Pricing is one of the trickier components of creating and selling digital products. After all, there are countless pricing models, and how you price your product has a direct impact on sales. Although settling on and testing a pricing model can be intimidating, this information is designed to help point you in the right direction so you can maximize your revenue through your pricing efforts.
Deciding on a Product Price
For most product creators, pricing can vary across different offerings, as it should. A good pricing strategy offers a variety of products at multiple price points to serve different segments of your target market that may be more or less price sensitive. Even once you do set a price, it may not make sense for a product to be priced at that level forever.
The price you set for your product should demonstrate value, take into consideration the time and resources needed to produce it, be consistent with your industry and, in the end, maximize profits. There are many factors to consider, and over time, these factors will continue to evolve. Here is a list of some of the most common pricing models and what they mean:
- Cost-plus pricing – This pricing method takes into consideration the cost necessary to produce the product, then adds a profit margin on top of that to determine price
- Competitive pricing – This pricing model considers the price range of the competition selling to the same market, so that the product price falls somewhere between the high and low price that others have set
- Rate-based pricing – This pricing model is often used for services, and is used to price per hour of work completed
- Project-based pricing – This pricing method is typically a set fee per project
- Value-based pricing – This pricing model considers what customers can pay, and will pay and can vary widely
- Luxury pricing – This pricing method is often used by luxury brand names, and products are priced according to the perception and image it delivers to the customer
- Tiered pricing – This pricing strategy gives customers various offerings and price points to choose from for similar products with more basic versions and more enhanced versions, so that there is something for everyone
- Donation-based pricing – This pay what you want pricing method allows product creators to test demand by allowing customer to decide what they want to pay for the product by the value they expect it to deliver
How to Test Pricing
Although there are various pricing models, you’ve got to start somewhere. Once you set your initial price, continuously test it to make sure you’re not leaving money on the table. As with any testing, focus on changing one variable at a time. If you’re testing pricing, make that the variable, but don’t change design, copy, or call to action or you won’t know whether it’s the price or the other variables that are responsible for the change in sales volume. If you’re testing a lower price, make sure you’re not marketing that lower price to customers who already purchased at the higher price.
You can test pricing through multiple channels, including social, search and email. You can also test pricing by split testing different landing pages and sales pages with different price levels on each. As long as the traffic is coming from similar sources and the target audience is similar, this is a very effective way to test.
With email for example, consider price testing for a new product by segmenting your customer list and sending promotional emails to these segments at various product prices. Send the same email to your entire list, changing only the price. See how those perform and which results in the most sales.
Additional ways to test your pricing include understanding your market and their purchasing habits through market research. Preselling is a good way to know what people will pay as well, along with surveying, and ongoing A/B testing.
How to Know When the Price is Right?
As you can see there are many pricing models to consider when pricing your product and many ways to test these prices. And as if that’s not enough, product owners must also keep in mind price elasticity of demand. Price elasticity of demand means that, with all else being equal, demand for your product will decrease with increased price.
The lower your price, the more people will typically buy your product, however, this creates more support requirements and customer service needs. At a higher price, fewer people will buy from you, so you may be leaving money on the table. There is an optimal pricing level you can reach to maximum profits and your job is to keep testing until you find it. A very small adjustment in pricing can have a huge impact on your revenues, especially if you sell at a high volume. Keep cranking out great products, testing, crunching the numbers and adjusting prices accordingly.