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.