Product pricing can be one of the hardest things for entrepreneurs. How much to charge? How much is too much? Am I selling myself short? This article gives you some crucial things to know about product pricing strategies and techniques.
The basics
In product pricing you have to make a decision what kind of a pricing strategy are you going for. The strategy of choice depends quite a lot on your product itself and its competitors.
Expensive pricing
People generally have a pretty good idea what is cheap and what is expensive. If you’re going for expensive pricing, your product has to feel expensive. Your role here is to increase its perceived value.
Do this exercise: think of a few luxury brands, and a few discount brands and write down the characteristics of each. What makes the difference? What do the expensive brands have that the cheap ones don’t?
Things that drive up the perceived value of a product:
1) Packaging & Design
Every high priced item you buy comes in a fancy box. Your product has to „look“ expensive. You can do this also with digital products, just spend time on some high-end products’ websites and take note of what makes that website look expensive. Start with making your website look expensive, and make your product look fancy too.
When it comes to information products, then pdf e-books will always seem cheap. Everybody knows how to create a pdf document and know it doesn’t take much. We recommend against it. Online courses, e-learning environments and information products shipped on physical media (DVDs) will always seem more valuable.
2) Format
Product differentiation! Don’t be like most products in your category. Repackage it into a different format, one that noone else is using. For instance if everyone else is selling e-books on your topic, do your product in video.
Video products always look higher class compared to text-only products.
3) Uniqueness
Expensive products have to be one of a kind – the only one that does what it does. If your product has no unique differentiating characteristics in a crowded market, you really cannot charge more than the market average.
4) Availability
You can charge a higher price is you have a very limited quantity, e.g. a coaching programs that only accepts 25 people.
If all these four points are met, choosing an expensive pricing strategy can be very profitable. Things to remember about expensive products:
- It is one of the three strategies to increase profits (the other two are to sell more products and to sell to more customers),
- Charging more money for a product makes people instantly think it is better. Example: I bought 2 cars last month. One of them cost $10,000 and the other one $85,000. Which car is better? See – you don’t even need to know anything else to answer that question.
- Different + expensive = desire.
- Once you have successfully established your product as an expensive, your income will go up significantly every time you have a sale (but don’t do it too often or you’ll end up pissing off the customers that paid the higher price).
Cheap pricing can sometimes be better
Remember: if your product is not unique, you are always going to compete on price. If there are no significant differences between your product and competing products, people will choose based on price. That can work to your advantage.
The most proven pricing strategy in a competitive market is doing it cheaper than others. People like to get stuff cheap. This is the best strategy to choose if your product is very similar to the others in the market.
Cheap product pricing does not necessarily mean that you have to be the cheapest in the market. Testing a higher-than-average price for your product is a good thing to do. If you test a higher price and it brings in the same number of responses as the lower price, you immediately increase your profits.
Generally higher price should reduce the number of sales. The theory of market elasticity says that the number of sales will go down when the price goes up, and vice versa. The question is: by how much? If its just a modest decrease, you will do better at a higher price becuase you will generate more profit and possibly bring in higher-quality clients that will spend more money later.
If you make the price too high, your sales will drop precipitously to a point where you are bringing in too few new customers to maintain cash flow. This is usually easy to notice and fix.
When you enter an exisiting market with a product that is not siginificantly different or better than the competitive products, the market experience is that you usually find more success when selling the product at a discount. When there is an established price for the same type of products then it is easy for the customers to figure out what is the average price. If you can sell at a significantly cheaper price, you can sometimes enjoy a very strong response.
The question you need to answer is whether you can afford to run your business like that.
Niche product pricing (when you’re unknown)
So how does being a ‘nobody’ relate to pricing? Well one would assume that if you don’t have a big name that you can’t charge a high price. Even better, you can’t charge a high price if you have a small information product.
The truth is that you actually can sell your infoproduct for a nice price, even if your readers don’t know who you are. You can also do well regardless of the size of your product.
- Write down the prices of as many ‘comparable’ information products within your niche. By comparable I mean products that target the same vein of information that you do.
- Create a list of the top 3 information products. Those products you feel would be most likely to compete directly with your type of reader.
- Now ask yourself these questions: Does your information product introduce a brand new theory? Is it something that nobody else is teaching? If it’s a product geared towards consumers, charge 20%-50% more than the highest priced product. If it’s geared towards business people, charge 30%-100% more than the highest priced product.Does your information product explain a topic differently than your competitors? Charge a median price. The average price between the lowest and highest products. Are you selling an audio or video product, where everybody else is selling a print product? Choose a price between the lowest and medium priced product. If you offer a brand new theory, go higher than the highest price.
Online buyers comes from all walks of life. Some people perceive ‘free’ as being poor or inferior quality. Maybe they’ve been misled by free information, so they’re weary of it. Likewise if you price a product too low some buyers get suspicious. Quality = high price in many people’s mind.
The rationale I hear from quite often from infoproduct creators is that if you price low, you’ll make it up in volume. Not always. Most people overestimate the number of people they think are going to buy their product. You might guesstimate 1,000. When in actuality you may only have the capacity for 500. That’s a big difference in the bottom line if you’ve decided to sell for $9.95, instead of $22.95.
Optimum pricing strategy
Before you set your price, you have to gain some insight into how much room you have to maneuver. A good way to start is to get a clear overview of your costs. Costs can be divided into variable and fixed costs.
Variable costs are the costs you incur that are directly linked to the product you sell. For example if you sell a instructional video course “How to grow health houseplants” on a DVD, your variable costs per item would include the cost of the DVDs, the rights that you might have to pay per video and the shipping costs.
In the online market, you are usually also paying to acquire the customers. If you pay 20 cents per click to Google and you convert every 50th visitor into a customer you’d have to add $10 to your variable costs per product.
Fixed costs are the costs you incur to keep your business running. These include employee wages, the rent for your office, telephone costs, utilities and so on.
Let’s say that in the case above, your fixed costs amount to $1,000 USD a month. Your variable product costs come to $25 USD per DVD. You are expecting to sell 500 videos a month.
Fixed costs: $1,000
Variable costs per video = $25
You are expecting to sell 500 videos so your total costs will be:
(500* variable costs + fixed costs) 500* 25 + 1,000 = $13,500
To break even, you will have to charge $27 per video. (13,500 / 500 = 27) At this price you are not making or losing any money. This is your lower limit. The highest price you would be able to ask for is the market’s ceiling price. Look at your major competitors to estimate what this price could be.
The price you charge for your product has a major impact on sales. Choosing the price, like choosing the media or the product, is fairly easy to do. Start by finding out what the competition is doing. If your competitors are selling their widgets for $195, you should consider selling yours for $195 too. You can safely assume that any product that has been selling well at $195 has been tested at other prices—higher and lower—and that $195 is where the money is.
To be successful you will need to find this optimal selling price: a price at which the selling campaign will yield the greatest profits. This optimal price can change during the life cycle of the product—being higher when the product is hot, for example—but it is always important to know. If you deviate from it significantly, you will reduce profits or even create losses where profits should have been.
Once you’ve taken stock of your costs, your product’s value and your competitive positioning, it’s time to select a price. Here are some guidelines to keep in mind:
- Better to charge more than less. A higher price increases the perceived quality of your product. If your price starts on the low side, you’ll meet more resistance from your customers as you try to increase your price than when your product is a little overpriced.
- If you are a small business don’t compete solely on price. For a smaller ecommerce business it’s normally a better idea to compete on added value than it is to compete on price. In a price fight, larger competitors with deeper pockets and lower operational costs wipe you off the field.
- When marketing to the global market, think about the US market and in US dollars ($USD). Undoubtedly, the US dollar is the currency of the internet; the majority of all transactions on the internet occur in US dollars. With almost 200 million internet users in North America, the US constitutes one third of the worldwide internet market.
- Price points matter. Never charge $100, charge $99.95 instead! If you want to charge over $100, then don’t go up to $101, go to the next natural bracket such as $109.95.
- When possible and your product is expensive, offer installments or financing. Many people are short on cash so offering them a special deal can work wonders to motivate sales. Why do you think there are so many retailers that offer “ZERO MONEY DOWN!” Giving customers the option to pay in installments or to receive financing can increase sales.
Advanced pricing techniques
The contrast princible
Do this experiment at home. Fill 3 bowls with water: one with cold, one with hot and the third one with lukewarm water. Put one of your hands in the cold water and the other one in the hot water. Keep them in there for like 30 seconds. Now put both of the hands in the lukewarm water. One hand feels cold, the other one warm. This is the contrast principle.
Nothing is expensive or cheap, its what you compare it to. The best way to sell $800 shoes is to place $3000 shoes next to them. This works very well with expensive products as you can make them seem not as expensive compared to other products.
Go to any high end retail store and see how this is done effectively. The only reason watch stores carry $50,000 watches is to make the $3000 watch seem like a reasonable price.
Decoy pricing
Decoy pricing is a method of strategically pricing products so that consumers will choose the one that you most want to sell to them.
Dan Ariely in his book ‘Predictably Irrational’ explains this. When people were offered to choose a trip to Paris (option A) vs a trip to Rome (option B), they had a hard time choosing. Both places were great, it was hard to compare them.
Now they were offered 3 choices instead of 2: trip to Paris with free breakfast (option A), trip to Paris without breakfast (option A-), trip to Rome with free breakfast (option B). Now overwhelming majority chose option A, trip to Paris with free breakfast. The rationale is that it is easier to compare the two options for Rome than it is to compare Paris and Rome.
A graph to explain this:
How to use this in pricing? Here comes another example from the book.
An ad for an Economist subscription gave 3 options
1) Print-only for $59
2) Web subscription only access for $125
3) Print and web access for $125
Obviously 3 looks like the best deal. In an experiment Dan ran with this setup, 16 subjects chose option 1, zero chose option 2, and 84 chose option 3.
What if we remove option 2 and have people choose between print-only and print and web access, leaving the prices the same?
The results should be the same as the prices did not change, right? Instead, the results changed dramatically. 68 chose print-only and 32 chose print and web access. It was only by option 3′s relation to option 2 that made option 3 look so good.
Option 2 in the Economist pricing served only as a decoy price and they didn’t even want to sell it.
Three packages
The old truth about offering 3 pricing options / packages holds water. Check out this test they did with selling beer.
People were offered only 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer.
Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.
Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and arounf 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price.
Moral of the story: you can influence people’s choice by offering different options. Old school sales people also say that offering different price point options will make people choose between your plans, instead of choosing whether to buy your product or not.
Three packages with decoy pricing + the contrast principle
Now let’s put all of these options together for maximum effect.
Let’s say you want to sell your product for $59. The best way to do it is to add a cheaper decoy price option and a more expensive contrast option.
It could look something like this:
| Decoy
$49
Minimum amount of features, benefits |
What you actually want to sell
$59
Tons of features, benefits |
Contrast
$159
Some extra benefits, but not *that* much better |
The magic number nine
It’s true. Prices ending with the number 9 sell better. Test described in the pricing strategy book Priceless said a product was sold for 3 different prices: $34, $39 and $44 dollars. The highest volume of sales took place when the price was $39.
Everybody understands that $39 is basically $40, but in our subconscious mind it still seems to be a lower bracket price.
Better than nine
There is one way of displaying the price that is even more effective than prices ending with 9. It’s the former price – current price technique. When selling the same product with these two price labels, the $40 price will win.
Crossing out the previous price is very effective. Have you noticed how Amazon uses it all the time?
Value before price and always explain your price
Never publish your prices before communicating the value of your product first. You have to put the price into context.
If I say the price for the loaf of bread I’m selling is $50, it seems expensive. If I had communicated first that it was hand-made from fair trade organic wheat and rye by Angelina Jolie herself, the $50 price tag would not seem that steep anymore.
Always sell the value before publishing your price.
What other product pricing strategies and techniques can you share?
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