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.
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