Lately I’ve been fussing about product prices. As many readers know, I run a particle effects shop in the Second Life Virtual World™ called Electric Pixels. The shop now has around 200 items for sale and many thousands of items have been sold over the past year. But how do you go about setting a price for an item? Or worse, how do you go about setting a price for a custom, one-time-only product?
When I started selling items 18 months ago I really had no idea, and simply guessed. This method still works for me today! However, upon reflection there should be more science applied to the problem. Here are some pricing strategies that work in the real world and may also work in a virtual world:
- Give it away! Yes, this is indeed a strategy. Contemporary web services use this technique often, and survive by selling advertising or providing add-on services for a fee. I suspect this approach may only work for certain kinds of virtual items. Or it can be used if you wish to promote your business or contribute to the community.
- Price based on Effort: How long did it take you to make the item? One hour? Two? What is an hour of your time worth? This approach might make sense to the maker, but often doesn’t make sense to the buyer. Worse, in the virtual world hourly rates are typically not comparable to real-world rates. Some makers use this technique but their products are usually very unique, and that permits them to demand high payment.
- Price based on Value: What will the customer get from using the item? Will it speed up their process? Will they be able to sell more items of their own? How much money will they get by investing in your product? Determine or estimate their value and set your price to be lower than that so that it makes sense for them to purchase. If you set your price higher, they won’t buy it because it won’t make business sense. This is why pricing on sffort sometimes doesn’t work.
- Price based on Competition: What are competing products selling for? Is your item better or worse than the competition? Should you price yours higher or lower? Again, this test sometimes causes pricing by effort or value to fail. Even if your product is a good value, a competitor could still charge less than you.
- Price based on Volume: How many of these items are to be sold? One? Ten thousand? Your effort in making the item could be the same regardless of how many are sold. A single unit sale would have to recover all your profit on that one sale, while profit for a high-volume product can be recovered over a large number of sales. Typically unique one-time products are priced much higher than high-volume products because of this phenomenon.
Which approach is best? All of them! Any product should be considered in all of these dimensions, and if it passes all these strategies, then you probably have a good price.