I’m currently consulting with an individual who is starting a subscription-based online business, focused on providing high-value content in a lucrative niche.
One of the biggest questions he had was: “How do I price my subscriptions?“
It’s a question that anybody offering a service online (or offline has faced).
Pricing models are a complex issue, worthy of a academic discussion amongst economists. But pricing is also a practical issue that every entrepreneur has to address.
So how to price your product? Here are some of the simple ways I recommend going about it.
Figure Out Your Costs
Every successful business provides products and services profitably so you need to figure out what it will take for you to do that.
If you’re selling a product, whether it be a piece of software or a piece of content, the first step is to figure out your fixed costs – how much will it cost you to produce the product that you sell?
Usually, you can’t sell a single product for the amount of your fixed costs. For instance, if you’re writing an eBook on digital marketing and you figure that it will cost you $1,200 to produce it, chances are that you’re not going to be able to sell each download of the eBook for $1,200.
But to make your effort worthwhile, you need to recoup your fixed costs and then some. So give some thought to a realistic pricing model that enables you to do this.
For instance, do you think that you will be able to sell more than 40 copies of your eBook at $29.95 (which roughly gets you to break-even)? If not, you have a problem and it’s worth noting that you’re more likely to overestimate sales numbers and underestimate the difficulty in obtaining sales.
Don’t forget to factor in your marginal costs (the cost of selling each additional product). While the marginal costs of selling an eBook, for instance, may be close to zero, this may not be the case depending on the type of product you’re selling (i.e. if you’re selling a video download, you should factor in the costs of bandwidth).
Figure Out What Your Product is Worth to the Consumer
Factoring your costs into pricing is only one part of the equation. Continuing with my hypothetical eBook example, it’s easy to say “If I sell 100 copies of my eBook at $29.95, I’ll have made over $1,700 in profit.“
But is your eBook worth $29.95 to 100 people that you can realistically convert into customers?
When offering a product, you need to put yourself in the shoes of potential customers and evaluate the value of your product.
This isn’t always easy but here are two simple “methods” you can often use to go about it:
- Look at competing or similar products. How much do they cost? Are they selling?
Try to figure out what the product you sell will “do” for the customer. Does the customer think that it’s going to make him more money? Does he think it will save him money? If you can figure out the “return” that your customers may reasonably be able to achieve using your product, you not only have a means to price your product but a means to market your product in a compelling manner. In effect, you’ve discovered what may be your most powerful sales pitch.
No matter what “method” you use to estimate (or more accurately guesstimate) the value of your product to a potential customer, it’s important to be realistic.
Once you’ve come up with a price, do a reality check by finding people you think would be potential customers and ask them for feedback.
Here are some other tips that I recommend considering based on my experiences over the years.
Err on the side of not underpricing yourself. I’ve found that businesses offering high-value products often sell themselves short and this is hard to fix. After all, it’s easier to lower prices than it is to raise them.
Underpricing can be very detrimental. Think about it – if my hypothetical digital marketing eBook, for instance, purports to show readers how they can save thousands of dollars on their online marketing campaigns while at the same time boosting conversions but I sell this eBook for only $9.95, a potential customer might ask “Why is something this good being offered so cheap?“
Thus, underpricing usually undermines the true value of your product and leads to lost sales.
Experiment. Don’t lock yourself in to a certain price. Be willing to experiment with different pricing models when you see signs that current pricing is not working well or is not maximizing returns.
One of the best ways to experiment is to offer discounts. While these sometimes work wonders because potential customers think they’re getting a bargain, I’ve had clients who have discovered more effective permanent price points through discount offers.
- Package products. If you sell multiple products, try packaging some together. Oftentimes, your pricing may not be that far off on an individual product basis but a package of multiple products will create an overall offering that works far better.