What Is a Pricing Model?

By Staff WriterLast Updated Mar 25, 2020 10:16:42 PM ET

A pricing model is a method used by a company to determine the prices for its products or services. A company must consider factors such as the positioning of its products and services as well as production costs when setting the prices of its goods and services.

To choose a pricing model for its products, a company must decide whether its primary objective is to maximize short-term or long-term profitability. It must also decide whether it wants to differentiate itself from the competition by offering products with more value at higher prices.

A value-based pricing model is usually the most profitable option in the long-term, as it is based on the value that a company's customers attach to its products or services. Using this model, a company typically sets prices according to the value its goods and services provide to consumers. A company must consider psychological pricing, as there is a limit to what consumers can pay for a product or service regardless of the value it provides.

A company should consider popular price points within its industry at which consumers are typically willing to buy more products and services. Although such prices allow the company a smaller margin, the increased sales may compensate for the lost margin.