Project Diary Part 3: The Secrets of Product Pricing For Profit

This is my third article in the Project Diary series detailing the exact steps I’m currently taking in order to define, create and market a brand new profitable Internet based product. This is my guide to coming up with the perfect price for a new product – a price that will generate the kind of profits desired.
If you have not read my previous two articles in the series, now is the time to do so. You can read Part 1 by clicking here, and Part 2 by clicking here.
In the next article in this series I will be telling you exactly what the product is that I have chosen to develop… and how everything is progressing – But first, let’s talk about the ideal product price and overall pricing strategies.
Firstly, as you may have realised from reading other articles on this site. I am a firm believer in using ‘multiple streams of income’ to contribute towards my monthly sales targets – rather than leaving it up to just one product.

For most of the part, these products generate an income for me completely on auto-pilot leaving me to concentrate on developing further new products, and the managing of the ‘off-line marketing campaigns’ for the mail order side of my business.
By ensuring complete automation of these Internet products, it means the work that I did last year for example, like developing a new image hosting service for auction sellers at: www.imagestorepro.com  and the fill-in-the-blanks auction template at: www.auction-o-matic.com  ); continue to pay me each month with very minimal maintenance on my part. By minimal maintenance, I mean literally a few minutes here and there answering customer emails etc.
The point I’m trying to make is that I have an overall income strategy for hitting my sales targets each month – So should you. This strategy didn’t just fall into place automatically mind; I had to quickly define a few basic rules based on my past mistakes.
1. A series of £20 products which can never generate £100,000. If you want to make £100,000 with your products each year, then you need to develop the kinds of products that you can price at a level that can generate £100,000 a year. Without a strategy, you may end up developing a series of £20 products which can never generate £100,000. Set an annual income goal, and then develop products that can be priced to achieve that goal.
2. Avoid selling anything for under £40. My experience tells me that selling something for less than £40 requires too many sales to make much profit. Generally I want to earn at least £50,000 from any product I market through the mail and £5,000 for any Internet based product. And if I price below £40, it will take too many sales, too many customer to generate a contacts and too much support decent profit. But if I price at £40 (and well above), I can do quite well on fewer sales and fewer support issues.
Also think about this. A product priced at £20 will require 5 times as many sales as a product priced at £100 to generate the same revenue.
Put another way – 500 sales of a £20 product will earn you £10,000, while 500 sales of a £100 product will earn you £50,000. The same amount of work is usually involved in fulfilling the order.
3. Product support is expensive. No matter what you sell, there will be some product support required. Some products (software), will require a lot more support than others. The more support you have to provide, the more it costs you in time and resources. For that reason, always factor the cost of support into your product prices.
Imagine the nightmare if you sell 1000 units of a software product you priced at £19.95, and every single customer calls you on the phone requesting support. How much will it cost you to answer 1000 phone calls (or give refunds to the calls you can’t take?).
Better to price the product at £100 and only sell 100 units. You’ll make the same income, but support costs will drop by 90% (90% fewer customers). And whenever possible, create products that by their very nature don’t require much support. (provide as much help inside the product as you can!)
4. Too low a price kills sales. Setting a price too low is a very common mistake. If your price is far below the expected price and far below your competitor’s price, customers will think something is wrong. Better to have a higher price – which usually indicates better quality. I learned this the hard way.
5. You’ll only sell a small percentage of your projections. Marketers almost always over-estimate the number of products they will actually end up selling. People tell me they expect to sell thousands of their product. They’ll say, “I only need to sell 1,500 units to break even.” In reality, very few independently developed products sell more than a 1,000 units. Yes, it happens, but rarely – unless you spend thousands on marketing, or run a loss-leader
Still, if you price your product right, you can do quite well selling just a few hundred units. If you sell 300 units of a £100 product, you generate £30,000. And if you have ten products doing the same volume, you generate £300,000.
6. Finally as we have already discussed – Don’t try to reach your annual income goal from sales of just one product. If you have high annual income goals, don’t try to make all that income from a single product. You’ll be better off to have an assortment of related products (all appealing to the same general target market). Doing this encourages customers to buy several items at a time – increasing your per order volume. If you have ‘all your eggs in one basket’ product-wise, you can get taken-out immediately by sudden changes in the market place or consumer demand.
My Personal Product Pricing Strategy
When it comes to choosing the perfect price for your products, I believe it’s best to price your product before you actually come up with the final product.
That’s right, come up with the price before you develop the product.
This way, knowing in advance what the price will be, it is much easier to create a product that matches the asking price.
To me this makes a lot more sense than trying to come up with a price after the product has been developed. When you do it that way, your pricing options are pretty much locked in by the limitations of the product and the market being targeted. For example, if you have developed an eBook showing how to make money on the Internet, you are pretty much locked into the price of other eBooks offering the same information (just a few dollars). You may want to charge more, but most likely your effective price will be limited by customer expectations.
But if you start with the price, before you come up with the product, you can find the right market, and build the right product to fit the price range.
The Selected Pricing Point For My New Product
I’ve decided that my product will be priced at $67.00 (approx £40) The product will have a far higher perceived value than this amount (judging by the price of similar products aimed at the same niche market I have defined). I also firmly believe that I will be able to sell at least 200 or so copies of this product. As we’ll see from ‘running the numbers’ in just a moment this could… at the price I have chosen…  return a substantial profit.
[I am pricing this is US Dollars for the reasons mentioned in Part 1]
Let’s Run Some Numbers
I thought it would be useful for you to see ‘hands on’ how setting the wrong price can have a disastrous effect on your new product. Then to also show you… how by tweaking your selling price, you can almost guarantee success with your new product.
I have put together a worksheet for you to use as many times as you like. (I’ve also entered some typical development costs). Try changing the retail price of the product and see how quickly it effects the break even point… and the point at which your profits from this product will pass several significant financial milestones. To use the worksheet click here.
Closing Thoughts On Pricing
One of the greatest things about developing products is that you get to choose the kinds of products you want to develop and the niche markets you wish to sell into.
My belief is that if you really want to be successful, you have to choose to develop products that are priced for your success. To help meet your financial goals.
Think about your target income from your development of this new product first. – (You should remember from Part 1 of this series, right upfront I set my goal to $10,000 )
Second set the price of your product to meet your financial goals, based on how many units you think you will be able to sell in the first few months. Also take into account how large your defined market is and perhaps how many similar competitors you have.
Don’t forget to always run the numbers before you start a new project. It could save you thousands of pounds and hours of your time.