UNIVERSITY OF CAGAYAN VALLEY

(Formerly Cagayan Colleges Tuguegarao)

Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

Name: ______________________________________Year/Section: _____________

Subject: ______________________________________Teacher_________________

Module No. 3
Title Analysis of Pricing Structures
Overview Pricing is one of the most important decisions that businesses
make in their efforts for profit maximization. The course is a
foundation for effective pricing decisions by teaching key
economic, analytical, and behavioral concepts associated with
costs, customer behavior and competition. In addition, advanced
pricing techniques that aim to create additional value are
introduced to the students.
Learning By the end of the course, the student should be able to:
Outcomes  Know what are pricing structures.
 Describe how pricing structures support pricing strategy.
 Analyze industries and firms that use pricing structures
effectively.
 State reason on why pricing structures are often difficult to
maintain.
Learning
Objectives Upon the conclusion of this course, the students will be able to
 Know the different pricing structures.
 Explain and apply how pricing structures support pricing
strategy.
 Develop and evaluate proper philosophy on pricing
strategies
 Analyze on why pricing structures are often difficult to
maintain.

INTRODUCTION

You can’t open a business without answering this fundamental question: How much
do I charge? Even with an answer in hand, you may find sales are slow, an indicator
you may be charging more than customers will pay. Or your sales are great, but
you’re charging too little for a healthy profit.

Pricing is one of the hardest business aspects to get right. If someone built several
products for startups and large businesses there will always be responsible for
pricing. There will be challenges of getting pricing right while factoring in
considerations such as costs and profit margin.

Pricing is tough because it involves many variables. It affects all business areas,
including sales techniques such as how to prospect for sales, sales forecasting, and
the entire sales cycle. A pricing structure solves these issues and helps you achieve
your pricing goals.

Overview: What is a pricing structure?

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(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

A pricing structure defines and organizes prices for your company’s products and
services. The objective is to charge a rate that aligns with your pricing strategy while
balancing profits with what the market will bear to avoid over- or under-charging
customers.

A pricing structure prices products and services so that it makes sense to customers
and gets them to buy. For instance, you might offer a discount when customers buy
more than one product.

Several pricing structures exist. These are common ones:

 Flat rate: You choose one price for your offerings and you’re done. This
works great when you have a single product or service, or you charge an
hourly rate that doesn’t change.
 Tiered pricing: This is a popular option. You set different product prices
based on value. The greater the value, the higher the price. An example is a
software product. The basic version is one price, and if you want more
features, you upgrade and pay a higher price.
 Pay per use: This pricing structure charges based on how much of your
offering is used. A typical example is electricity. The more electricity you
consume, the more you pay.
 Razor-blade pricing: This approach is called "razor-and-blade" because razor
blades are an example of how the model works. You sell a core product, the
razor, then make money from selling complementary products: the
razorblades.

Prices are dynamic. Your competition may change prices. Your costs increase as
suppliers charge more. The pricing structure keeps you organized in this dynamic
environment.

A robust pricing structure is important to maximize sales and profit. If your pricing
structure is too simplistic or lacks price controls, particularly in B2B sales, you end up
with prices all over the map.

For example, there are some observations on how sales reps abandon the price list
to make up their own pricing. In these cases, the business loses money because of
unnecessary discounting and lack of price fences.

Pricing structure vs. pricing strategy: What’s the difference?

Pricing strategy is the overarching approach used to set pricing for a company’s
products and services. It doesn’t define actual price points, but the pricing structure
is a consequence of the strategy, and it’s where you set the price customers see.

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 UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

You must first set a pricing strategy before you can build a price structure since the
former dictates the latter. Netflix is a good pricing structure example. It uses a
value-based pricing strategy to lure customers from cable television subscriptions.

Netflix applies a tiered subscription pricing structure to articulate its pricing strategy.
The tiered pricing enables customers to choose an option based on their needs, such
as selecting a higher priced plan for high-definition picture quality. Netflix uses a free
trial as a carrot to get sign-ups.

How to set up a pricing structure

Pricing structures can be simple or complex. Start with a simple approach to avoid
becoming overwhelmed by the process, especially if you sell several products or
services. Then evolve your pricing. These steps show you how.

Step 1: Do your homework

Before you tackle pricing, do your homework. Research and understand your target
customers, the competition, and the marketplace. Depending on the industry you
operate in, other factors may affect price, such as local laws and industry
regulations.

Business costs are the other research area. These costs aren’t limited to the
production of your goods or services. Rent, employee payroll, taxes, Sales and
marketing, and other factors contribute to your costs.

This information influences your pricing strategy. Once a strategy is in place, you’re
ready to build your pricing structure.

Tips for doing your homework

This first step is the foundation for effective pricing. These tips can help.

 Know your customers: No matter your product or service, you must identify
your target audience and learn as much about them as possible. This includes
their income level and why they are attracted to your offerings. Do this
through customer surveys, reading research online, or simply asking your
customers for feedback, not just about your business, but also what they
think of competitor prices and pricing structures.
 Examine competition: Look at competitors and dissect their pricing
structures. Why are they using that approach? Should you use the same? See
what they typically charge for an offering similar to yours. Check their
website, visit their location, or call them. This research ensures you’re not
charging too much or using an overly complex pricing structure, which can
drive customers to competitors. It also identifies if you’re too far below the
market price, which eats into your profits.
 Understand the market: Your local market consists of several elements:
your geography, industry, and addressable audience. For example, a luxury
car dealership’s business is limited by the number of people with the income

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 UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

level to afford the cars who live nearby. You want to know your market,
including how it may evolve over time and what trends can affect you later.
Much of this information is available online, although some sources may
require you to purchase the data.

Step 2: Define success metrics

You’ve done the research and set a pricing strategy aligned with your
company’s positioning, which defines how your business is presented to customers.
Now decide how to measure your sales.

Do you track the number of units sold? Is your business subscription based, so
you’re looking at subscription sign-ups? Do you employ a sales team? If yes, track
the number and amount of closed sales.

These success metrics help you identify your pricing structure and measure its
effectiveness.

Tips for defining success metrics

Your business flies blind without metrics. Define them with the suggestions below.

 Track what’s important to your business: The metrics should align with

your company’s offerings. For example, some products may require a higher
price point. In this case, use a tiered pricing structure, and track sales
separately for each tier. Doing so gives you visibility into each pricing tier’s
performance.
 Look at your sales process: Examine how you generate sales. Should
you bundle products or services together? Do you offer greater benefits when
customers pay more? Does demand fluctuate seasonally or because of other
factors? A bed-and-breakfast owner may have a room with a view that
generates a higher price point. Tracking bookings by room type becomes a
necessity to capture this factor.

Step 3: Find a base price

Establish a base price to build your pricing structure. The base price is the
foundation for pricing decisions, even if the amount isn’t applied to all offerings.

The base price gives you a starting point from which to assess higher price points,
how much to discount when you want to generate demand, and other pricing
decisions.

Tips for finding your base price

Setting your base price can prove tricky. These recommendations can help.

 Factor your costs: Your base price should cover your costs, and include
some markup. This gives you flexibility to discount when you employ pricing
strategies such as bundling.

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(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

 Evaluate value: Your offerings hold higher value to some customers than

others. That’s why it’s important to define your target audience. If you sell
organic groceries, a customer who cares about eating healthy food will
happily pay more for organic food. Your research helps to evaluate your
offering’s value to arrive at a base price.

Step 4: Develop pricing models

This is the culmination of the other steps. Using your success metrics and base
price, model how you see your business growing.

This pricing model helps you assess which pricing structure makes the most sense.
For instance, with vacation rentals, if your business is seasonal, your model should
account for more units rented during your high season.

You can modify your base price up or down to evaluate the impact on revenue.
From there, try different pricing structures to determine how you want to price your
offerings.

Tips for developing pricing models

This is where the rubber meets the road. Here are suggestions to help.

 Establish fences: Set appropriate buyer and price fences in your model.

These are criteria for certain price points to take effect. This approach is
critical if you rely on others to generate sales, such as sales reps, because the
fences act as guardrails to prevent a price that’s too low while
they’re prospecting or performing lead management during the sales process.
When you run a New Year’s sale that ends on New Year’s Day, you’re setting
a time-based fence. If you provide a discount based on the volume of units
bought, you’re setting a purchase quantity fence.
 Keep it simple: The first time you model pricing, keep it simple and don’t get
lost in the details. If you use tiered pricing, limit the tiers to no more than
three. Keep discounts and special offers to a minimum, or consider excluding
them until you’ve collected real world pricing data by seeing how customers
respond to your pricing structure before adding complexity into the mix.

Step 5: Experiment to grow market share and profit

Despite your best efforts, you won’t know how customers will respond to your
pricing until you try them. Some business owners are hesitant to test, thinking once
a price is in front of customers, it’s difficult to change without alienating them.

That’s not the case. Today’s customers are used to dynamic pricing. Think of airlines
that change prices daily, or companies such as Amazon, where the price for goods
can suddenly plummet through their lightning deals before rising back to full price.

Introduce your pricing structure, collect real world data, and see how your success
metrics are trending. Customer engagement software, such as CRM software,
collects customer data you can use for this exercise.

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 UNIVERSITY OF CAGAYAN VALLEY
(Formerly Cagayan Colleges Tuguegarao)
Tuguegarao City, Cagayan, Philippines

SCHOOL OF BUSINESS ADMINISTRATION AND GOVERNANCE

Get a baseline, such as a month’s worth of sales. Then experiment. See what kinds
of pricing approaches drive sales or help you grow market share, then double down
on those to grow your business.

Tips for experimenting

If you don’t test and experiment, it’s an uphill battle to grow.

 Choose low-risk tests: Start tests in a low-risk environment. Choose

customers you, or if you have a sales team, your sales management have a
strong relationship with. Select a small sample size or a specific segment of
your customer base. Adjust based on your findings, and continue testing until
you see your success metrics moving in the right direction. That’s when you
can roll out the pricing structure to all customers.
 Look at non-sales outcomes: Analyze if certain pricing structures incur
higher costs in time, money, or effort. Even if sales increase, a labor-intensive
pricing program could eat up profits due to increased employee hours. Also
consider how your pricing approach affects customer perception relative to
competitors.

Conclusion

Pricing is a lever to grow your business, and its impact on your customers is the
most important factor in choosing the right pricing structure for your business. Prices
that draw customers in but aren’t profitable are as bad as prices that drive
customers away.

Apply a pricing structure that strikes the right balance and makes the most sense for
your business model and customers. Experiment to find that balance, and watch
your profits grow.

Sources
https://www.fool.com/the-blueprint/pricing-structure/

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