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The Dark Art of Product Pricing

This post was written by the Web Marketing Ninja — a professional online marketer for a major web brand, who’s sharing his tips undercover here at ProBlogger. Curious? So are we!

One of the most common questions I get asked is how much I’d charge for a given product. I guess the reason I’m asked this so much is it’s one of the hardest questions to answer, but the importance of price should never be underestimated.

Here’s the process I go through when I’m trying to arrive at a product price.

1. Your existing readers

It doesn’t matter if it’s your first product, or your tenth. If you know your audience, you should have a feel for their propensity to pay for things—and to what degree. If you’re unsure about this, look at the sorts of affiliate campaigns that are more successful with your readers. Do low-cost/high-volume campaigns deliver your highest revenue? Or do high-cost/low-volume promotions boost your bottom line the most?

Outcome: My existing customers have a propensity to buy cheap/expensive products.

2. Market perceptions

The general public has trouble valuing things—and brands have been exploiting that for years. But what you need to determine for your specific product is this: is there a market-based status quo when it comes to the price people expect to pay? If you’re selling music, or books, ask if there’s generally an accepted price range for these products.

Outcome: The community perception is that my type of product will be priced between $____ and $____

3. Where it fits in your product/customer life cycle

If this is your one and only product, then this perhaps doesn’t have much of an impact, but typically, products fit into three key life-cycle categories: entry level, standard, and premium. Once you’ve slotted this new product into your product life cycle, you want to apply one simple rule: make the step from entry level to standard small, and the step from standard to premium high. For example, you might offer an ebook as your entry-level product, a webinar series as your standard product, and one-on-one consulting as your premium offering. An example price structure might look like this:

  • ebook $19.95
  • webinar: $49.95
  • consulting: $5000

Outcome: This product is my Entry / Standard / Premium offering in my product portfolio.

4. Competitive market research

When building a competitive profile, aside from the prices my competitors charge, I document five key items:

  1. Influence of the brand (High, Medium, Low)
  2. Perception of the product (reviews, sales volumes)
  3. Core problem the product is solving
  4. History of discounting
  5. My product’s key point of difference from the competition

What I’m attempting to find with this research is where there is an under or over representation in terms of high/low value and high/low price. You’ll also get a good understanding of the caliber of your opponents’ products in the particular subsection of the market you choose to enter.

Outcome: My product has (high/medium/low) value and a (low/medium/high) price, and my closest competitor is…

5. Defining the real cost of the product

Bloggers often fail to figure out the cost of selling the product. You need to factor in things like transaction fees, the likely overhead of affiliate payments, and, if you’re selling a physical product, delivery, storage and other costs. While you may be likely to sell electronic products, you’re still going to have to pay money for every sale that’s made. How much?

Outcome: On average, my product costs $____ to sell.

6. Correlating feature relevance with customer value

Things can get tricky at this step. You need to make a realistic assessment of how relevant your #1 feature is to the customer problem that your product solves. Don’t get caught adding up the ten different features your product might have—focus on the top one. Then, make a call about the value people put on the solving this problem.

Outcome: My product has a (low / medium / high) relevance to solving the customer problem (___________) and people are willing to pay (a little / some / a lot) to solve it.

Other considerations

Okay so that’s the first stage done. Since you’ve answered some critical questions, you should now have a feel for what the market expects to pay for this type of product, and where yours fits into that spectrum. Now there are just a few more considerations to keep in mind as you choose a price.

Don’t be the cheapest.

It’s easy to start a pricing war by offering the cheapest item, and if you’re after a short term windfall, then it’s and option. But rarely does the cheapest win when if comes to competition.

For me this was summed up when I heard a five-year-old kid say to his mother, “We need to get that one, it’s more expensive, so it must be better”. The innocence of youth — saying what we all think!

Discounting is dangerous.

Lately, many successful product launches have initially offered a special introductory price that’s discounted. That’s fine, but try to avoid any ongoing discounts. It’s actually more advantageous to offer outrageous 50-60% discounts than smaller 10-20% amounts, as the customers’ perceptions of returning value on higher discounts are a lot greater. But if you can, avoid discounting at all.

The smaller the price, the more important it is to get it right.

If you decide on a low-priced product, keep things in proportion! The difference between $5 and $10 is 100%. So if you price your product at $5 you’ll need to sell twice as many to earn the same amount of income as you would if you sold the product for $10. Worse, a product you sell for $5 needs to sell four times as much as it would if it was priced at $20. When working with small numbers, finding the sweet spot is extremely important.

Don’t get stuck in middle.

Those irrelevant middle prices do nothing but cost you money—especially at the high end of the market. If you’re thinking of an $800 price tag, and your product has a unique selling point, charge $999. For a $325 product, go for $399 or $499. Your competition might seem to drive your price downwards, however I’d be working the other way. If you’re competitor is $999 try $1499—as long as you can prove why your product is better.

Throwing caution to the wind

As this post’s title attests, pricing is an art. Pricing can be so hard that sometimes you just need go with your gut, pluck a number, throw it out there and see what happens. Remember though, that it’s easier to drop the price of something than to increase it.

What techniques have you used to price your products? Have you had any pricing disasters?

Stay tuned from most posts by the secretive Web Marketing Ninja — a professional online marketer for a major web brand, who’s sharing his tips undercover here at ProBlogger.

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Comments

  1. Sudeep says:

    Hey,
    I was about to bring out my e- book when I had this in mind about cost factor. Due to market low and economic hardship I was going to give it for free or for very few amount. But after reading this I would definitely research and think more.

  2. Elegant calculator for pricing products. ‘Don’t be the cheapest’ is essentially an important warning that i overlooked my most people. Thinking that they can attract more buyer, the under price and over deliver. It is waste of energy and time for which you are not rewarded properly for and if your product is so cheap, it might also be under estimated by the people.

    Thank you Ninja :)

  3. eric says:

    Pricing is driven by market economics. Supply and demand. If your product is in demand, you can charge more. If there is scarcity, you can charge more. If there is an excess of supply, consumers won’t pay as much (they can get the same thing somewhere else cheaper).

  4. Lots of things to keep in mind! I am currently working on my first product and I am contemplating how much value it offers and how this should correlate with price. It’s a tough decision but your tips will definitely be taken into consideration!

  5. Mike says:

    I agree with the statement at the end of the blog post, just go with your gut! Price what you think people will pay for your product! Everyday there is tons of items sold on Ebay, that are priced cheaper on Amazon! Its all about how you justify the price you are charging!

  6. This was a great post. Pricing is such a fine art that it’s difficult to say exactly what will work in which scenario, however the best advice was the last part about just doing it and seeing what happens. I know a lot of times people (including myself) get caught up in the pricing conundrum, and that leads to a products either not being produced or taking forever to bring to the market. Sometimes it is just better to put it out there, and see what happens. I’ve been doing that more often, and for the most part I’ve been having positive results. By the way, it is always better to start high and see what happens, then lower as necessary. I’d love to hear more about people’s pricing experiences. I’m sure the stories run the gamut!

  7. I disagree with the idea of not offering discounts.

    Offering a discount as a “thank you for signing up to my newsletter” or “thank you for becoming a fan” etc. is a very nice giveback, methinks.

  8. Bernice says:

    agree with Barbara, discounts have always worked out well for me and it spreads by word of mouth as well, bringing more people in.

  9. Ayo Oyedotun says:

    Great tips!
    Underpricing your products can make you appear fake while overpricing them can scare customers away.

    This is truly a web marketing ninja.

  10. The “expensive is better” factor plays a major role. While I was a student I used to help people fixing PCs and the like via an ad in the local newspaper (this was the time where internet connection meant 9.600 bauds modem…). At first it was hard to find customers. Then a friend of mine who was a consultant told me to double my prices. It did attract more customers, because people think that cheap is not credible.

    On the same note, I witnessed many decision makers saying that “Linux is free… It can’t be good enough for what we do”. Facepalm.

    Go for high prices.

  11. I was wondering how to start up a webinar and get people to pay for it?…

    Thanks

    :]

  12. Thanks so much for this article, the detail is incredible. I do think that pricing can be an issue with products that aren’t tangible but as was stated with good market research and a good feel for your customers you can get it right 90% or the time.

  13. Price your product can be an headache..but I just try to stay affordable so the average Joe can pay for it.

    “TrafficColeman “Signing Off”

  14. Angela says:

    Thank you thank you thank you! Normally I have a real issue with anyone calling themselves a “ninja” as they tend to be all hot air and no substance, but in this instance I couldn’t have been more wrong. Invaluable advice, especially at this stage of my business growth. Again, thank you!

  15. Marcie Hill says:

    This was very helpful as I am conducting target market research this week and will be need all the help I can get. This is what I call a blessing in my inbox.

  16. Andrew says:

    I’ve been promoting several products on affiliate marketing and blogging and have observed that those who are willing to pay $49.95 for an e-book are also willing to pay $100 for the same book if the sales page is written in a nice manner, the product comes with a lot of bonuses and the author of the product has a nice reputation!

  17. Hadi says:

    For sure, my product services (websites design) get stuck in the middle. I was hoping to get some orders with the ranges cost of our service, but seems it’s not really worked out. This article encourages me to define our future pricing.

  18. Shay says:

    Barbara & Bernice I don’t think the message was not to provide discount but do it carefully and I totally agree with you that it should be used as incentive for signup or its similar

    Ninja I liked the way you summarize every point to a simple sentece

  19. I work at marketing firm, where we go through similar product cycle for offline products, and it has been great eye opener in online world too, although I have yet to create my own products, this tips are very useful.

  20. Graham Jones says:

    Interesting article and some good points made. I think it is important to emphasise the need to avoid the small price area. This is commodity pricing and you are far too dependent upon what is happening in the rest of the market, rather than on your own decisions. Establish your value and your prices become much less relevant to people.

    I have produced a presentation on the psychology of pricing, particularly which numbers to choose (7 or 5 or 9…?). They have an important influence in click through rates because of the way we perceive numerals. We often perceive higher numbers to be cheaper.

    Find out why at my presentation at:

    http://www.grahamjones.co.uk/multimedia/presentations/how-to-choose-the-right-price.html

  21. Eddie Gear says:

    Discounting is dangerous? I’m not sure how you arrived at that conclusion. Don’t you think that different discounting strategies might work in different situations or for different products? And in what situations is offering an outrageous discount advantageous? Lastly, it is hard to ignore the allure of discounts :)

  22. Or you can do it the easy way. Decide what you think people will pay for your product…then double it! Seriously, this was great information. Thanks!

  23. Bill says:

    Don’t be afraid to ask for money if your product solves a problem or delivers some real value. If it doesn’t, then the cost is not the problem.

  24. Gary says:

    Alan Sugar from the recent Apprentice would say if you can get more from the product and the Customer will pay it then demand more