lesser value than the item purchased at full price.

Example: A shoe store might offer a BOGO promotion where customers who buy one pair of shoes at full price can get a second pair (of equal or lesser value) for free. This encourages customers to buy more than they originally intended.

This model is commonly used in retail, particularly for consumable goods like groceries, personal care items, or clothing.

31. Free Gift with Purchase

The "Free Gift with Purchase" pricing model is a promotional strategy where customers receive an additional product or service at no extra cost when they purchase a specific item or spend a certain amount. This model is designed to add value to the customer's purchase, encouraging them to buy more or choose a particular product over others.

The free gift is typically related to the main product, enhancing the perceived value of the purchase. The promotion can be triggered by purchasing a specific item, spending a minimum amount, or buying from a particular category.

Example: Estée Lauder offers a free beauty bag filled with sample-sized products or travel-sized versions of popular items like moisturiser, lipstick, or mascara when they spend $75 or more on Estée Lauder products. The customer not only enjoys the products they initially bought but also gets to try new ones, which might encourage them to buy those products in the future.

This model is often used in industries like cosmetics, fashion, and consumer electronics.

32. Flash Sales

A flash sale is a pricing model where products or services are offered at a significant discount for a very short period, often just a few hours or days. The urgency and limited availability create a sense of scarcity, encouraging customers to make quick purchasing decisions.

Flash sales are typically announced with little advance notice and are often conducted online. The deep discounts and limited time frame create a "buy now or miss out" mentality, which can drive a surge in sales.

Example: Amazon Prime Day is an annual event exclusive to Amazon Prime members, featuring massive discounts and flash sales on a wide range of products. These sales typically last for 48 hours, but many of the best deals are available only for a few hours or until the item is sold out.

This model is popular in e-commerce, fashion, and tech industries, where retailers use it to clear inventory quickly, boost sales, or attract new customers.

33. Cash-Back Offers

Cash-back offers are a pricing model where customers receive a rebate in the form of cash after purchasing a product or service. The cash-back amount is typically a percentage of the purchase price and is returned to the customer after the transaction, either immediately or after a set period.

Customers make a purchase at the regular price and then receive a portion of the money spent back, either as a direct refund, a credit to their account, or through a third-party cash-back service. The offer can be for a specific product, a category of products, or across all purchases made with a particular credit card.

Example: A credit card company might offer 5% cash back on all grocery store purchases. Customers who use the card to pay for their groceries will receive 5% of the total purchase amount back as a credit on their statement, effectively reducing the cost of their groceries.

Cash-back offers are commonly used by credit card companies, online retailers, and brands looking to incentivise spending.

Product Bundling

34. Pure Bundling

Pure bundling is a pricing model where multiple products or services are only sold together as a single package, and customers do not have the option to purchase the individual components separately. This model is used to create a combined offering that provides greater value or appeal than the individual items would on their own.

Example: Microsoft traditionally sold its Office Suite as a pure bundle, including applications like Word, Excel, PowerPoint, and Outlook together. Customers could not purchase these applications separately; they had to buy the entire suite.

35. Mixed Bundling

Mixed bundling is a pricing model where products or services are offered both as a bundle and individually, giving customers the option to purchase the bundle at a discounted rate or buy the individual components separately. Mixed bundling can also include combinations of new and old products to enhance perceived value or to introduce new items alongside existing ones.

In mixed bundling, the customer is given a choice: they can either purchase the bundle at a lower combined price or select individual items at their full price. This flexibility appeals to a wider range of customers by offering value through bundling while still catering to those who prefer specific items.

Example: Rituals, a luxury home and body cosmetics brand, offers beautifully packaged gift sets that include a variety of their products, such as shower foams, body scrubs, hand creams, and scented candles. These sets are curated around specific themes or product lines, like "The Ritual of Sakura" or "The Ritual of Ayurveda." The gift sets are offered at a discounted price compared to buying each product individually.

36. Add-on Bundling

Add-on bundling is a pricing model where a primary product is sold at its regular price, but customers are offered the opportunity to purchase additional related products or services at a discounted rate as part of the bundle. The add-ons enhance the main product's functionality or value.

The customer buys the main product, and then they are presented with optional add-ons that complement or enhance the primary purchase. These add-ons are offered at a discounted price, incentivising customers to increase their overall purchase.

Example: On Amazon, when a customer views a product, they are often shown a bundle of "Frequently Bought Together" items, such as a camera, a memory card, and a carrying case, at a discounted price when purchased together.

37. Leader Bundling

Leader bundling involves offering a popular or high-demand product at a discounted price when purchased as part of a bundle with other products. The "leader" product draws customers in, while the additional bundled products increase the total value of the sale.

A key product (often a best-seller or loss leader) is discounted to attract customers, who then receive the benefit of purchasing additional products as part of the bundle. This model is designed to increase the overall transaction value by leveraging the appeal of the leader product.

Example: McDonald’s often uses leader bundling in its Extra Value Meals, where the main product (e.g., a burger) is bundled with complementary items like fries and a drink at a discounted price compared to buying each item individually

38. Cross-Industry Bundling

Cross-industry bundling is a pricing model where products or services from different industries are combined into a single package. This approach creates a bundle that appeals to customers by offering complementary products or services that fulfil multiple needs or desires.

Businesses from different industries collaborate to create a bundle that provides more value together than each product or service would individually. The bundled offer usually targets a specific customer segment that benefits from both products or services.

Example: American Airlines partners with Hertz to offer a bundle where customers can book a flight and a rental car together at a discounted rate. This cross-industry bundle caters to travellers looking for a convenient and cost-effective way to arrange their transportation.

39. Custom Bundling

Custom bundling allows customers to create their own bundles by selecting a combination of products or services that meet their specific needs. This model offers high flexibility and personalisation, appealing to customers who prefer tailored solutions.

Customers are given the option to choose from a range of products or services to create a bundle that suits their preferences. Pricing is typically adjusted based on the selected items, with discounts applied to the bundle as a whole.

Example: Nike offers a custom bundling option called "Nike By You," where customers can design their own shoes by selecting colors, materials, and even adding personalised text. This customisation allows customers to create a product tailored to their tastes.

40. Occasional Bundling

Occasional bundling is a pricing model where bundles are offered only during specific times or events, such as holidays, special promotions, or product launches. These bundles are often temporary and tied to a particular occasion or marketing campaign.

Bundles are created and promoted for a limited time, often tied to a seasonal event or a specific promotional period. The limited availability and special occasion create a sense of urgency and exclusivity.

Example: Sephora Holiday Gift Sets available only during specific times of the year, such as Christmas or Valentine’s Day.

Final Thoughts

I consider this article to be an extensive collection of pricing strategies and models, all gathered in one place, complete with descriptions of their purpose, mechanics, and possible applications across different industries, making it valuable tool for anyone looking to optimise their pricing strategy. And this collection is regularly updated as the commercial world continues to evolve.

That's why, stay tuned and revisit this guide regularly to stay inline with the latest trends and innovations in pricing!

REFERENCES

1. Mohammed, Rafi. "Expand Your Pricing Paradigm." Harvard Business Review, Jan.-Feb. 2023, www.hbr.org/2023/01/expand-your-pricing-paradigm.
2. Simon, Hermann. Confessions of the Pricing Man: How Price Affects Everything. Illustrated ed., Springer, 2015.
3. Zatta, Danilo. The 10 Rules of Highly Effective Pricing: How to Transform Your Price Management to Boost Profits. John Wiley & Sons, 2023.
4. De Backer, Gust. "Revenue Models (2024): 19 Different Ways to Make Money [B2B & B2C]." Gust De Backer, www.gustdebacker.com/revenue-models/. Accessed 15 Aug. 2024.
5. "Positioning Decoy Pricing to Shape How Customers Perceive Value." Simon-Kucher & Partners, www.simon-kucher.com/en/insights/positioning-decoy-pricing-shape-how-customers-perceive-value. Accessed 15 Aug. 2024.
6. "Global Pricing Study. State of Pricing 2024: What you need to know." Simon-Kucher & Partners, www.simon-kucher.com/en/insights/global-pricing-study. Accessed 15 Aug. 2024.
7. "A Roadmap to Better Pricing." Boston Consulting Group, www.bcg.com/industries/insurance/roadmap-better-pricing. Accessed 15 Aug. 2024.
8. "Pricing: 5 Common Strategies." BDC, www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pricing-5-common-strategies. Accessed 15 Aug. 2024.