This is a guest post from Dee Kumar, first published in 2011. Dee covers the fundamentals behind various pricing strategies for selling products, which are still just as relevant today. – Yaro

I’m Dee Kumar and I’m a little different from other writers here. I come from both a small business and multibillion dollar background, so my articles always take the approaches of the giants and aim to give practical advice as to how their tactics can be implemented by entrepreneurs.

If you have been following any of my previous work here you will also know that I write a series of articles on one particular topic, or miniseries, if you wish.

This miniseries will focus on a very important part of your business. The one thing that literally can make and break you and which most entrepreneurs never even think about properly. I am, of course, talking about Pricing and Pricing Strategy.

For some reason, entrepreneurs, or more specifically Online Marketers, have based their pricing strategy firmly on the market. They look at their competitors and what they are charging and sit somewhere comfortably in the middle.

Even when the small percentage of Online Marketers do think about pricing a little more clearly, they usually only limit it to very basic pricing rules.

However, the big boys and the truly successful never think that way. They really research how to test a price and how to adjust a price correctly. They also have a clear strategy as to when to discount the price and even how to discount their price. Let’s not even mention considering how to squeeze the last few pennies out of an outdated product.

Well, that is one weakness that this miniseries aims to eliminate. A pricing strategy is so important, yet nobody really teaches how to do this well. Thankfully my education, my experience running multiple small businesses (online and offline) coupled with my work at the very top of Europe’s largest retail organization has given me some very important education in this field, which I will deliver in bite size pieces throughout this course.

I will discuss the basics of how to price your product, along with how and when to discount a product. I will also give you multiple strategies as to how to set a product price, a very important discussion for any marketer.

For some of you who have never thought about pricing, much of this miniseries will be invaluable to you. Those who have some experience with pricing will still find many interesting techniques and insights, which will make this course well worth reading. Many business people will tell you pricing is perhaps the biggest consideration in business life, so it would do you no harm to pay close attention to this series, even if it is just to refresh yourself and best practices.

Pricing Basics

There are two major concerns when it comes to pricing. The first is to ensure you are actually making a profit, and the second is in regards to where you stand compared with your competition (i.e. your position in the market).

Traditional marketing textbooks and advice run along the same old lines. Very valuable advice, but with one serious flaw: They were all designed for physical products. Nobody has really taken the time to understand how Internet Marketing has changed all that. Some things are the same, but certain things really do not make sense online.

The very basic rule of pricing still stays the same:

For any successful business to flourish you must ensure your price covers your costs.

Sounds obvious but many business in the real world forget to cost their products properly. I know this firsthand as I sat at the top of a 2.4 billion Euro retail firm, who unbelievably had no true idea of how much their goods cost them. No, that is for real!

The true cost of a good is not the price you pay for it, rather it is the costs involved from the moment you pay for it until it gets to your customer. It included all the costs of storing the good and delivering the good through to the end customer.

Unbelievably, the huge retail firm I worked with had never really understood the cost of a good. They never added the cost of freight and the storage costs whilst the good was in a warehouse to each individual good’s price. When they were finally made to truly look at the cost of a good, or the ‘total cost of ownership‘ they found that they were actually selling almost 20% of their good at a loss. That is 20% of 1.2 million different products!

You see, every step in a process adds a cost. For Internet Marketers these costs are usually hosting, domain renewals, payment processor costs and support service costs. It is so surprising that when I coach clients and ask them the costs associated with each good, they do not really know.

With Information products, once you have created it, you think the rest is pure profit. However, you have to factor the average support time each person will need and its associated costs. You have to factor the payment processor costs and any update or email marketing costs to keep that person in an auto-responder. Only once you know these costs can you really judge a minimum price for your product. You see, even each person on your autoresponder adds a cost, even if it is pennies, it is still a cost that gets added to each individual subscriber.

If you own a product or service online, see if you can answer the following questions quickly:

• How much is the payment processor fee EXACTLY for each item you sell?
• How many other costs are associated with selling your product?

Chances are that many people cannot answer these, and chances are even greater that many of you will believe that these costs are so small that they do not even matter. Well, I can tell you that the 2.4 billion Euro retail company did not think so either, until they were in real big trouble.

You have to know your numbers. I know this sounds trivial, but you must set the good habit now.

However, the true meaning of today’s article is to explain how to set a starting price for your product or service. Before doing that, I wanted to highlight just how little attention Internet Marketers really pay to costs within their business. Ensure you think carefully about the cost of your product before setting a price. If you do that then the rest of this series will be truly useful.

How To Judge Your Starting Product Price

Picking a good start price is a major decision for any business. Of course, they ensure they cover all their costs as a minimum, but finding the right price point is always down to a lot of trial and error and as always, a little luck.

Pricing is not an exact science, it never has been and never will be. Too many external factors influence pricing and that is why firms can spend months trying to figure the right price point before launch.

Thankfully Internet Marketers have a number of tools that can help find an ideal starting price. Even when Internet Marketers get it wrong, there are many ways to recover quickly, which is often not possible with physical products. If you feel the price is too low, you can release a ‘version 2’ with a higher price. Or if you feel the price is too high you can release a ‘lite’ version without looking like you made a mistake.

All of which can be done to correct a pricing error, but here are the steps needed to attempt to get it right first time:

Discover The Value Of Your Service

Value is very different to cost. Cost is the monetary sum that must be paid for each sale of the product. Value is more subjective, it is what the customer FEELS the product is worth. Your job is to discover the optimum value of your product.

The higher priced your product, the less you will sell, but that in itself does not tell us anything interesting. Let’s say the price for an item is £0.50 and you sell 100 unit (£50 of sales), but when you lower the price to £0.20 you sell 400 units (£80 of sales).

Using some of the techniques below, your job is to find the sweet spot:

The price point where you make the most money.

Of course you should look at competitors for a good idea of general pricing, but we can only find the true value of our own product by using some cool tools and techniques. Here are three of my favorites:

1. Pre-launch Pricing

When I started the Online Marketing MBA course, it was very difficult to judge what the price point would be as the course is so unique that there are no direct competitors. So I had to find a way for people to give me an idea of how much they were willing to pay for this course.

I could describe the concept to people and ask them to tell me how much they would pay, but if they have never experienced the product then that would not be very accurate.

I instead took on a number of free students, hoping they would be able to give me a good idea of my courses value. However, I found that taking on free students is great for course content feedback, but not great for gaining an idea of value as they have invested nothing, so have no base point or price to judge the course from. They were always in the ‘free’ mindset and thus could not think about monetary value seriously.

So I was stuck. I had invited a large number of people on the course for nothing and I was gaining a poor idea of the value of my product. They were loving the course, which was mighty motivational, but could not tell me how much they would pay for it.

I then realized I had to have some people actually pay for the course, and allow them to tell me if they felt satisfied with the amount they paid or if they felt they would have happily paid more. However, I had to do it on a very small scale so that I did not ruin the value of the course with a silly price.

I turned to one of my well known Internet Marketing friends and asked him to pre-launch my product for me. Only people from his list would be allowed to buy my product, thus limiting the disclosure of my price point to only those who choose to read his newsletter.

A number of people took up the offer and after keeping in touch with them over the 26 week course, they told me my $47/month price point was too low and that they would happily pay $97/month! These were all people who had paid for my product and thus their view was worth much more then people I had previously allowed to join the course for free.

A simple, small pre-launch helped me find a better price point. (I actually settled on $87 because I’m nice!)

2. Skimming

Price Skimming is used most often in the technology industry, but you also see it a lot with software product within Internet Marketing. It is where they start the product at a ridiculously high price and then lower the price over time until they find the sweet spot.

The theory is that by lowering price they do not lose value (if you start your product off at a low price and then raise the price, people may think that the product really isn’t worth the new price and perhaps you are trying to con them).

The problem with this strategy is that things move really fast within Internet Marketing so competitors can jump on your idea very quickly… They can simply undercut your pricing and then take a large number of potential customers away.

The second problem with this strategy is that however much we try to prevent piracy, it is in some form inevitable. The idea is thus to find the sweet spot where people will want to buy your product and have the official version rather then take a pirated version.

A common example in electronic products is the Sony Playstation 3. They originally sold it at $599 because they had limited supply and they knew hard core fans would be desperate for it. When supply increased the price dropped to $299 to remain competitive.

Your product must really be of high value and very different from competitors for this to work. I have never personally tried it, but am thinking about trying it with my next product. I have, however, seen it in action with some well known marketers, so have been saving it until I was better known too.

3. Rising Price Model

I personally love this method. It is great for new marketers who have no idea of their product’s value. It basically involves you setting a stupidly low price for your product at launch. The catch is that only a few customers will gain access to the product at such a low price before the price rises.

For example, I could sell my Online Marketing MBA coaching program for $1 for the first five people. After those five have purchased, the price will jump say $5 for the next five people. After those slots are gone, it would jump by $5 again and so on. You can of course change the jump values, the start price and the number of people required before it jumps.

The great advantage of this method is even if you are relatively unknown, people will still be willing to take a punt if it is only a few dollars. As the price rises, you gain a better understanding of what people are actually willing to pay for your product, and when the demand slows down considerably, you will have a clearer view of what the optimum price would be.

The other advantage of this method is that price rises create a sense of urgency and even a buzz about buying your product, all of which help both your product and your brand image.

This model is used extensively on Internet Marketing forums such as the Warrior Forum. I have just linked directly to their special offer section where you will see this pricing strategy in action, just be sure not to get carried away and start buying! The Warrior Forum actually offers a tool which automates this type of selling, and I know a number of membership software packages (such as DAP) also offer this facility.

These are my three preferred strategies for finding a good price point. The key with pre-launch pricing and the rising price model is to try it in a select environment before you hit your big lists for launch announcements. The Skimming model is perhaps ideally used when you are well known, and I am looking forward to trying it on my next product.

If you have never thought about pricing then I strongly suggest you do. You should know all the important numbers in your business, and many of those numbers should influence your pricing strategies.

In the next few articles in this series, we will delve into how to discount a product and when to actually discount a product. We will also look at ways to drop your price without annoying existing customers, alongside how free trials affect your pricing strategy.

Feel free to leave your comments below and add any pricing advice you may have too.

Click here to read part two of this series

Dee Kumar