A Simple Framework for Pricing Digital Goods

Do you struggle with how to price your online products? Well, this episode will help.

Pricing your product or service can be a challenge. Too cheap and you can’t make your rent, too expensive no one will buy. So what do you do?

Pricing does not need to be a huge challenge … if you start with the right framework.

In this episode we deconstruct pricing models and give you a proven formula you can use to set the right price.

Yes, there is some math involved (sorry), but in the end, pricing your eBook, training course, or any digital good, does not have to be a huge challenge.

In this 30-minute episode, Sean Jackson and Jessica Frick discuss the most common concerns and proven strategies for pricing, including …

  • The #1 rule that you must follow when setting your pricing
  • Why understanding your costs is the key to an effective pricing strategy
  • Solid guidelines that will help demystify pricing
  • Why you should always start out at a high price
  • And of course, our question for the week – Is PPC for everyone?

The Show Notes

A Simple Framework for Pricing Digital Goods

Voiceover: Rainmaker FM.

You are listening to The Digital Entrepreneur, the show for folks who want to discover smarter ways to create and sell profitable digital goods and services. This podcast is a production of Digital Commerce Institute, the place to be for digital entrepreneurs. For more information, go to Rainmaker.FM/DigitalCommerce. That’s Rainmaker.FM/DigitalCommerce.

Sean Jackson: Welcome to The Digital Entrepreneur, everyone. I’m your host, Sean Jackson. I’m joined, as always, by the eclectic Jessica Frick. Jessica, how the Frick are you?

Jessica Frick: I am eclectic, Sean. How the Jackson are you?

Sean Jackson: Oh well, I’m still suffering from this cold that has been going around, but as I said before, our audience is too important and the show must go on.

Jessica Frick: You are a trouper.

Sean Jackson: I’m going to suffer through, but I will make it happen. Jess, where did we leave the last episode? What was the question of the week we wanted everyone to ponder?

Jessica Frick: See, here’s where I know that you’re pretending like you’re doing this just because you believe in the audience, but I know secretly you have been looking forward to this conversation. I have been having so much anxiety about it. Just the idea of it makes me anxious. Last week you’d asked me what I disliked the most about online business, and my answer was pricing.

Sean Jackson: Ah, yeah.

Jessica Frick: You know, I thought more about it, and just the concept of pricing is enough to put me into analysis paralysis. I won’t launch anything because I’m too afraid to put a price out there. Then you can’t really change it once it’s out there. “Did I go too high, too low?” Sean, what is your best piece of advice for someone like me who is not a numbers, math, or money person like you and can just say, “This is the price”?

The #1 Rule That You Must Follow When Setting Your Pricing

Sean Jackson: Yeah, your fear and anxiety around this is very common. I think especially when you’re starting out with anything new, you’re always worried, “Am I going to set the right price?” I think at the end of the day it helps to remember the fundamental rule, which is you control your pricing. That control gives you both responsibility, but it also gives you a lot of latitude. To address that fear, we have to realize that there’s no set book that says, “All things must be priced accordingly.” That you actually can pick a price. And picking that price — the goal is to defend the price, to make people not even question it.

When I was in sales many years ago there was a great quote that I used, which is that if they question the price you haven’t sold it enough. I love that quote, because it says that really pricing is a function of justifying it through the sales process. How you support it is what makes that price seem reasonable. Let’s do this, Jess. Let’s go to a break, and then when we come back, let’s get into the mechanics of this. I want everyone who’s listening to this episode to feel empowered that they are in control.

In the next part of our show, we’re going to talk about how they can actually do that, but I don’t want to leave this section without everyone sitting there going, “I have control. With that control, I can do what I need to to make my business successful by pricing the right way.” Is that a good way to end this particular section?

Jessica Frick: I am in control.

Sean Jackson: That’s right. When we come back from the break, we’re going to talk about how you can maintain that control. We’ll be right back, folks.

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Welcome back from the break, everyone. Jessica, we left the last segment with you wanting to know how to price your online product. Is that correct?

Jessica Frick: It is. There’s so many things that I feel like you need to put into that total price. What all goes into it, Sean?

Sean Jackson: Okay. Well let’s start with a very basic idea. Let’s use this as the example for the show. Let’s say you want to make $400,000 in revenue. Is that a good target? Would that be okay for you, $400,000 in revenue for the year.

Jessica Frick: I wouldn’t kick $400,000 out of bed.

Sean Jackson: Sure. You sit there and say, “Okay, I want to have $400,000. That’s my target for the year. That’s the amount of revenue, money, that I want to bring in for the year.” Let’s use that. “I want to do that by selling some sort of digital goods online, membership, ebook, etc.” All right, so we want to make $400,000. Let’s start looking at that number in a little more detail. Jessica, let’s say you want to sell some sort of membership site or some sort of training program or something like that.

Jessica Frick: Okay.

Sean Jackson: You want to make $400,000 in revenue. That’s our target. How many customers would you need to reach $400,000 in revenue? The response is, “Well, it depends on the price,” right?

Jessica Frick: Totally.

Sean Jackson: If you have one customer paying you $400,000 … But let’s go through the math a little bit more, because I want people to understand an important part of that $400,000 number. All of the money you are going to spend to make that is going to be taken out of that $400,000. And part of that $400,000 is the cost for you to deliver your product.

Jessica Frick: Okay.

Why Understanding Your Costs is Key to an Effective Pricing Strategy

Sean Jackson: Now this is different than the expense of running your business. An expense of running your business is like your Internet connection. That is an expense for the business, but it’s not a cost of you providing a product or service to a customer. Let’s look at what I mean by cost. In any online business that’s selling a digital good, your target should be around 20-25% of the money you collect should be the cost of providing that product or service to the customer. All right?

Jessica Frick: Okay.

Sean Jackson: Let’s use 25%. You want to make $400,000, right, Jess?

Jessica Frick: Yeah.

Sean Jackson: But 25% of that money is going to be the cost of delivering that product or service over to your customer. So what is 25% of $400,000?

Jessica Frick: $100,000.

Sean Jackson: That’s right, $100,000. By the way, every business has a cost to provide the product or service, every single one of them. 20-25% is a very good rule of thumb, simply because there’s a lot of money that you spend to give that customer the product or service. Even if you’re giving a training course, you still have to do customer support, right, Jess? That’s a cost, right?

Jessica Frick: Yeah.

Sean Jackson: You still have to have a website for them to go to. That’s a cost. There’s a lot of costs. Even if I bought your training program and it’s all online, I still have a cost of supporting you. I have a cost of collecting your money via credit card.

Jessica Frick: Yeah.

Sean Jackson: When you look at it … Now let’s go back. Jess, you want to make $400,000. You know that $100,000 is going to be the cost of providing that product or service to your customer. The question is, Jess, how many customers can you support for $100,000? That is the key. If you know it’s going to take you $100,000 of costs to support them and you have $400,000 of revenue that you want to make, how many customers can you support for $100,000 a year? To make the math easy, I’m going to say it’s 1,000 people. Would you say that feels about right for your training course, let’s say, that you’re trying to put up?

Jessica Frick: On average, because you know, again, there’s a 90/10 rule.

Sean Jackson: Sure.

Jessica Frick: 10% of the people are going to take up 90% of your time.

Sean Jackson: Right, but if I come in and I want to buy your training course, I want to buy your ebook, I want to buy your membership system, or I want to buy whatever digital good you have — your software product, whatever — then you have to say, “For $100,000, how many people can I support?” Now in this example I’m going to say 1,000, because it makes the math real easy.

Jessica Frick: Okay.

Sean Jackson: Let’s go through. You want to make $400,000, right, Jess?

Jessica Frick: I do.

Sean Jackson: You know that if you spend $100,000, you can support 1,000 customers. What is the average price you have to charge to make that $400,000? You’ve got 1,000 customers and you want to make $400,000 in revenue. How much do you have to charge on average?

Jessica Frick: On average, about $400.

Sean Jackson: That’s right. See, this is where it becomes kind of fun.

Jessica Frick: But Sean, that assumes that all of the things that I sell are going to be $400. What if I want to scale it?

Solid Guidelines That Will Help Demystify Pricing

Sean Jackson: Ah, that’s right. This is where we come through the next part, because we know we need to make $400 per sale. If we have 1,000 customers at $400 a sale, it’s $400,000 a year. I got my $400 average. Now let’s put the price together. This is why we have to know a little math, folks. We know we need to make on average $400. Here is how you get that $400 average. You don’t do it by selling one product. You do it by providing three to four options for people to buy online.

There’s a whole science and study around this, but I’m going to make this easy because, again, we’re trying to figure out the price of what we want to sell. We know we have to make $400 because we’re going to sell it to 1,000 people. That $400 is going to be the average between the things that you sell online. Now let’s do this, Jess. We’re going to create up a product that we’re going to call the anchor product.

This is important psychologically, because the anchor product is the single most expensive thing you ever sell. It is the thing that when people look at it, they go, “Man, I wish I could buy that. I wish I had enough money to buy that particular offering.” It’s like when you go to buy a car. Sometimes they’ll show you the most expensive car just so that they can put your … Because they want to sell you …

Jessica Frick: Oh yeah, I watch that on the DIY shows all the time. They show you the house that has everything you want.

Sean Jackson: That’s right.

Jessica Frick: And then you find out it’s half a million more than your budget.

Sean Jackson: That’s right. Now let’s come through this, folks. You need to create what I call the anchor product. The anchor product is the single most expensive thing you would ever provide to anyone from the products and service of your business. This is the uber offering of everything. This is the consulting. This is the come and wash your house for you. It is everything and anything that you would want to sell, and you’re going to price that at a level that is extremely high.

Remember, we want to make an average of $400 in our example. So your anchor product is going to be way more than $400. Let’s call it $2,000, just to throw it out there. Here’s why the anchor product is so important: No one’s going to buy the thing.

Jessica Frick: It’d be nice if they did, right?

Sean Jackson: Yeah, a few people will, but the anchor product sets the expectation. For instance, if I had two houses that you can take a look at, and one is this uber million-dollar house that is gorgeous — it’s got all this finish-out, etc. — and then I show you a house that’s $200,000 that is kind of like the million-dollar house, you’re going to sit there and anchor in your mind the features of the million-dollar house and look at it in the $200,000 house, and say, “Oh, that fixture right there. That was in the million-dollar house. Well, this must be just like the million-dollar house.”

Jessica Frick: Yeah, and you start negotiating with yourself about the different things.

Sean Jackson: That’s right.

Jessica Frick: It makes that lower price one so affordable.

Sean Jackson: That’s right. You’re like, “Well, it has some of the same features of the big expensive one that I can’t afford, so it must be as good as that really super nice thing that I can’t afford that I really want.” That’s why anchor products are crucial. The beauty of an anchor product, folks, is you can make up the price. You know what your average is, and you’re going to sit there and jack that anchor product up way higher than your average. In this case, let’s go ahead and say it’s $1,500 to $2,000. It really doesn’t matter if anybody buys this product. By the way, folks, you should be super excited that they do. But no one’s going to do it. It sets expectation.

The next thing that we do is we set up our mid-tier product and our lowest-tier product. These are important in the digital goods space because, again, we want this average of $400. What should we price our mid-tier product and what should we price our lower-tier product? Very simple. We want to make $400 in our example. That’s the average. No one’s going to buy the anchor product. It’s solely there to set expectations. The average of the money that we make is going to be the difference between the lowest-tier and the mid-tier, so let me give you how that would work. If you know you need to make $400, then your mid-tier product should be about $600 and your lowest-tier should be about $200. Your average price is going to be the difference between them, which is $400. See how that goes, Jess?

Jessica Frick: I do.

Sean Jackson: Your anchor product is there to establish the value. Your mid-tier product, which you hope a lot of people will buy … It turns out people will tend to buy that mid-tier product. A lot more people will buy the low-tier product. Your average is going to be the difference between the two.

Folks, let’s stop for a second and run through your personal situation. You have a product or service that you want to sell. Number one, set a target price, the target revenue. How much is the revenue you want to collect? Number two, how much is it going to cost you to support that revenue? It’s generally about 25%. Then from that, figure out how many customers can you support with that cost, that gives you your average. Once you find your average, then you create up a really expensive product called the anchor product. Then you have your mid-tier and lower-tier, and your average revenue is the difference between those two. I know this is a lot, which is why we’re linking to a post on exactly how the math goes.

Jessica Frick: It actually sounds a lot less intimidating when you break it down that way.

Sean Jackson: It does, because it really gives you a formula that you can key off of. You can take any ebook that you’ve got, any learning management, any software, any service — anything that you’ve got — and break it into three buckets. “My really expensive anchor one, my mid-tier one, and my low-tier one, all of which are similar together. Knowing that the average amount of money I’m going to make is the difference between the mid-tier and the low-tier.”

That universally works out. You will always have costs, which will help you figure out what your average is. That’s why it is important to understand how much money you want to make in the year, how much it costs you in the year, and how many people you could support in the year. Then from that simple little math you can figure out all of the rest of what you should price the product at. Okay?

Jessica Frick: Hmm.

Sean Jackson: Don’t worry, folks. Look at the link to the post that we wrote about this. It will make it much clearer than the audio portion of this exercise. Now I want to go into Jessica’s question. I have figured out how much I’m going to charge now. How much I have to charge to meet my goals. Jess, you asked a question earlier. “What about discounts? Can I change my pricing? Can I move this up or down accordingly?”

Jessica Frick: Yeah.

Why You Should Always Start out at a High Price

Sean Jackson: Okay. The simple answer is yes, you can always change this. I would say that it is — to start with — better to price high than low. Now, why do you think I say that?

Jessica Frick: Because you can always discount, but you can’t really go up unless you add more to it.

Sean Jackson: Exactly. See, folks, when you’re coming up with this hypothetical for your personal situation, what I want you to realize is that it’s better to start out high and discount back than it is to start out low and try to increase up. You’re going to have to justify the price no matter what you do. At least if you start out high you can create up additional incentives that decrease the price to the person or add more value into it, versus starting out really cheap and saying, “What I was charging you $100 for is now $1,000.” To make that psychological leap from $100 to $1,000 requires a ton of effort, versus, “Hey, it was $1,000, but we have a special this week and we’re going to discount the price back.”

Again, I want you to feel that you’re in control. But realize that any time you are discounting or increasing your price, you’re going to have to give a lot of justification around it to make sure that your audience understands why you are doing what you are doing. If you’re starting out high, it’s a lot easier to come down low than it is to go back up and have to justify why you increased the price up. It’s definitely possible. Jess, I’ve given you $400,000. Congratulations.

Jessica Frick: Yay.

Sean Jackson: You have to spend $100,000 for it. You’re going to generate 1,000 customers. They’re going to pay you, on average, $400. You’re going to create up your anchor product, which is super expensive. You’re going to create up your mid-tier and your low-tier offering. The difference between them is going to be your average. That’s the basics of the pricing for whatever you are selling online. Okay?

Jessica Frick: I dig it.

Sean Jackson: That formula works from day one, and you can tweak it accordingly.

Jessica Frick: Now, I have one tricky question, and this one always catches me up too. When you’re working out your pricing, how do you know — based on what your business needs to stay afloat — whether you should offer monthly, quarterly, or annual pricing, or just the one-time, done-with-it thing?

Sean Jackson: Yeah, that’s a good question. When you come in and look at how you collect that $400 in our hypothetical, do you ask for it all at one time period or do you try to break it up? I’m going to let you folks in on a little secret. The world revolves around credit cards. What I mean by that is everyone is debt financing almost all the purchases they make in their life. It is amazing to me how much debt people are using to buy the goods and services they have. Credit cards are hugely important in that, because it helps people finance the purchase.

To your question, should you offer a payment plan of some sort — a monthly, quarterly type of subscription — or should you ask for all the money upfront? My feeling is that you should give people the option, but you absolutely want to help them finance the deal. What I mean by that is, if you can afford to do monthly, provide them a monthly. If you can afford to do quarterly, give them that.

It is so much nicer when you have someone’s credit card to charge that on regular intervals. It makes that easier for the person to buy it because they know they don’t have to give you $400 right now. They can give you, let’s say, $30 right now, and then they pay you every single month thereafter.

I always recommend, if you can finance a purchase, then absolutely finance it by offering payment plans — whether they be subscription, monthly, quarterly, etc. Or, if you’re going to charge them a big chunk of money upfront, let them pay it off over four months. You would find that in doing so, they would be more inclined to buy because the money perception going out is a lot less than if they have to give you that $400 right now.

Jessica Frick: I see a lot of people setting their prices higher when they charge monthly. Then they give you a discount if you pay it all at once.

Sean Jackson: Yeah, I think so. You should do that. That again goes to the point that … Remember when I talked about cost, there is a cost of the fact that if you want an average of $400 but you’re going to be giving discounts. Then your average goes down. Again, it goes to your cost. Can you afford to give people that discount? I think a lot of people can, because you can always increase your price up.

Jessica Frick: Yeah, that’s true. I feel like a huge weight has been lifted off of me. Thank you, Sean. I was dreading this call.

Sean Jackson: Well, I know a lot of people listening to this are rolling their eyes, going, “Gosh dang it, Sean. I’m a marketer, not an accountant. Why are you doing this to me?” But here’s the thing, folks — to really end this particular section, remember you’re in control of all of the pricing when it comes to your product or service. Start high to begin with. Do some very simple math. Set some targets. Figure out what it’s going to cost you. How many people can you support? Realize that the average is going to be a function of how your different offers are put together.

For God’s sake, please read the post that we have tied to this, which is The Smart and Simple Framework for Finding the Right Pricing Model for Your Site. By all means, please read this post. It makes it so much easier. I have seen, Jess, so many people underprice what they have. That are struggling to make a dime online because they think that they needed to be cheaper, not more expensive. That were not comfortable with the money side of this. Yet they’re doing it because they want to make money online. Get comfortable with the math, and then you’re going to find that the money is there. You just have to have the right pricing strategy, which we’ve given you a formula to do it. Does that help?

Jessica Frick: Makes sense to me.

Sean Jackson: Perfect. Folks, hopefully it’ll make sense to you. When we come back, we’re going to share some tips, tactics, tools, and ideas that you should be thinking about for the week ahead.

Hey, everyone. This is Sean Jackson, the host of The Digital Entrepreneur. I want to ask you a simple question. What is your business framework for selling digital goods online? Now, if the question perplexes you, don’t worry, you are not alone. Most people don’t realize that the most successful digital entrepreneurs have a framework or a general process for creating and selling their digital goods in the online space. One of the best free resources is Digital Commerce Academy. Digital Commerce Academy combines online learning with case studies and webinars created by people who make a living selling digital goods online.

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Welcome back from the break, everyone. Jess, now it’s time in the show to talk about recommendations. What do you have this week for our audience on something they should take a look at?

Jessica Frick: Well, my very favorite resource for all things data and analytics-related is Annielytics.com. That’s Annie — her name is Annie — lytics.com. Annie Cushing has created a number of guides that make analytics sexy. I know. It sounds completely insane, but once you read it you’ll see what I mean. She teaches you how to do an actual site audit or develop a marketing strategy or an analytics audit with real life data. Also, her blog takes complicated concepts and puts them in such a familiar voice that when you read it, there is no anxiety whatsoever. By the end of it, you are actually working on your data without hired help.

Sean Jackson: This is very important, because at the end of the day, when it comes to the work that we do on the online space, we are awash in data. Certainly Google Analytics plays a big part of that data — both aggregation and research. Having someone like Annie Cushing can really help you understand all of this data and how to put it into context so that you can make informed decisions. Would you say that’s the end benefit of going to Annielytics?

Jessica Frick: Absolutely, and she has a number of resources available for free. She does have some paid resources, but when you look at the pricing, you’ll find that she did a really great job at making it completely affordable with a huge payoff.

Sean Jackson: Ah, very good. I like that recommendation. My recommendation for the week is a book called Contagious. I am absolutely blown away with this book. Jonah Berger created this book up, and he really went through the science of why things go viral online. I was fascinated. It’s not a long read. It’s a fairly short read. It’s called Contagious by Jonah Berger. He really goes through the science of analyzing, “Why do certain videos go viral? Why do certain products just take off?” In doing that, he found a formula that they all use to make something go viral online. The read is absolutely fascinating. I highly recommend it. Backed up by some real science, some real data.

It’s funny, because he’s also in that same universe. Have you ever read the book Made to Stick by the Heath brothers? He’s in that same universe. These are guys all know each other, and they all talk about the psychology and behavioral dynamics of online marketing. I highly recommend taking a read of this book, Contagious. It’s not very long, and I think Jonah did a phenomenal job with it. That’s the recommendation for the book.

Of course, folks, we will put into the show notes on the webpage links to Annielytics as well as to Contagious so you can take a look at them. Jess, what is the question of the week we want people to ponder while we put together the next show?

Jessica Frick: We are talking about analytics and it also got me thinking — paid traffic. Sean, is pay-per-click for everyone? Should everyone be doing it?

Sean Jackson: Absolutely. Everyone should be doing pay-per-click.

Jessica Frick: Not everyone, Sean. Not everyone.

Sean Jackson: I’m sure Google thinks so.

Jessica Frick: Well yeah, Google, Microsoft. They’re all like, “absolutely.” But there are cases where you shouldn’t. We should talk about that next week.

Sean Jackson: Really?

Jessica Frick: Yeah, we should talk about this.

Sean Jackson: Let’s do this. What do you think, folks? Should you be doing PPC or advertising on Google, on Microsoft — on all the major search engines and all the other ad networks out there? Or is it not right for you? I think that’s a good question to ponder for the week. We will answer that and much more in our next episode of The Digital Entrepreneur. Take care, everyone.

Jessica Frick: Thanks for listening.