Below you’ll find an unedited chapter from my upcoming book 40 Rules for Internet Business Success. To receive updates about the book and get a free digital copy of my book in its current form, enter your email address in the sidebar to the right.
How are you going to decide how much you’re going to charge your customers for your product or service? Deciding on your pricing is not just a matter of asking yourself what you think customers might realistically pay for your product, because the strong likelihood is that you’re going to underestimate the value that you’re bringing to your customers. You might select a price based on how much it costs you to acquire a customer or how much some similar products cost, but this isn’t the right approach. You should determine how much value your product or service is bringing to your customers and charge them a percentage of that value. If you were to create a software-as-a-service product that saves a particular company 50 hours of work each month, you could be saving them $2,000 per month in labor costs. At most companies, it would be an easy-sell to purchase a piece of software that costs $200 per month that saves them $2,000 per month in expenses.
Charge Based on Value
You can determine your minimum pricing based on how much it’s going to cost to acquire a customer and deliver your product or service to them. If it’s going to cost you $50.00 to get a new customer through Google AdWords and another $25.00 to create and deliver your product to your customer, you can’t charge any less than $75.00 for your product without losing money. You’ll want to make a healthy profit margin on your product or service, so you probably wouldn’t want to charge less than $150.00 if costs $75.00 to get a customer and deliver a service to them. You should never select a price based only on the cost of goods sold and cost of customer acquisition, but knowing these two numbers will help you identify what the absolute minimum you can charge without losing money. The nice thing about building products and services that are entirely digital is that there generally aren’t a lot of expenses that go along with them, so the total cost of customer acquisition and delivery of your product or service should be a small percentage of your company’s overall revenue. In 2013, my company had a net margin of 79.8%. That means if I had only charged based on what it costs to deliver my company’s products and services, I would have been leaving as much as 80% of the revenue my company made on the table. Always charge your customers based on the value that they receive and not what it costs to run your company.
Test Pricing During Your Launch
When you’re first determining pricing, you’re probably going to be taking a shot in the dark. You assume you’ll be providing your customers a certain amount of economic value and will charge them a percentage of that as your fee, but there’s no way to determine the price that will generate your company the most revenue without testing your pricing. When you’re launching your product, you can segment your launch list into three separate groups that receive three different sets of pricing. If you’re planning on setting a $99.00 price point for your product, you might advertise your product to one group at $79.00, another group at $99.00 and a third group at $129.00. If all three groups purchase your product at the same rate, you know that you can safely charge the higher price to your customers. If you were to find that the conversion rate of the $129.00 group is half of the $99.00 group, you’d certainly want to stick with the $99.00 price point as your final price. There won’t ever be one perfect price for your product. Different people are willing to pay different amounts for what you’re selling, but you can get a pretty good idea of what price will generate the most revenue for your company through split-testing your pricing.
One Time Vs. Recurring Payments
There are other questions about your pricing that you need to determine besides the amount of dollars you’re going to charge your customer. Are you going to sell your product or service for a one-time fee, or are you going to charge them on a monthly or annual basis? If your product is something that your customer downloads once and doesn’t require ongoing support, you’ll likely charge them a one-time fee. If you’re selling them something that requires ongoing support and maintenance, like a software-as-a-service product or a membership site, you’ll want to charge your customers on a monthly or annual basis. I recommend avoiding offering lifetime memberships for products or services that require you to produce content or provide support on an ongoing basis. Ten years from now, you’ll be miserable because you have a bunch of customers that purchased your product a decade ago that still expect you to support them. If your product or service requires you to do ongoing work, you should be charging your customers on a recurring basis.
I highly recommend building a product or service where customers pay you on a regular basis. When you build a product that people buy once, you continually have to find new customers in order for you to generate revenue. When you have customers that pay automatically every month, you can wake up in the morning and already have made sales before ever logging into your computer. When you have recurring revenue, you can actually take a vacation without your business grinding to a halt. With my press release distribution business, Lightning Releases, we charge a flat fee for each press release that gets distributed. Whenever any of our past customers wants to submit another press release, we get paid again. With my investment newsletter business, customers are automatically billed $14.97 every month for the service as long as their a customer. By offering products and services that customers pay for on a per-use or monthly basis, you’ll be building a steady stream of cash flow for your company.
Payment Processing Considerations
You also need to decide what payment methods you’re going to. Many entrepreneurs make the mistake of only accepting PayPal for payments. With my businesses, I offer both PayPal and credit card payments through Stripe (www.stripe.com). Four out of five customers choose typing in their credit card numbers over paying with PayPal. Since you’re running an Internet business, I recommend not accepting checks or money orders. They tend to be much more of a hassle than they’re worth and most customers that might want to pay by check will pay with another method if they don’t have the option to pay by check.
Your Refund Policy
Finally, you need to determine what your refund policy is going to be. By offering a return or refund policy, you’re reducing the perceived risk with your product. Your customers know that if your product or service doesn’t work out for them, that they can get a full refund on their order. I offer a 30-day money back guarantee on my company’s products. Some companies offer a 60-day refund period, which is generally the maximum length a payment processor will allow you to process a refund. In my testing, I haven’t found a measurable difference in conversion rates when testing between a 30-day and a 60-day guarantee. You should clearly list your refund policy on your ordering page. Every now and then you’ll have customers that will ask for a refund months after they purchase your product, so you’ll need to be able to point out where your policy is listed and politely tell them that they’re not eligible for a refund.