A latte costs $5. A used car costs $5,000. Each of these prices come from somewhere, right? It’s not like prices are determined by someone throwing a dart at a board with a bunch of numbers on them (even though it does feel like that sometimes).
Whether or not you’ve sold a product before, it can be daunting to come up with a price tag that feels right. How much is enough? How much is too much? You want to charge a price that makes it worth your while to develop the product, but you also want customers. . . so you know that you can’t charge too much.
There are many fancy formulas for how much to charge for your products. The simplest concept is that your price is where supply meets demand, but that is notoriously difficult to actually calculate. What is the market demand for an online course on a topic that nobody else has covered yet? 🤷
If someone already has a similar product, that can work in your favor, because you can base your product price on theirs, but that is too simple of an approach. Think about what factors are different, such as your competitor’s audience size, target demographic, industry experience, and brand positioning. How do those compare? You may need to charge more, less, or a completely different amount from your competitors for a similar product.
Most economists would say no, you should not charged based on your costs to provide a product or service. The “Cost of Production” theory of value reigned during the industrial and agricultural era, where customers had direct knowledge of how much it costs to grow corn, raise chickens, or make a shoe, so they expected to pay close to that.
As production has become more complex, specialized, and scaled, that is more or less irrelevant (though you should make sure you are building a profit margin into the products you sell). Do you have any idea what it costs to make an iPhone today? Or for that matter, a pencil? Nobody does. Apple barely does. So that pricing theory doesn’t hold up. Instead, you should price your products based on perceived value.
How much is it worth it to your audience to solve the problem that your product solves? You need to take into account how much the problem “hurts” because people pay to remove pain or add pleasure; your product needs to do one or both.
As George E. P. Box said, “All models are wrong, but some are useful.” While there is no perfect formula for pricing your product, there is one formula that seems to work well: put a price on the transformation your product offers, and charge 1/10th of that to the customer.
If you teach people how to make $1,000, charge $100 for the course. If you teach people how to lose 50 pounds, and they become faster, lighter, and healthier because of it, that is the transformation you sell. It is hard to put a value price on that, but even if you ballpark and say that it is worth $1,000 to them, then once again you can charge $100.
What if you’re teaching a diabetic in their 60s how to lose 50 pounds? That might add 5 years to their life, which is worth a lot more. Specialized training adds value. Does that mean you are giving away 90% of what you could make? Possibly. But more likely, you are selling digital products that scale without your time commitment so you can afford to sell many copies for a lower price than you could if you offered 1-to-1 services.
When your customers realize your product exceeds their expectations and gives them far more than you asked for, they feel like they owe you. The reciprocity effect means these customers will do everything they can to promote your product to their friends and family.