Five Ways to Price Your Products

Friday, July 4, 2008 Friday, July 04, 2008

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.

3 comments:

dandellion Kimban said...

While all of your criteria makes sense, there are some more. Shopping is not quite reasonable stuff. Ask any woman and you'll see. I've tried to explain three more factors that determine the prices. Those are more on the other side of logic. But, the game of shopping is a wery weird one.

ArminasX said...

Absolutely true, Dandellion. Next week I intended to describe a related situation where I have observed at least one of the effects you describe: price determining the price. Thanks!

Peter Stindberg said...

Coming from the SL service industry and expanding into the SL wholesale (hopefully) sector, I gave this some consideration too. With Babel Translation, I checked for the competition prices and intially stayed lower, but in the end started to charge the same pricing. Since a translation is always an individual service, it is also priced on effort, but adjusted to the SL microeconomy where RL pricing is illusionary.

With the furniture business GREENE concept, we primarily checked for competition prices, but soon found out that there are not many competitors qualitywise so we feel comfortable with charging more.

As for fashion I was never blinded by a label. For me, the only thing that counts is quality. One of my favourite pants is a freebie, and if a well known designer brings out an unsatisfactory iem, I simply do not buy it.

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