Let’s take a moment to explore different approaches to pricing your digital products. With digital products, you avoid recurring manufacturing costs, transportation and shipping costs, as well as warehousing costs so, selling digital products online is an attractive business model. Unlike selling physical products online, digital products are made only once, but sold repeatedly. A common pitfall for online retailers of digital products, however, is treating their product mix the same as they would if they were selling a physical product. Just because your costs are low, the price of your product does not necessarily have to be low. Cost of production is not measurement by which to price your product as, rarely, does this fact alone determine a products perceived value by customers. Still, many online retailers of digital products default to a cost-plus pricing model, leaving a lot of money on the table.
In lieu of a cost-plus pricing model, employ a value-based approach when pricing your digital products for online sales. How valuable is this product to your customer? How much are your customers willing to pay for this product? Fortunately, for the creative or those willing to experiment with pricing and packaging, there are a number of ways savvy online retailers capture the most profit, and a lot of it has to do with psychology.
Don’t Be Too Shy To Price High!
Sales and profits are not equal. In order to increase profits, you can either increase profit margin (sell at a higher price-point) or sell more units. However, your cost of acquiring a customer is the same regardless of your product’s price so, if your product attributes and benefits permit, you might as well price your product higher, focusing on maximizing profit, not on the number of units sold.
Price-point is a signal to consumers and a higher price-point implies higher quality.
Suppose I just bought 2 cars. One of them cost $8,000 and the other cost $75,000. Which car is better? Without any additional information, you came to a conclusion, right? Psychology plays a major role in successful e-commerce.
Use Reframing Strategy For High Priced Products
Even with great benefits messaging, conveying value for higher priced products can be difficult, and this is especially true for digital products sold online. Factors that typically drive up the perceived value of a product, like Packaging & Design, Format, Uniqueness, and Availability, are not always relevant in online sales of digital products. So, if you know your product is priced appropriately, these reframing strategies and psychological tips can influence purchase behavior and have a track record of improving sales.
- Create Multiple Pricing Tiers
Value-based pricing is complex because people value different things. You might worry that, if you price your product on the high-end, you will miss out on a number of sales. This is a valid concern, unless you are able to offer multiple pricing tiers. Those customers who see the value in your higher priced offering will be willing to pay the higher cost, whereas those who are not willing to pay the higher price will buy your lower tier offering.
- Introduce a More Expensive Product
You can make the price of the product you want to sell appear more valuable by positioning a similar, but more expensive, product next to it. A classic example that was published in the Journal of Marketing Research and again in Yes! 50 Scientifically Proven Ways to Be Persuasive, is Williams-Sonoma’s bread maker. Their print catalog listed a $275 bread maker that was not selling. When they introduced a similar bread maker for $429, and positioned it next to the $275 bread maker, sales of the $275 bread maker nearly doubled.
- Decoy Effect
Similar in concept to the contrast effect at play in the case of Williams-Sonoma’s bread maker, the decoy effect works by introducing an additional option, but with less value than the higher priced one and at nearly the same cost. The phenomenon is that customers will compare this new option to the one you want them to select and think, "for only x more dollars, I can have Y more value," driving their purchase accordingly.
- Center Stage Effect
There are a number of studies documenting the effectiveness of the Center Stage Effect, a phenomenon where, when presented with a line of products, consumers will prefer the middle product, regardless of the number of items and even when the items are identical. The best way to capitalize on the Center Stage Effect is to place your most expensive product in the middle, rather than listing products by price. Companies usually do this visually by presenting product images horizontally, with the higher priced product image ‘center stage’.
- Framing Effect
In e-commerce, the framing effect is frequently achieved by highlighting how much a customer will save to offset the difference in price between products. This is a good tactic for bundling or subscription products. Framing also applies to discounts and evidence suggests that, for higher priced items, it is more effective to state dollars saved than percentage off.
- Bandwagon Effect
Just as the name implies, this is a psychological phenomenon whereby people do something primarily because other people are doing it, regardless of their own beliefs. One way to achieve this effect is by showing customers which product or option is the most popular. Option 1 (Low Cost), Option 2 (Most Popular), Option 3 (All the Bells and Whistles)
- Try removing or minimizing dollar signs next to your price
Cornell University researchers published a famous study that found items that did not have a dollar sign next to the price were ordered more often than those that had a dollar sign. In e-commerce, testing this theory is easy enough and worth a shot!
The beauty of e-commerce is that you can test these strategies on a smaller group before rolling them out to your entire customer base. Pricing is not a ‘set it and forget it’ game. You won’t get your pricing right the first time out of the gate so, try to relax and have a little fun with it! Keep optimizing, testing different price points, and experimenting with some of the psychological e-commerce strategies employed by the savviest of online retailers.