Pricing: Why Most Internet Marketers Get It Wrong
By Anna Johnson on January 14th, 2009If you follow the typical Internet marketing dictum – particularly the dictum of Internet based information marketers – your approach to pricing your products is probably along these lines:
Step 1: Identify the prices of other, similar, products.
Step 2: Price your product similarly, subject to how much more or less value you believe your product delivers. For example, you might choose a higher price if you believe your product lies at the premium end of the value spectrum.
Step 3: Test this price against one or more alternatives to see which, overall, generates the most gross profits (sales multiplied by gross margin).
And ta-da you have your ‘optimal’ price!
While this approach seems quite logical and rational… how much of it is based on a real understanding of the relationship between the price you charge… the perceived value you offer your customers… the profits you make… and the return on investment (ROI) you need?
After all, when you assess the ultimate ROI associated with producing and marketing a particular product, ya gotta ask: ‘is this really the best ‘investment’ available to me?’
Now, I should state that it’s not the price per se that matters; it’s the impact of that price on your gross margin (price less the cost of fulfilment – cost of sales or cost of goods sold). Your gross margin, in turn, affects your total gross profits, which in turn impacts your net profits (gross profits after overheads) and the money you ultimately get to pay tax on, or keep, or reinvest in the business.
You can also seek to reduce your cost of fulfilment in order to boost your gross margin, but most other marketers have greater control – and flexibility – with regard to setting the price than the costs of fulfilment which may include such costs as raw materials, printing costs, merchant fees, shipping and handling, etc.
And that’s why, in the ‘Margin Multipliers’ module of the StomperNet Formula 5 business growth program, Paul Lemberg suggests that increasing your price is the fastest way to increase your gross margin and, in turn, your total gross and net profits.
Now, as Step 3 indicates above, there is going to be a ‘sweet spot’ or optimal price where a certain price is associated with the maximum possible volume of sales. This, in turn, results in the maximum amount of gross and net profits. By extensive testing you should be able to identify this optimal price.
But what if that ‘maximum amount of gross and profits’ is still not enough?
What if you discover that, based on this approach to pricing, the net margin you make is LESS than the return you could make by investing your money elsewhere?
In other words, let’s say you discover that the optimal price is $100 and, after sales and expenses are taken into account, you make just $10 in net profits – a 10 percent return on investment. But what if you also know that if you invest that $10 in another kind of investment – another product or another kind of investment altogether – you derive a 25 percent return?
Still want to ‘invest’ in selling that product?
Perhaps, however, there’s one more step you can take before ditching this product in favour of something with a higher ROI.
Enter Step 4. In Step 4, you work out the ROI you require and increase your price accordingly.
But can you arbitrarily increase price like this? Won’t sales go down if you do so?
Well, it turns out that even if you sell something as generic as table salt… you can still do certain things to justify a price increase.
In the StomperNet Formula 5 program, Paul Lemberg provides an extensive list of ways you can do this, but I’ll give you a clue: it’s all about value. And when it comes to ‘value’ don’t just think in terms of the product you ‘think’ you’re selling… what you seem to be selling, and what your customers are buying, are often two different things.
Powerful stuff, and definitely a case where ‘thinking smart’ can help you overcome problems that will leave your competitors for dead…
