You’ve decided to create an online business…great! You’ve developed great products, you have enlisted the help of others, and you are ready to launch your website. Only, you have a problem. How much are your products actually going to cost? Learning how to price your online products is one of the most difficult parts of running a successful business. Do it right and you can set yourself up for long-term success; but do it wrong and you could create problems that your business will never be able to overcome.
It is incredibly important for you to know how to price your online products correctly if you want your business to be successful. Understanding pricing strategy and all the elements that go into it can be fairly complex. As Charles Toftoy, an associate professor of management science at George Washington University, said, “It’s probably the toughest thing there is to do. It’s part art and part science.” Before you get overwhelmed with all that is involved in pricing strategy, let’s go over some important things you need to consider and some pricing strategies to help you price your online products better.
Important Things to Consider
Before we get to the strategies, there are a few things you have to consider in your pricing. First, you need to know your unit cost. Before you can price your online products competitively and efficiently, you need to know how much your cost to produce each product you sell. You also need to take into account your marketing, overhead and other company costs to get an accurate idea for pricing.
Second, consider your market. You need to know how similar companies with similar products are pricing their products. You wouldn’t want to price your online products way higher than similar products because no one would buy them. On the other hand, you don’t want to price them too low either because you won’t be very profitable. Knowing how other businesses are pricing their products will help you price competitively within your market.
Third, know your customers. Are your customers bargain-hunters or luxury buyers? Bargain-hunters will always be looking for the best deal possible so if that’s your audience, you’ll want to price towards them. However, if your audience is more a luxury buyer, then offering deep discounts won’t be very effective.
Now, we will move on to the strategies.
The first strategy to consider when you price your online products is charm pricing. This is one of the most common strategies used and you should be familiar with it. It is basically using .99 at the end of the price instead of .00. Which would you be more likely to buy? Would it be the product that costs $20.00 or a similar product for $19.99? It would probably be the latter right? That’s charm pricing and it can increase your conversion rates by almost 100%.
Rational vs Emotional Pricing
To really understand the power of this strategy, you need to understand your product and your customers extremely well. Is your product more likely to be purchased after a rational decision or an emotional connection? Surprisingly, the more your prices visually match that characteristic, the higher conversion rates you’ll see.
For example, computer prices tend to look technical and thought out, like this laptop from Amazon. The price appears more complicated because the product itself is more complicated and requires a more rational based decision.
On the other hand, simpler products that appeal more to our emotions will appear to have simpler prices. These Tegu building block sets are a great example of that. Not only does the simplistic design of these blocks bring back childhood nostalgia, but the visual simplicity of the cost does too. With every price ending in .00, it simplifies the emotional decision to purchase the product.
Now this strategy is a simple one to consider as you start to price your online products. Make the font size of your prices smaller on your website. That’s it. After all, who wants a big price confronting them? Make it smaller, within reason, and your sales should improve.
This is the most interesting and least known pricing strategy on this list. There is the theory that how long it takes to say a price will affect if a customer will purchase a product or not. Consider these two prices; $32.78 or thirty-two seventy-eight vs. $33.16 or thirty-three sixteen. Of the two, which is faster and easier to say? The latter and because of that, the $33.16 will convert better.
As you try to price your online products, don’t let yourself get overwhelmed. Do your research and remember to consider the cost of your product, the market you’re in, and who your customers are when pricing. Based on that information, consider which pricing strategy will work best for your business and then, go for it!