There are a lot of problems with popular notions about pricing and marketing. Pricing is more nuanced than the common advice suggests. Let's look at 6 steps that will help you price the products in your online business.
There are two very popular notions about pricing in the online marketing space. One, “Charge what you’re worth.” Two, “Charge what you want to make.”
Those folks who dispense these pieces of advice make it seem that pricing is simple. But is it? The answer is NO.
There’s a lot that’s unsaid in these popular notions about pricing and marketing. Pricing is more nuanced than common advice suggests. There is some serious work to be done before a business owner can price a product.
- You have to understand your product class and the market for it.
- You need to set objectives for your pricing and what factors can constrain it.
- You need to estimate demand and revenue.
- You need to figure out what your profit would be at different pricing levels.
- You need to choose your pricing approach.
Only after doing all this groundwork can you set your price. Not THAT easy, right?
While pricing is not THAT easy, there are Six Steps on Pricing that you can follow. These will help you have a more rational perspective on pricing and approach it the way a professional marketer would and one who wants their online business to succeed should.
Before we dive into the steps, let’s talk more about the popular notions of pricing and why they don’t work.
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Popular Notions of Pricing: Why They Don’t Work
- “Charge what you’re worth”
As an online marketer, you may have heard this popular saying: Charge what you’re worth. What does it even mean?
It’s not about you personally because we’re all inherently valuable. What it means is to charge what your product or the transformation you’re giving people is worth. But what is your product worth? How do you figure that out?
Some will say that one way is to figure out the value of the transformation for your audience. But what member of your audience would that be? Would it be the most successful or the average one? The truth is there is no way that you or anyone else could reasonably estimate what the expected value of your product is.
Pricing has never been about you taking all the value. It’s fundamentally a negotiation between you and the buyer where you both get some of the value.
The subtext of the advice to charge what you’re worth has to do with a theory of pricing called prestige pricing. The problem with prestige pricing, however, is that it doesn’t work for everyone. It makes sense for products whose demand curve is weird and where you could make fewer sales if you reduced your price.
Example products are Rolls Royce cars and Louboutin shoes. A pair of Louboutins may not be that much nicer or much more comfortable than an equally comfortable pair that’s just a fifth or a sixth of its price, but what you’re paying for is that red sole. You’re paying to show off the prestige that you have Louboutin shoes. There’s nothing wrong with that. People buy Louboutin and Rolls Royce because these brands have attained a level of status or prestige.
In the online marketing space, though, there are very few cases where prestige pricing would work. There could be some Life Coaches or Certification Programs where prestige could apply, as in when people may be willing to pay to say they worked with this coach or were certified by that program.
In most circumstances, however, if you’re someone who has to be told to charge what you’re worth, chances are you’re not at a point in your business where you have the credibility to apply prestige or premium pricing.
I realize you may not like what I’m saying, but the reality is that much of what determines and allows people to charge that premium price is that they have a reputation and a name. Louboutin can charge what they charge because they are what they are. It’s their reputation and experience that come into play. If you’re not at that level, using premium pricing just doesn’t make sense.
- “Charge what you want to make”
Another common refrain that I hear a lot in the online space is: Figure out what you need to make and that will decide your price. Simply put, it’s “Charge what you want to make.”
So, for example, let’s say that I’ve decided that I’d like to personally take home $27 million next year by selling legal templates. That’s okay. However, that doesn’t mean I can just look at how many templates I’ve sold this year and then raise my prices based upon how many I could hope to sell next year to make the amount of money I want.
That’s not how the economy or business works. Pricing is about supply and demand. You have to think about what people are willing to pay, not just what you want to make (assuming, of course, that there are people out there who are already willing to buy your product).
Figuring out how much you need to make does come into the pricing determination, but it comes later on in the process. Because part of the pricing determination is figuring out whether you can create a particular product and sell it at a price that it’s going to make you money. If it’s not, you’re not going to do it. There’s an analysis that you need to do because pricing is complicated.
Steps in Pricing for Online Entrepreneurs
There are set steps that professional marketers follow when they are pricing products. When you understand how professional marketers think about pricing, it can help you set your prices realistically.
Step 1: Identify Pricing Objectives and Constraints
If you only have one product, the objective is going to be pretty clear: you want to make money. But if you have multiple products, you can have different pricing objectives for different products. The same is true with pricing constraints; the constraints will be on a product-by-product basis.
From a pricing perspective, you will think in one of two camps: to maximize profits or to maximize market share.
When you’re in the maximize profits camp, your objective is to make enough revenue to cover costs and then have money left over at the end. Maximizing profits, by the way, doesn’t mean charging the maximum price. Price is still going to depend on the demand curve of your product.
On the other hand, when you’re in the maximize market share camp, your objective is to get people into your world. You want to get yourself known and to build market share. Your pricing objective will impact the price you are going to charge.
For example, I sell my website policy pack for $27. If you look at many of my competitors, they sell a similar pack for $1,000 or $600. It’s hundreds of dollars for most of them. You might look at it and say, “Why are you doing that, Bobby? Couldn’t you charge more?” The answer is yes, I could, but my goal with the website policy pack is not to maximize profits on that individual product. I’m thinking more broadly about how I can get market share, so I become known as “The Legal Guy” for a bigger segment of the market.
One of the things we figured out is if someone buys their first legal template from me, chances are they will buy all their legal templates from me. They’re not going to buy that from me and then go buy a different agreement somewhere else unless I don’t sell it.
Now you also need to know what the price constraints are which will determine how much you can charge for a product. There are five main kinds of constraints:
What is the total demand for the product, the product class, and the brand? If we take cars as an example, demand would be the number of people who are going to buy a car in a given period. That’s the total market. There’s a limit on demand and that can limit your sales.
Stage of the product in its life cycle
As a product moves along its life cycle, oftentimes its price must come down. When plasma or flatscreen TVs were new, they were more expensive. There was a lot of demand at a high price. As prodcuts age, the price generally goes down.
Cost of production
The cost of production will force you to charge a minimum amount. For example, if it costs you $1,000 to produce a unit of something, you’re not going to sell it for less than $1,000. That sets a floor amount.
The type of competitive market your business and product are in will affect its price. A market ranges from pure competition to pure monopoly. Monopoly is where you are the only person in town that can solve a problem and so you could name your price and use what’s called monopolistic pricing. You can maximize profits.
Meanwhile, a pure competition market is where there is no distinction between products. Examples are commodities like corn, wheat, oil. One product is like the other in its class. In those kinds of markets, profit margins are razor-thin. You don’t have a lot of choice in pricing, so your pricing must follow what the market price is.
None of us in the online marketing space are in a pure competition market. We live in the middle ground. Our pricing is affected by how much competition there is, things like positioning, and whether people see us as premium or not. Audience awareness also comes into play. The more informed or aware of products people are, they will have options and preferences. This will affect pricing.
What are your competitors charging, and how aware are your potential customers of those prices?
Price competition matters if people are actively using price as a factor. If you sell a product comparable to that of your competitors for less and people become aware of you, this creates a problem for your competitors. On the other hand, if you sell at a higher price, you need to do a good job of product differentiation or showing people the value that you offer.
Now, some entrepreneurs have the notion that they don’t have to think about competitors’ prices and that they don’t have to pay attention to what their competitors are doing. No offense, but I think that’s dumb.
Some people advise marketers to ignore the competition because it affects them emotionally. I say that instead of reacting emotionally, you need to figure out a way to see what your competitors are doing. You need to know their pricing, their messaging, or how they keep their audience informed because that’s going to affect what you price your product. It’s going to have an impact, whether you like it or not.
Step 2: Estimate Demand and Revenue
Several factors affect demand. Among the most important ones are people’s tastes and desires, their income and disposable income, competitor prices, and product positioning.
We can’t do large surveys the way professional marketers can, but we can probably get on the phone and ask our audience questions so that we can have an educated guess on things that will affect demand for our products because this is all part of pricing.
Try to ask whether your audience wants your product or product class. Is there a desire for your product, and if so, how strong is it?
What is the level of income and disposable income of your audience? When you’re talking to people who have high disposable income, they’re more likely to be willing to pay and not worry too much about price increases. But if you’re talking to people who are on tight budgets, every incremental dollar that you charge could matter. That’s going to affect the demand for your product significantly.
Another factor that affects demand is your product positioning. Back in the early 2000s, Kia and Hyundai didn’t have the reputation that they have now. So, if they had introduced cars that cost $150,000, there’d probably be no demand. Whereas BMW could have a car for $150,000 and people would buy. It’s because of the perceived value and positioning of the brand.
Here’s an example for estimating demand and figuring out revenue. Let’s say that according to your estimate of demand, 100 people will buy your product at $97 and 50 people will buy at $297. In this model, you can look at it and say, “I will bring in more money by charging more.”
But it could be the other way. It could be that you’re going to make 100 sales at $97 and you’re going to make 10 sales at $297. In which case, you’re going to make more money by pricing it at $97. By looking at all these, you can make a more rational pricing decision.
Step 3: Determine Cost, Volume, and Profit Relationships
Because revenue and profit are not the same, you’ll need to calculate your profit margins at different prices.
This is where you’re going to do a couple of things. One is breakeven analysis. Breakeven is the point at which you’re neither making money nor losing money. The revenue that comes in covers costs and nothing else.
The other calculation you need to do is to determine your optimal price. There’s a price that will maximize revenues and a price that will maximize profit.
If you’re in the digital products business where you’re just selling digital products, for the most part, your optimal price is going to be the one that maximizes revenue. Our profit will go up as revenue goes up because our marginal cost of each additional sale is next to none. In this type of market, normally, the profit-maximizing price is also going to be the revenue-maximizing price.
In other markets, that might not be the case. For instance, someone with coaching might think that she could make more by setting a lower price. But given the cost, whether it’s hiring other coaches or adding more coaching time, the coach may realize that she’s making a lower rate for each hour of her time. In this situation, the coach could decide to set a higher price and make fewer sales because that will maximize her profit.
Going through an analysis like this will enable you to think more rationally about pricing. For one, you might go through this analysis and discover that the problem is you’re never going to hit your breakeven point. The demand is not going to be high enough at any price to cover your costs. Discovering this ahead of time can help you see that it’s not worthwhile to even launch this business.
Step 4: Pick a Pricing Approach and Set Your Price Level
There isn’t a single pricing approach. Here’s a selection:
You start at a high price and sell to members of your audience who are considered top of the market. Then you reduce your price and skim the next group of people. You keep reducing your price for each succeeding group.
In other words, if 1,000 people are willing to buy something at $5,000, you’re going to start selling at $5,000. You can sell to those 1,000 people, then you’ll reduce the price and sell to the next level down. This is how theoretically you could maximize your profits.
The problem with this approach to pricing is that it’s not going to work in some markets, including ours because those who bought at a higher price will be pissed off at you. So, normally this will not work, but this happens in the technology market where at the beginning, they charge the most, and then the prices come down. Most of us would never use skimming pricing.
You can do this when you’ve established yourself as Rolls Royce, or something like that. Again, unless you’re at a point where you have prestige, it’s hard to go with prestige pricing as your pricing approach.
You intentionally price things low at the beginning to gain market share, then raise the price later. A lot of people do this, especially with beta launches and with founding members.
Positioning relative to the market
You can say that you are “above market,” “at market,” or “below market.” Each of these positions has a different signal to your market. You can compare yourself to a competitor and their price in a very direct way.
With cost-plus pricing, you choose a markup, e.g., 50% or 100%, and add this to your cost to determine your price.
You price at the level you think will bring in the most profits.
Most people start with something close to penetration pricing to get to critical mass and hopefully get to breakeven. And then they will raise their price to get to the optimal price to maximize revenue and maximize profits.
But for most of us in the online space, I believe the optimal approach to pricing will be to start with penetration pricing (underpricing to get a lot of sales up front) and then raise the price over time.
Step 5: Set Your List Prices
The next step in pricing is to set your list price. It could be that your list price is flat or fixed, but it could also be different or flexible based on how many units a buyer purchases.
Step 6: Make Special Adjustments
Having discounts for volume purchases is one example of an adjustment that we use. For example, if people want to buy legal templates in bulk from us to provide to their people, we will give a bulk discount.
There’s also variable pricing which means you can make adjustments in real-time. List prices can have adjustments. These are changes or allowances for certain things like different markets as well as the timing of purchases (e.g., early-bird pricing) and certain other factors.
Some Final Takeaways
When you’ve priced your product but aren’t getting any sales, you might wonder why there are no takers. Your first instinct may be thinking that you’ve overpriced your product. That could be an explanation.
The problem is it’s not always pricing. It could be a lot of other things. It could be because they’re not aware of you or aren’t getting your message. But if a lot of people are hearing your message yet not buying, then you should talk to people and see what’s happening.
You could say that pricing is an art more than a science. You have to do a lot of thinking and figuring out what the right price level could be, or what level people are going to respond to. It’s trial and error.
But I’d still suggest that in terms of pricing, it’s almost always going to be best to come at it from the perspective of starting cheap and raising prices later.
So, that’s pricing. I’ll ask again: Is pricing really THAT easy? No! Pricing is incredibly complicated, and that is the reality.
As online marketers, we won’t be able to get the kind of data that Procter and Gamble has where we can make these great estimates of demand and so on, but we should at least try to look at it from the perspective of a professional marketer. This means going through this process when we’re deciding about pricing. If you do that, you can hope to get to the right price over time.
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