When it comes to pricing your product, you have two options. You can either base it on cost or value.

The question is, how do you know which one is right for you? It helps to have a good understanding of what each pricing model means. So, to help you decide how to price your goods, below you’ll find the key things you need to know about cost versus value pricing.

What Is Cost-Based Pricing?

With cost-based pricing, you price products based upon how much it cost to produce them and the profit you want to make. So, if a product cost $100 to create, you may want to make $50 profit. This means you would sell the product for $150.

If you’ll be shipping the products to customers, these costs can also be factored in. A lot of customers prefer free shipping these days, so you may need to up the selling price to cleverly cover the “free shipping” costs.

What Is Value-Based Pricing?

With value-based pricing, you price the goods based upon the value they provide to customers. You’ll be setting a cost based upon how much your customers will be willing to pay for the goods or service.

While this can be the best way to price digital products, it doesn’t come without its challenges. You’ll need to spend a lot of time researching similar products and their prices to establish how much your products are worth. There is also the fact that different people value things differently. So, not all customers will be prepared to pay the price you set. However, this is the same for cost-based pricing too.

What Benefits Does Each Provide?

Both cost-based and value-based pricing offer numerous benefits. With cost-based pricing, you’ll have a set price that you apply to the products. You won’t need to spend as much time researching what to charge or working out the value of the product. It also ensures that the cost of production is covered, making sure you make a profit from each sale.

With value-based pricing, you can potentially earn more profits than you would with cost-based pricing. You’ll also find this type of pricing tends to build up more customer loyalty. Customers will know you’re proving value, so they’ll be more inclined to buy additional products from you when they’re released.

How to Know Which One Is Right for You

In order to determine which type of pricing would work best for you, it’s important to think about the type of products you’re selling.

If you’ll be offering physical goods, cost-based pricing tends to work better. However, if you’re selling digital goods or services, a value-based pricing structure often work best. You can still take into account any costs that occur through the creation of digital products. However, a value-based approach does tend to work so much better in this case.

As you can see, both options have their own benefits. So, when working out which type of pricing model to use in your business, it’s important to take into account the pros and cons of both.

Tiered Pricing: When to Do It and How

Have you considered using tiered pricing for your digital products? There are lots of pricing strategies you can utilize, but tiered pricing does tend to be one of the most effective.

Here, we’ll look at tiered pricing and when it can be used. You’ll also discover how to do it effectively.

What Is Tiered Pricing?

Tiered pricing is basically offering different priced packages. You’ll provide a basic price for the product, then increased prices for larger bundles.

Say you sell online courses. The basic tier would include access to the course only. Then you could create two additional tiers, each offering something extra at an additional cost. The middle tier could include course access, alongside additional resources. Finally, the most expensive package could include the course, resources, and one-to-one email mentoring.

This is just a basic example, but it allows you to market your products to a much larger customer base.

When Might It Prove Useful?

Tiered pricing can prove extremely useful if you’re selling to a wide range of customers. The different prices will appeal to different buyers. For example, not everyone will have the money to invest in your highest package deal. So, they could choose to invest in your basic, lower-cost package instead.

Giving customers options tends to work out really well. People want to choose the service they receive. So, if you give them an option, they’re more likely to buy at least one of your packages.

How Can You Use It?

There are a lot of different ways you can utilize tiered pricing. However, the most effective tends to be offering a three-tier system.

This includes offering a basic price, then a more advanced option, followed up by an expensive price (as in the example above). The basic package is going to be your most successful as it’s accessible to everyone. The advanced option should be advertised as the optimal option, providing everything the customer needs. Then finally the expensive option should offer a complete, excessive service that goes beyond what the customer needs.

The great thing about this tiered option is that it appeals to everyone. You’ll have the opportunity to make huge sales with your expensive option, but you won’t miss out on the customers who can’t necessarily afford that option right now.

Another way to offer tiered pricing is to bundle products together. These are known as quantity tiers. The more the customer buys, the more of a discount they get. This works better for products rather than digital services. This type of pricing is actually known as volume pricing, and it only works better than tiered pricing on limited products.

As you can see, tiered pricing offers a great range of benefits. It’s simpler to incorporate than you might think too. You can always check out your competitors to get an idea of the types of tiered prices they offer.

If you’re looking to increase the chances of making a sale while appealing to a large customer base, this type of pricing can be extremely effective.