“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – Katharine Paine
If you’re reading this, you probably have something that you want to sell online Whether it’s a software, a physical product, a course, a service, an event or anything in between you’ve landed in the right place.
In this article, you’re going to learn the fundamentals of pricing that are going to give you the confidence to accurately price anything.
The goal of this guide is to show you how to adopt a pricing strategy that does the following.
I wrote this comprehensive guide to pricing because I feel very strongly that internet business owners like you need to understand how to price your products correctly BEFORE you worry about things like sales funnel optimization, how to write seductive sales copy and other things that I teach here at EntreResource.com.
Developing a great pricing strategy is not covered well enough in this space and many entrepreneurs end up looking a lot like this guy…
It pains me to think about how many potentially great businesses fail because they’re priced incorrectly. It doesn’t matter what the product is. Whether it’s a physical product with a one time price (like clothing) or a SAAS product that has a recurring payment (we will cover SAAS pricing strategies at length in this article by the way) pricing matters more than I can convey in words.
While I do have a degree in economics (which helped) this article was mainly the result of my real world experiences with pricing hundreds of different products for my own businesses, softwares, services and those of my clients.
There is no “one-size-fits-all” formula for deciding on your product’s pricing so I couldn’t make this post any shorter than it is. Trust me, it is actually much shorter than it could be. I’ve worked hard to trim a massive topic into its most important concepts so you can get the best results as quickly as possible.
I’ll start by covering some basic best practices and pricing concepts and then get into some more specifics of pricing strategy as they relate to:
- Pricing software (SAAS)
- Pricing physical products
- Pricing events
- Pricing courses and information products
- Pricing services and consulting
Throughout this guide I’ll refer to what your pricing as a “product.” This is a catch-all term that refers to whatever you might be selling. It’s just much easier than typing out “course, software, physical product, event or service” every time 🙂
Since this guide is quite long, I recommend that you read it in pieces or jump around to the section that applies to you most immediately AFTER reading the next chapter and the best practices.
Let’s get into it!
The Connection of Pricing Strategy and Marketing Strategy
I spent 7 years getting a degree in economics and have been self employed since 2014.
My formal education taught me the fundamentals of pricing strategy and economic theory and my real world education taught me how marketing ties in and how things really play out outside the classroom.
If you’ve taken many economics courses, you know that marketing is hardly touched on in any of them.
Understanding economics and pricing strategy prepared me to set and test price points and while marketing taught me to sell products at those price points.
Since I’ve seen both sides (dry theory and application) I know that you can’t separate pricing strategy and marketing strategy.
The prices you set are dependent on how you market and how you market is dependent on how you price!
If you want to price your product higher than your competitors, your marketing strategy will focus on things beyond practicality. You will sell status or luxury. You will focus more on marketing and brand building than your competitors.
If you want to price your products below your competitors, your marketing strategy would focus on practicality, utility and appeal to sensibility.
Your sales and marketing team must be on the same page with your pricing and how it relates to your competitors so they know how to position your product.
General Pricing Best Practices
Here are the most important aspects of pricing strategy that you should consider before pricing anything.
These tips apply to literally ANYTHING you might sell. Software, services, digital products, physical products, etc.
Know Your Customer
You should have a defined demographic you’re targeting for your product. Identifying your customer is critically important to setting price and planning your marketing strategy. You can’t do either of those things until you know who you want to buy your product.
For example, you can’t sell $4,000 suits to the average person BUT it doesn’t mean that you can’t sell $4,000 suits and create a successful business around that pricing model. It means you need to know where your buyers are, what they value and if there are enough of them who will be willing to buy at that price point to maximize profits.
“Identifying your customer is critically important to setting price and planning your marketing strategy.”
If you don’t know who your customer is, how do you know if there are enough of them to market your product to or how to market your products properly so they resonate with what they value?
If you don’t know who your customer is, how do you know that they would want your product even if they could afford it?
What is it that they want in a product? What things do they value?
Keeping with the $4,000 suit example, you would need to adopt a marketing strategy that complements your high price point.
You wouldn’t sell a $4,000 suit on the basis of affordability or basic functionality, would you?
You’d sell it as a status symbol or a luxury item. You’d have to work very hard (and I’m not saying that it isn’t possible) to get people to resist their natural reservations that $4,000 is exponentially more than they could pay elsewhere. You would have to create a marketing strategy that sells to their emotions rather than rely on logic. Logically, a $4,000 suit is too much without the extrinsic value brought by branding and emotion based selling.
On the opposite side of the $4,000 suit spectrum you’ll find companies that capitalize on economies of scale and focus on selling high volumes of products at lower margins.
They have lower prices knowing that it will get them more customers but they can still make huge profits thanks to the volume they move.
Walmart for instance is selling their “everyday low prices” to the large demographic of the average, cost conscious buyer who is more interested in convenience than luxury. When it comes to spending habits, a Walmart customer typically wouldn’t identify her preference in most items as “high end.” If she does, she isn’t putting her money where her mouths is (at least not at the moment) since she’s at Walmart.
I don’t need to tell you that this approach works for Walmart. They are absolutely crushing it. Whether you love them or hate them, Walmart is the textbook example of a company capitalizing on the power of economies of scale.
Much like Amazon.com, Walmart sells just about anything the average person would ever need. You could theoretically buy everything you’d ever need at Walmart. Unfortunately, that would require you to bump elbows frequently with the people of Walmart, who can be …interesting.
This approach doesn’t work as well when you have a very defined demographic and lack capital like Walmart (which you do). If you have fewer customers but you cater your product perfectly to them (one of the benefits of being small and well defined is specialization and the ability to offer higher quality products) then you can likely charge more for your product and make up for the small customer base with great margins and loyal customers.
If you read the entreresource.com blog frequently, you know how barriers to entry like capital and overhead costs are being further broken down every day. You don’t need to be a big name brand and you certainly don’t need to be Walmart to become very wealthy.
A company like Whole Foods takes a different approach than Walmart. They target people who have more disposable income and are more concerned with their health and buying products that are organic, harvested humanely and less processed. You won’t find Whole Foods ever trying to compete with Walmart on price for the few items that they both carry.
Whole Foods knows that people will pay a premium for this and they focus their advertising on that demographic rather than trying to compete with other large groceries like Walmart on price.
Neither is right or wrong. Both companies are doing very well. For the most part, I recommend that you try to emulate Whole Foods in your pricing strategy.
Research Your Competitors
You absolutely must research the existing competitors for your product BEFORE you price it or even create it.
If you don’t see what people are already willing to pay, how can you know that your costs will leave you with enough (or any) profit?
The lazy and most common approach to pricing is to emulate your closest competitor.
Many people think, “I’ll just set my price at or below the closest competitor This is a terrible approach.
You need to look at ALL of your competitors and identify what demographic they’re targeting. Just because a price point works for them doesn’t mean that it will work for you. You need to take a macro approach to your analysis.
“The lazy and most common approach to pricing is to emulate your closest competitor.”
Is your product as good as the alternative? I highly recommend that you buy and test out the products of your competitors if possible.
Will your marketing be better? Better marketing allows you to charge more.
Will you target the exact same demographic? Is your product offering something better?
Is it faster? More accurate? Better marketed?
If you’re going after the same buyers as your competitors and have a nearly identical product offering, you’ll need to stick closer to their existing price point or out market the heck out of them.
If you reach a demographic with your product that is very different and unfamiliar with any solutions (what we in marketing call a “blue ocean”) you can charge more than any similar products.
If you think your product is original and has no competitors, look more closely. What are people doing now that comes as close to solving their need as possible? There is likely something that isn’t exactly the same as your product but achieves a similar end result. See how they price that end result.
You should buy or use the products of your competitors as well. Many entrepreneurs are hesitant to buy from their competitors. They say things like:
- “I don’t want to be accused of stealing their ideas”
- “I don’t want to be influenced and lose my products originality”
- “I don’t want to support my competitors with my own cash”
All of these excuses are BS. If you’re selling something, you owe it to your potential customers to see what other solutions are out there. This not only helps you set pricing but it may also lead you to improve your product if a competitor has superior features that you can legally emulate.
Many great ideas never even get to the startup phase because the concept creator didn’t have the guts to price their product with confidence. Even worse, they may have made it to market and failed.
I understand, pricing is awkward and not something that comes naturally to most people. Even the people who aren’t shy to set a price point typically don’t know much about why they’re choosing it.
This guide you’re reading will give you a better understanding of pricing strategy which will then leave you feeling more confident in setting a price. You’ll know that you’ve done the work to land on something accurate and you won’t be as hesitant to get it in front of your consumers.
I struggled with pricing when I began working for myself.
I had no excuse, like I said, I majored in economics, so I should have been ahead of the curve in regards to profit maximization and gauging supply and demand. This just wasn’t the case. My economics degree didn’t teach me the most important things about pricing like mindfulness of my customer’s needs, how to analyze the market and find a demographic, etc. Those skills were developed slowly and painfully.
Avoid Being the “Cheapest” (Typically)
Pricing is critical not only to your direct profits for whatever particular item you are dealing with at the time, but it also reflects upon the quality of your brand. Even before someone tries your product, the price you set gives them an impression of your brand.
Fair or not, being the “low cost” alternative can cause your brand to take on the “low quality” label as well. Your pricing decisions stick to your brand forever so don’t ever let your product become associated with low quality, even if it is the cheapest option.
Also, people don’t always want the cheapest options. Many buyers are indifferent to price when it comes to products. There are enough of these people in most demographics to create extremely lucrative businesses. You can let someone else who is less creative but is willing to take lower profit margins cater to the penny pinchers. I have rarely found that it works well for me.
Example of Price Indifference
You have horrible heartburn and want it gone ASAP. You walk into your local drugstore and see the familiar “Tums” bottle (or rolaids or whichever big name you trust most) and you grab it almost without thinking.
Nearly every drugstore has a cheaper option than Tums, I am sure of it. But you didn’t even think about it, you just grabbed the Tums. You need your heartburn fixed and you are willing to spend the extra $1-$3 it takes to purchase something you know works.
The store brand seems less appealing now, because your heartburn problem is worth much more than a couple of bucks.
If it were only as simple as being the cheapest! This study performed by the good people at Kissmetrics analyzes the effect of implicit and explicit comparisons to arrive to this conclusion. Implicit comparisons occur when a customer takes the initiative to compare two or more products. Conversely, explicit comparisons are those that are specifically stated or brought up by the marketer or advertiser.
The impact of being the “cheapest” will depend on the product you sell and your target demographic. Some products with fewer distinguishing features (table salt for example) may maximize your profits when sold at the lowest price possible. With services however, being the cheapest is rarely the best option.
The risk of being the most expensive it that you may come off as cocky or arrogant. You could seem out of touch with your client base if you are way out of the ballpark on price. If done correctly, however, you can dominate the market if you are truly the best quality. Your high price will actually make your product more desirable.
Price Based on Value, Not Costs
Remember how I said pricing strategy and marketing are dependent on each other? Here is a good example of that in action.
Studies show that providing potential buyers the feeling of connections and quality time with a product has a more favorable effect on sales than focusing on savings or % less than competitors.
Aim to create meaning for your product.
It is easy to sell happiness if your product can deliver it.
A great example of this is Coca Cola. While there are many generic competitors, they sell the “happiness” associated with Coke.
Their slogan after all is, “open happiness.” It isn’t, “taste the savings” or “the cheapest cola around!”
Coca Cola would never advertise as affordable. Consider this when pricing your products.
Utilize Charm Pricing
“Charm pricing” (also referred to as “psychological pricing” or “price ending”) is a pricing strategy based on the theory that certain prices have a psychological impact on consumer behavior, EVEN when the price is only a few cents different on any item.
Whether its a $99 software instead of a $100 software or a $1995 couch instead of a $2,000 couch, the prices ending just below higher intervals sell better.
According to a 1997 study published in the Marketing Bulletin:
- Roughly 60% of prices in advertising material ended in the digit 9
- 30% ended in the digit 5,
- 7% ended in the digit 0
- All other digits combined for just over 3% of prices evaluated.
Many studies suggest that this is a real psychological phenomena that seems to defy rationality. Studies haven’t proven this to be true in all cases but it is clear that it’s working since nearly 90% of all prices (at least in 1997) ended in the digit 9 or 5.
Will we really choose to buy something because it’s $99 instead of $100?
As a consumer, I admit, I am more drawn to the concept of $99 or $95 than $100 and that “rounding down” logic seems to hold true when buying things of nearly any price point.
How about you?
Unless you have a serious reason against this (for example, Subway should maintain their $5 footlong as opposed to making it $4.99) you should aim to use prices that end with 9 or 5 whenever possible.
Bundling allows you to package multiple products or service features into one and:
- Generate more revenue per client on average.
- Entice clients to purchase because they since the value
- Help leverage less popular items (or less in demand features) with more popular ones and sell them much more than they could sell alone.
If you sell a physical product, bundling could also include incentives and bonuses for reaching certain cart sizes. For example, free shipping on orders over $50.
The goal of bundling is to maximize the average purchase value for each visitor. Bundles are a great alternative to flat discounts and sales (I’ll explain why those can be harmful if abused later). Having a higher average purchase value for each visitor is helpful since you can spend more to get traffic to your product.
Clearly Define What Is Included for the Price
One of the worst mistakes I’ve made was taking on jobs for a set price without setting proper end dates. This really bit me in the butt when I created websites for clients. Since I didn’t define the projects well, they would expect me to provide support long after the work was done. Of course, if you’re going to provide ongoing support, you need an ongoing payment. I didn’t make this clear so I ended up with never ending projects.
You should always provide follow up support within reason, but it is not reasonable for you to charge a flat fee for a website and then be accountable to answer all questions the client has for the rest of eternity. Let them know that you want them to be able to carry on without you so it is important that they ask any questions they can think of now. I typically give my clients a week after my work is completed to request modifications and answer all of their questions.If your client feels the need to have support ongoing, they should be ready to pay for it. As long as you are clear about this upfront, you will be fine.
Test and Adjust Prices
Changing your prices too frequently will rub clients the wrong way, especially if you cut the price steeply after they purchased at the original, higher price.
But remember this: pricing will affect your business for as long as it exists, it is worth finding the best price point and this might mean getting a bit uncomfortable.
Tip on “Grandfather Pricing”
Avoid punishing loyal, existing customers when you increase prices if you’re using a recurring payment model. I always do my best to “grandfather” past buyers in at their original price. The last thing you want is to lose your best customers with a price hike. If your costs go up and you’re losing money, yes, you may need to raise the price for everyone, including existing customers. You should give yourself enough buffer on pricing though that even a steep increase in your costs will leave you with a good profit margin on your original price.
Utilize Weber’s Law and avoid increasing or decreasing your prices by more than 10% at a time. Try and adjust prices in a way that goes unnoticed. Quantity of sales will dip, but it is the total profit you need to pay the closest attention to. If your price increase causes you to lose money, reassess.
You may be wondering “how can I test my pricing without punishing some buyers with higher prices?”
You obviously shouldn’t be offering the same product at different price points at the same time. This is a bit unethical.
I recommend launching an “early release” at a lower price and then raise the price after the period is up. You can limit this by time or units sold (I usually do units).
You’ll be able to see the change in units sold when you raise the price. Be sure to factor in the fact that scarcity will drive more people to act on the lower price.
If you want a more accurate idea of what the change in price will do in terms of units sold, you can skip the scarcity launch entirely and just start with a lower price and over time, raise it.
If you want to increase sales, you can also do a marketing campaign in which you advertise that the price is going up in “x” amount of days and users can get the product at the original, lower price if they act before the deadline.
Focus on Profits Not Revenue or Total Sales
This seems so simple yet for some reason, many entrepreneurs seem more focused on amassing huge revenue numbers than maximizing profits.
This usually goes back to “don’t worry about being the cheapest.”
Yes, being the cheapest may drive more revenue overall, but it cuts into your profits AND leaves you with more customers to service.
This is so often overlooked. More sales means more work! This is why you shouldn’t gauge the effectiveness of your pricing strategy on the number of units you’ve sold. I have a software that is $199 for lifetime access. If I wanted more customers, I could drop the price to $10. Obviously, that would be ridiculous.
When you adjust price, you don’t adjust your costs (with the exception being costs that aren’t fixed like percentage based commissions and credit card processing fees).
If your costs on a product for example are $20, dropping your price from $99 to $49 will mean you’re netting $30 profit on each sale.
Due to the basic laws of demand, more products should be sold if you lower the price BUT you’re profit margins will drop. This means you need to sell more of your product to increase your profits compared to your original higher price.
Here is how the math works out (I have not included any credit card processing fees or percentage based commissions for simplicity).
ROI = (Net Profit / Cost of Investment) x 100
Price option A= $49
Price option B= $99
Cost option A = $20
Cost option B = $20
ROI option A = ($49 % $20) * 100 = 245%
ROI option B = ($99 % $20) * 100 = 495% (great margins btw!)
Here is why revenue isn’t as important as profit.
You will need to increase units sold by more than 2x in order to get the same profit as you would with the $99 price. If you’re wondering, I got this by dividing the ROIs (495/245 = 2.02)
Yes, the lower price will increase your sales BUT unless they more than double units sold, you would be better off at the $99 price point.
Another thing to consider is that you will have 2x as many customers to deal with! That means 2x more support, more refunds overall and just more to do. In the option above, hopefully the server costs and support costs (if applicable) are accounted for!
So which of those price points is right? Given the data we have, there is no way to know. Either one might be optimal or, the optimal price could be somewhere in between the two extremes.
Yes, ideally pricing option B ($99) would be the one that works but until we see how customers react to the price (units sold) we have no way of knowing.
You need to test.
Use Sales with Caution
Sales and limited time offers are an awesome way to drive a quick influx of sales.
However, many marketers abuse sales and end up damaging their brand’s image and ultimately, their future earning potential.
Why? They train their buyers to EXPECT discounts. They also diminish the value of their product by consistently dropping the price and “showing their hand” to their customers.
Constantly running sales is like saying, “we aren’t making enough sales at regular price, our product isn’t worth what we charge so we are going to drop the price to actually make some money for once.”
A company that I believe fails with how they run sales is the online education platform Udemy.
I love Udemy as a platform for taking online courses but would never recommend relying on them to sell your web course (more on pricing your course later).
Here is where Udemy fails on pricing.
First, they run discounts that are too deep.
Udemy will regularly run sales campaigns that drop prices up to 95% off the list price of almost all of their courses.
Courses that were listed at $199 might sell for as little as $9!
As awesome as it is as a buyer, what does this say about the true value of the course? If it is worth $199, why would they drop it so ridiculously low?
That isn’t terrible in and of itself, but the next problem is where things get really bad…
Their discounts are nonstop.
I don’t think out of the dozens of courses I’ve purchased on Udemy, I have EVER paid more than $20 for any of them.
Keep in mind, I am the ideal Udemy customer. I’m the type of person who is ready, willing and able to spend money on self education. If there weren’t discounts to be found, I’d still buy! Yes, the sales allow them to possibly reach a wider audience (people who wouldn’t spend $199 on a course for example) but I struggle to believe their pricing strategy is a net positive for their bottom line.
The “value” of all the courses I’ve bought would be in the thousands of dollars had I paid the non sale prices.
Udemy constantly runs sales for holidays and events but also, leaves a ton of discounts live 24/7/365.
A simple Google search for “Udemy discount code” (many consumers search for these before buying anything) will result in easy access to a wide array of steep discounts.
This creates more problems than permanently dropping the average buy price (remember, you’re training your buyers to expect a discount and avoid paying full price).
Doing these sales also leaves a bad taste in the mouths of people who paid the full price. Anyone who pays $199 could easily see that they spent 95% too much at just about any point in time.
Consumers will start asking for refunds on the difference or, just refund and buy nothing else ever again.
Even worse, these now disgruntled buyers were their best customers! These are the people who value self education enough to invest $199+ in themselves and didn’t even think to look for a discount first.
I have no idea if Udemy is doing well or not financially, but this approach to sales is just terrible and shows that they don’t really care about the people who sell on their platform. It shows that they’re ROI on a course is astronomical since they are after all just a marketplace for these courses and don’t create them themselves. They have few costs and it shows in how they don’t protect the pricing of their products.
Get the Right Feedback
Many people go the route of “let me ask around and see what people would pay for this.”
One of my idols Jason Fried (founder of Basecamp) said:
“The only answers that matter are dollars spent. People answer when they pay for something. That’s the only answer that really matters.”
Jason Fried, Basecamp Founder
The problem is that until someone has actually bought, their opinion doesn’t hold much value.
Also, if someone isn’t in your target demographic, their opinion really doesn’t matter very much at all.
Going back to the $4,000 suit example, if you showed that to your brother who makes $35,000 a year as a construction worker, he’ll likely say thats a rip off and he’d never pay that.
We already know he’d never pay that, he would’t be in the target demographic! That demographic would be people who make a lot of money and value their professional appearance very highly.
So, take the opinion of anyone who hasn’t given you money for your product with a grain of salt.
By all means, ask around, but don’t bet the farm on pricing from people who aren’t talking with their own dollars and cents.
Want to really know if your pricing is getting close? Ask people to actually buy it! If they do, you’re either on the right path or maybe even priced too low.
Don’t Be Afraid to Walk Away
Sometimes the best pricing strategy is none at all.
Yes, if after analyzing your competitors, your demographic and your costs you find that your margins aren’t high enough, move on. You don’t have to commit to a good product if you can’t profit from it.
Super simple, but many entrepreneurs marry their ideas and end up losing money or making very little in return for their time and effort.
Pricing SAAS and Other Software
Pricing software is one of my strength. I’ve helped price softwares that have generated millions of dollars over the years.
Here are some tips that apply directly to software pricing.
One Time Vs. Recurring Vs. Free (Used to Gather Leads or Monetized with Ads and Upsells)
This is one of the most important decisions that you’ll make when pricing your software.
Will you give your software for a one time upfront fee or will you create a recurring payment (monthly, yearly, quarterly etc)
Here are things to consider for each model.
One time software pricing
Charging a one time price can be very appealing to your customers since no one loves recurring payments BUT some softwares are just not fit for this type of model.
If you have ongoing costs and your product requires a lot of support, you will want to avoid one-time options.
Recurring software pricing
Charging monthly, quarterly or yearly for a software is usually a good bet if you have server costs and additional costs that are fixed.
Why on earth would you giveaway something that cost time, energy and money to make?
Well, because there’s a lot of money in it!
Yes, sometimes giving your software away for free is the absolute most lucrative move you can make.
Most new software entrepreneurs aren’t savvy enough to forego instant gains for deferred profits. Here is why giving away software is often worth considering.
The first free option is “free with ads”. Many of the top apps are monetized solely through affiliate banner ads that appear when users are inside their app. You monetize your software via 3rd party ads or ads to one of your own products. If you’re debating between “cheap” and free, go with free every time!
The second free option is “free to gain leads.” You use your software as a lead magnet to get people onto your list. You can also
The third and final free option is “freemium” or “free to promote an up-sell.”You give free access for a limited version of the software and push for an up-sell to unlock additional features.
Don’t Price Down to Low Development Costs
Some of my most successful softwares are priced very high relative to how much they cost me to make. One of my softwares that earned me over $200,000 cost just $1000 to develop!
Why? Because the value is tremendous and it’s originality and marketing outweighed the fact it wasn’t extremely expensive to create.
Whether the software cost you $5 to make or $5 million dollars, you always price based on the value that the user gets from it.
One thing you should keep in mind though when pricing based on value if your product was cheap to create is that low cost softwares with high price points typically draw a lot of competitors.
If you could make something for “cheap,” it is likely competitors will spot this opportunity as well. You need to be prepared to out market them, even if you were first to market.
Utilize Price Segmentation and “Useless” Options
Segmenting your product selection lets individuals pick options that work best for them. They now have more options to consider and less excuses not to buy.
The “useless” pricing option refers to having segmented prices, and having the middle price point be inefficient compared to the value of the higher segment.
Here is a great video that explains how a “useless” pricing option turns customers from “bargain hunters” to “value seekers.”
Calling this option useless isn’t completely fair as it still should have value, but from a pricing standpoint, it should be less desirable than a more expensive but more powerful option. That option should provide more “bang for your buck,” relative to the useless option.
This can help frame the offering you want customers to buy more often (your highest tier) as the best value. This method works when executed effectively.
Consider Your Costs of Scaling
The two biggest costs you need to consider when launching a software are customer support and server costs (if applicable).
If your SAAS product requires a server or data from a 3rd party service that isn’t free, you need to be very careful in your scaling efforts.
Many server fees aren’t fixed, they’re based on usage.
If your customers start hitting your servers more than you anticipated, you may find yourself in a terrible situation in which you could actually LOSE money and have no choice but to abort the software or raise your prices across the board. Not good.
Utilize Annual Pricing Options for Recurring Programs
When you have a recurring program, retention can’t be ignored.
In fact, retention might become MORE important than new buyer acquisition.
One way to maximize retention is to provide an incentive if customers pay in annual or quarterly installments in exchange for a lower price.
The yearly option won’t work well without an incentive like a discount. After all, why would someone commit to a full year of a service without a good reason?
My formula for annual discounts is typically (Monthly Rate x 12)- (Monthly Rate x 2). Basically, whatever the total is that a user would pay for a full year at regular price MINUS 2 months of payments.
In even simpler terms, 12 months for the price of 10.
Many software companies, like Buzzsumo offer a flat 20% discount if you purchase an annual plan.
You shouldn’t run an annual discount option until you have a good idea of what the average lifespan of a customer is. If people are keeping their subscriptions for longer than 10 months on average, annual options might not do little more than give you an advance on your payments
Utilize Volume Discounts (If Applicable)
If you’re selling something that someone may purchase in bulk, you should encourage them to buy more by offering them a discount if they buy more.
This can be in the form of an upsell (buy 2 get 1 free) or just a custom rate given to individuals who need larger than average purchases.
Someone who has already added a product to their cart is your BEST customer. Don’t let them leave without making sure they buy as much as possible.
Volume discounts will help you maximize the average customer purchase value.
Pricing Physical Products
Physical product pricing might seem easy, but it isn’t. Here are some best practices when it comes to pricing your physical products.
Understand Utility vs. Perception
When you sell a physical product you are selling a combination of two things:
Utility + Perception
Utility is simply what the product does. A shirt covers your body and looks better than…not wearing one. You have to have shirts.
Perception is where the magic of branding comes into play. Perception is linked to the status that buying a product brings.
This is why companies like Burberry can charge $320 for a white shirt.
Meanwhile, companies like Old Navy focus on utility and functionality rather than status.
So, which is the better approach?
Neither is “better,” they are just the best model for each company.
Burberry spends more time and energy on advertising and brand building while Old Navy focuses more on scale and reaching a larger demographic.
This is why you need to define your customer avatar (as mentioned earlier) and protect your brands image constantly.
If Old Navy were to raise their price to $320 like Burberry, they’d greatly damage their sales (at least at first). They’ve grown a customer base that expects reasonably priced products. Old Navy customers don’t brag about wearing Old Navy products like someone wearing a $320 Burberry shirt might.
That is fine. It’s their model and they stay in their lane. It works for them just like the high end model works for Burberry.
You need to choose one or the other. Will you focus on a narrow demographic powered by strong branding and charge higher prices OR a broad audience with a focus on affordablity and lower prices?
Research Amazon with Keepa and CamelCamelCamel
Like it or not, Amazon will always play a key role in dictating the price of just about any physical product.
If you’re like me, before you buy something, you check to see if it’s on Amazon (whether its the exact product or a close alternative).
This is particularly true if you’re selling a generic type of product that isn’t leveraging strong branding.
Why? Because so many people know and trust Amazon. Amazon offers:
- Free shipping (usually)
- Fast and guaranteed returns
- A large array of alternatives and similar products (you could buy complimentary products you might want in the same transaction and get them at about the same time)
- Unbiased product reviews
One company that likely suffers from what I call the “Amazon effect” is Socialite Lighting a company that specializes in gear (particularly lighting) for filming and photography.
I was drawn to them by a very well done Instagram ad. Like any well trained Amazon buyer though, I had to see if there were any better products at lower prices on Amazon.
I did end up paying $249 to purchase a ring light from Socialite Lighting (I do like to support fellow marketers and smaller internet businesses) but there were definitely a lot of cheaper alternatives on Amazon.
It is safe to say that I am in the minority of people that would check Amazon first and pass on a close alternative that was more than half the price.
Socialite handles this better than some companies would thanks to their strong marketing and branding. Without it, I would have bought from Amazon and saved some money.
As I’ve said before, you should reference your competitors price but not make changes based solely on them. You need to take a macro look at the big picture. Socialite is surely aware of these lower priced alternatives on Amazon but has focused on competing with Amazon through strong marketing and branding.
So, unless you’re ready to out marketing and out brand products on Amazon, you will need to stick close to their prices.
Thankfully for us, Amazon makes their buyer data very accessible and 3rd party tools like Keepa.com and CamelCamelCamel.com share it in ways that we can leverage for insights.
Remember, just because a product is listed at a certain price, it doesn’t mean that it is selling at that price.
Although they can be a bit tricky to decipher for newer users, these tools provide graphs that will show you exactly how many units are selling and at what price.
This graph may look ridiculous (unless you’re an Amazon seller who references these habitually to make buying decisions) but that flat line that is closer to 0 shows that this product got really popular at the beginning of the year and is still selling with a sales rank of #18 product in the entire baby category and #2 in the Baby > Safety > Indoor Safety Gates sub category.
We can see that a price change likely impacted the shift in the number of units sold (as you’d expect).
Although the data isn’t perfect, I recommend that you familiarize yourself with these tools and use them for valuable insights when pricing products that have alternatives on Amazon.
You can also use CamelCamelCamel and Keepa to scout products to sell and validate that people are actually buying that type of item. If it isn’t selling on Amazon, it likely won’t sell on your website either.
More data isn’t a bad thing as long as you use it as part of the big picture.
You should take the pricing for your services very personally. You’re literally selling your time (or the time of your team) and the price you charge directly reflects the value you are offering.
Yes, charging lower prices might get you MORE customers, but remember, that isn’t what we want. We want MORE profit and BETTER customers.
More customers in a service based business can quickly spiral out of control since you are limited by time and energy.
Project Pricing Vs. Hourly Vs. Results Based
There are three main methods to pricing your services.
I’ll start with my favorite approach: project based pricing.
Project Based Pricing
With project based pricing, you are setting a defined scope of work that has a definite start and end date and provides a clear end result. For example, here is an offering for a service I had several years ago:
“I will create a 5 part email sequence for your internet business for $2,000. You will have 72 hours from the time of completion to request any changes. Additional work after this period will be subject to additional fees.”
The reason I prefer project pricing over hourly or results based pricing in most cases is because you aren’t punished for getting work done quickly.
Think about it, when you charge an hourly rate, the client will of course want you to finish as quickly as possible so they pay as little as necessary. This is backwards since your skill level should dictate your rate and as you get more skilled you can do often do the work more quickly.
This is particularly true for people who sell things like web development. As they get better at developing, they waste much less time since they know exactly what to do.
If it takes you 1 hour to complete a project in the same time it used to take you 3 hours, you’re now only making 1/3rd of what you did before. You can 3x your pricing to compensate for this (you should always increase your price as your skills improve), but you might lose some of your past clients who were used to paying you lower rates.
Here are 5 steps that you should complete whenever you sell a project to a client.
1. What will define the project (or benchmarks/milestones) as “complete?”
You and your client need to agree on what a successfully completed project will look like. Failure to reach the defined end results can result in a refund to the client or a renegotiation of a fair wage for the work completed.
2. What date you will start working?
If you can’t start immediately, make it clear when the client can expect you to begin working on the project. There should be no doubt as to how much time has passed since the project started and you do this by clearly defining when it will start and sticking to it.
3. Will the project be broken down into drafts or milestones? If so, how many and on what dates will you submit them and how much will become due after each?
Large projects should be broken down into milestones (also called drafts, benchmarks, etc). Consider each milestone as a mini project, financially and contractually independent of the other milestones. If you or the client decides to end the project after a milestone, you will still be owed the total agreed upon but not for milestones that you do not complete.
4. How long will the client be able to have to request revisions for each milestone (if applicable)?
Good freelancers want their clients to be satisfied with their work and should be open to reasonable revisions during a window of time. This is why milestones are useful and setting deadlines ensures that your client seeks changes now rather than much later down the road.
5. What is the final date of completion (the date where you will no longer work on the project unless more money is paid).
You must define the “end” or you risk working indefinitely without additional payments. Be firm with your clients on end dates as many will push you as far as you’ll allow them too. Additional work is negotiable but will require more funding. If you enjoy working with a client, doing more work for them is a smart choice!
I highly recommend you get actual contracts written up for your clients. Here is a great resource for helping you create contracts for your clients.
Using a contract will ensure that there are no questions as to what is expected. Many freelance networks like Upwork.com and Freelancer.com provide features that make defining your project clearly with milestones.
If you do choose hourly pricing (again, I recommend against it) be sure that you set your prices on the higher end relative to your competitors.
“But Nate, what if my services aren’t actually good enough to charge higher prices?”
My advice here is quite bold and many people will disagree with me, but if you aren’t good enough to charge higher prices, you need to get better until you are good enough to charge what your time is worth OR sell a different service.
You don’t want to be average do you? Your time is valuable but no one is going to honor that value until you show that your work gives them value in return.
To find out what others are charging for your services, you can do a couple of things.
- Check freelance networks like freelancer.com or upwork.com and see what others are charging for the same tasks.
- Google “(your task) + service” and see what other companies are charging.
- Ask colleagues what they are charging.
Again, I prefer the project based rate since it is usually easier for the client to swallow. They know that for “$x” they are getting “y” result. When you charge hourly, they might not know how many hours you’ll actually require and may get on you if they feel you’re taking too long. No one likes being micro-managed.
Results Based Pricing
This is a very attractive pricing method for many freelancers and clients.
Why? Money is only exchanged when results are achieved.
Think about it this way…
Would you write me a check for $1,000,000 to build you a website? Most people wouldn’t ever do that.
How about if I had already made you $2,000,000 thanks to a website I built for you?
Yes, of course you would!
Now, would you pay me $1,000,000 in the HOPES that I’d make you $2,000,000? That is much less likely. There is too much risk on you.
Results based pricing takes the risk off the client and puts it onto the service provider.
Many affiliate marketers like me LOVE to do these sorts of projects because we can often earn much more than we could with either project based pricing or hourly pricing.
We often don’t go this way though for several reasons. First, some clients might not want to “overpay” if we drive huge results. They may prefer the “risk” of paying us a flat rate to save money on the results. Another reason few charge on a results basis is because they just don’t have any confidence in their ability to drive results OR the project doesn’t have results that are easily measured.
Although I personally avoid projects that I don’t feel I can help with, sometimes people insist on hiring you regardless.
Some projects are just too difficult to quantify with money. Design work for instance is difficult to quantify in terms of dollars so a results rate would be difficult to make work.
You don’t need to charge in just revenue based performance though. You can get as creative as you want with this sort of pricing model.
Here are some creative results based pricing concepts:
- $1 per email captured if you’re helping with lead acquisition
- $100 per DA 50+ backlink if you’re doing link building
- $1 per YouTube subscriber if you’re a video editor
Those are just some random examples (they aren’t “right” or “wrong”).
Looking at those prices, I would GLADLY pay any of those rates for the end result given. I’d pay $1 for an email subscriber (that is what I estimate an email is worth to me each month). I would gladly pay $100 for a DA 50+ backlink if it’s relevant and white hat.
I would gladly pay $1/YouTube subscriber to a video editor.
Selling end results is a creative way of pricing that can help you earn more money AND encourage you to drive the best results for your clients. Clients will love that aspect of it and it makes pitching your services much easier.
Recommendation for Invoicing Clients
I recommend using a professional software for invoicing clients. The one I use is called Freshbooks. It allows you to create professional looking invoices, estimates and set up recurring payment options.
You can send invoices via email or snail mail.
The last thing you want to do is land a big contract and then send an ugly, unprofessional looking invoice or estimate.
Working for Free to Build Your Brand
Yes, free is a price you should consider in pricing strategy.
What?!? Why in the hell would someone do this?
Simple: Referrals are often worth much more than you could charge for a project early on.
Pricing your services at ZERO dollars is a marketing and brand building move rather a tactic to get sales today.
Here are times when you should work for free:
Make it clear that you’re working in the hopes of receiving a positive referral and not because your services aren’t worth paying for. You can’t MAKE someone give you a testimonial, but you should make it clear that you’d greatly appreciate it and that referrals are so valuable to you that you are doing this for them for free. I’ve never had trouble getting a referral from someone I worked for for free.
I definitely prefer working for free over working for cheap.
The prices that you work for will stick to you. Fair or not, if you work at unreasonably low rates you will have your services labeled as low quality. When you raise prices, people will remember that not long ago you were selling the same thing much cheaper.
Working for free on the other hand doesn’t stick to you as long as you do it sparingly. It is seen as a favor since obviously you’re services are worth SOMETHING.
As we’ve touched on a lot already, pricing strategy is more about branding and making money in the long run as it is about maximizing profits in the short term. The best service providers know this and do it well when building their businesses.
Pricing Online Courses, Info Products, Consulting and Masterminds
This is one of the most difficult things to price for internet entrepreneurs since the value of education can be very subjective.
One customer may take the information you sell and earn a million dollars from it. Others might never take action on anything you teach or just not find how to make it work for them.
So, what do you charge? Obviously if the results of the customer who earned a million dollars were common, you could charge massive amounts for your information. You can’t price based solely on outliers like this though (low or high).
Here are some tips for pricing your courses and trainings.
Price Based on the Average Result
You will have some customers who get amazing results and some customers who achieve absolutely nothing (your products should be good enough though that this was a result of them failing to take action).
What do most students who actually take the program and act on it end up achieving? That is how you set the price.
Although some people will reach out to you and share their results, the best way to know this is to follow up with past buyers and ask.
Also, your refunds should give clues as to whether or not your product is living up to expectations.
Refunds on information products are typically much higher than other products but if they get over 20%, you may be priced too high.
Don’t Give Too Much Weight to Length and Size
Many course creators price their courses based on how many units they include, how many quizzes there are or how long the course/training is.
This is a terrible way to gauge the value of your course.
I have taken courses that were 10 hours long that weren’t as good as courses on the exact same topic that were under 2 hours.
If you’re confident that your course is going to help someone achieve a result that will help them achieve a quantifiable goal, charge accordingly. Whether the course is an hour or 12 hours long, you sell the value given.
Your sales point that you have “Over 12 hours of content with more added each week” might actually drive away customers! Some people may like this but others may see it as too much or just too difficult for them to realistically follow up on. I high price point + content overwhelm can be a formula for subpar sales.
On the other hand, some people see length and difficulty as a sign of legitimacy. They might feel, “ok, I can believe that spending 12 hours of immersion on a topic would drive results,” while selling a 1 hour course that promises the same results may be perceived as highly unlikely.
There are pros and cons to each. I find that a medium sized program with defined reasonable expectations works best but the only way to know is to get out there and test.
Luckily, courses have few fixed costs so you may miss out on earning money by pricing incorrectly but you are unlikely to lose money. It may take a few tries before you price your course right so don’t beat yourself up if you mess up a few times at first.
Sell on Your Own Platform
As I mentioned earlier, platforms like Udemy don’t seem to care much about their instructors. Selling on someone else’s platform also means you have less control over your course branding and its pricing.
I recommend you check out Thinkific and Clickfunnels for creating any course and host it on your own domain. This will also make marketing much easier.
Take Student Success Personally
Many course creators focus on prospective students and landing more sales. This is backwards. You need to focus on your existing customers and helping them find success.
This leads to positive word of mouth advertising and strong testimonials that will help you get more sales in the long run.
Front end sales on an initial launch aren’t a sign of success in the long run. Take them with a grain of salt.
Include 1 on 1 Support (If Feasible)
Courses that include live support and regular office hours sell better.
When you create a course, if it’s popular, it will inevitably get pirated and shared across the dark web. Although this is just part of the business, it is annoying nonetheless.
Adding something that can’t be pirated like personalized support will increase sales, improve retention and allow you to charge a higher price. This also puts accountability on your students and will increase their chances of success.
Your Credentials Dictate Demand
Your ability to sell a course at a higher price will be dictated by how much authority you have in your space and how well you promote your program.
I’ve seen many courses sell millions of dollars in revenue because the creator was a well respected authority in his/her space.
This is how someone like Russell Brunson of Clickfunnels is able to charge $25,000 per year for his inner circle program AND have a long waiting list to get in.