How to Price Your Online Products

  1. your costs,
  2. your competition,
  3. psychology of your buyer,
  4. the market.

How to price an online product

There is no hard and fast answer to how to determine the price of a product. Your competition, costs, objectives, and buyers all factor into the right answer for you. Let us explain.

What does your competition charge?

Buyers in the market for your product rarely shop in a vacuum. They will almost certainly compare you, your prices, and the value you offer, to those of your competitors.

What does your competition charge?

What are your costs?

The price of a product must be determined, at least in part, by your costs. It is especially essential to generate a profit on an item if it is the sole item you sell. Your costs will be a prime consideration of your pricing in order to have a sustainable business. We will dig into this in more detail in a future section.

What profit margin do you want?

Your desired profit margin is a factor in how much you charge for a product. Once your costs have been met, how much more do you want to have of surplus? You may wish to maximize your profit margin potential as a strategy to enable business expansion without a loan or investments.

Who is your buyer and how do they think?

First and foremost, you should only be selling to someone you know inside and out. It may seem obvious, but many never take the time to ask their customer what they are willing to pay. You can discover this information by having a conversation or sending out a survey. By talking to your customer, you’ll learn whether they are looking for a budget option, which means you would need to be priced cheaper than your competitor, whether they want status or convenience, which means you can charge more, or whether they want something in between that is just average.

buyer personas
  1. One is called the Rule of 100.” This rule suggests that when your product is going on sale the sale should be communicated as a percentage off if the original price is less than $100. If, however, the price of the product is over $100 originally, then you should communicate the sale price in number of dollars off. The perception this creates has been deemed an effective sales pricing tactic.
  2. The other psychological concept to apply to pricing is called charm pricing. Charm pricing is at work when you go to the store and see an item marked at $8.99 instead of $9.00. A single penny “discount” is negligible, but people process $8.99 as a far better deal and are more inclined to buy.
  3. Make the buyer feel like they are getting a good deal by giving them something free with their purchase even if you are charging a higher price. The addition just needs to provide some sort of value to them but does not need to cost you much or any money. Alternatively, offer discounts on future purchases, and the opportunity to unlock exclusive deals to add even more appeal.

What conversion rate does it yield?

You don’t just want to fall into the trap of thinking that the price with the highest conversion rate is the way to go. It’s possible that a higher price point would lead to a lower conversion rate, but still bring in more revenue. It is true that if you price your product higher, you may lose out on the business of those who would purchase at a lower price point. How can you avoid losing this business? Create sales, periodically, that don’t go low enough to make you lose money, but are low enough to land the customers who wouldn’t pay the full asking price.

Product pricing methods

We just went over considerations on how the price of a product is determined. Here are 6 actual product pricing methods to use based on the considerations.

  • Cost-based pricing (or cost-plus): Thinking about your pricing this way revolves around your break-even point. This means identifying how many units need to be sold to meet all of your expenses and not generate a profit. This product pricing method is good for establishing a baseline price, as it does not factor in the market and what your competitors are charging. We will go over the formula, below, to help you determine what your baseline cost for your product should be.
  • Value-based pricing: There is a rule that states that customers should get a perceived value of 10x what they paid for a product or service. If a product is far greater than 10x cheaper the value they will derive from it, they will be turned off. Do not underprice your product even if you would still make great margins. Because, not being able to sell it at all would keep you from even breaking even much less generating a profit. To price your product appropriately, you should understand the value that customers place on it and how they compare your product to competing products. If the perceived value is higher than the cost-plus value factoring in a good profit margin, you could charge even more.
value-based pricing
  • Market-oriented pricing (competitor pricing): You can determine the price of your product using the market-oriented pricing method. This method is based largely on your industry, what market trends there are, and how your competitors price what they produce. The quality of your product is a large factor in using this pricing method. Your customers will judge the quality of your product based on its price and how it stacks up against the price and quality of your competitors’ products. An underpriced item will make you seem cheap. People are actually willing to pay more for good value. Your price leaves an impression on would-be buyers; the question is: what kind of impression do you want to leave? Stay ahead of the curve, and always be considering where your market stands and where it is headed. Are there any weather patterns or law changes coming up? What about change in societal views?
  • Dynamic pricing: Dynamic pricing features price changes based on market demand weekly or even daily. A few companies and industries may come to mind that do this on the regular: Amazon, Uber, hotels, and airlines. Raising and lowering prices based on demand can help you hit more people. There are some fantastic tools like QuickLizard, Omnia Retail, and Profit Peak that help companies with dynamic pricing.
dynamic pricing
  • Loss-leader pricing: Loss-leader pricing is essentially a form of marketing. It gets people in the door with a sale so low that it makes you lose money on the product, only to be made up by profit through the sale of other products that have high margins. The grocery retailer, Aldi, and outdoors apparel company, Patagonia, are known for this type of pricing to attract buyers to their store and website. Alternatively, this form of pricing could be done by bundling low-cost items with higher cost items. This method requires a lot of knowledge about your costs and margins.
loss-leader pricing
Patagonia’s loss-leader products
  • Market penetration pricing: As previously mentioned, this one is the opposite of price skimming: you start low to capture market share, and then raise the price to build on profitability. The main goal of penetration pricing is to spark the curiosity of your prospects and entice them to become customers. This method comes with some a risk: once prices increase, customers may choose to leave and switch to a cheaper competitor.
  • Captive pricing: Like penetration pricing, captive pricing involves counting on expansion revenue to offset an initial discount. In this case, you provide the core product at a discount but charge a premium for additional products and services (like what a mobile service will do with data usage) to use or get the most from it. Use this wisely not to create customer frustration if pricing for dependent products is too high.
  • Anchor pricing: The last pricing method we want to introduce you to is called “anchor pricing.” This is when a company makes a “regular” price visible to their buyers, but regularly sells it at a discount. This functions to catch the people who are always on the hunt for a good deal.
  • simple or flat rate
  • tiered
  • per feature
  • per user
  • metered/usage-based
  • freemium
  • premium
  • free trials
  • mixed pricing
  • dynamic pricing

How to calculate selling price of a product

Many of the product pricing methods above are based in part on art, psychology, and a solid intuition, however, the cost-based method uses a formula centered around business expenses to calculate the selling price of a product.

  • Materials
  • Time
  • Packaging
  • Shipping
  • Credit card transactions
  • Marketing
  • Legal fees
  • Rent
  • Electricity
  • One-time start-up costs

Beyond the basics of how to price your product

You may know your prices at any given moment, but there are some long-term considerations that are important to keep in mind, as well. Always be aware of where the market is going and how your competitors are pricing their products. These can change with the drop of a hat.

pricing

Conclusion

You can think about how to determine the price of a product forever — but, don’t.

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