How much should a product cost?

I want to help you set the perfect price for your product. I’m not a pricing expert, but I have made my share of mistakes that I’m confident I can help you avoid.

Pricing can be such a challenging thing. We want our products and services to be affordable, but we also want them to allow us to run a sustainable business. We want to be competitive, but we also don’t want to win the race to the bottom.

Chris Lema identifies the culprit beautifully in his article entitled, “You won’t help anyone if you’re broke.” In it he says,

If you are insecure at all, even if you’re mostly not insecure, the place where it will mess with you the most is when you’re setting a price.

I fell into this when we first launched Ninja Forms. I was new to the world of WordPress business and quite honestly, wasn’t sure anyone would even give us a second look.

In the early days, we sold Ninja Forms for a whopping $15 for an unlimited, lifetime license. Now before you go judging me, I was insecure. I know that now.

Ninja Forms was a new and fairly immature product in an already saturated market. My partner and I weren’t well known in the community (that much hasn’t changed) and we were easily swayed by the practices we saw in other businesses (this has changed).

We operated under this cloud of insecurity for an entire year and a half as we started to come into our own and discover how to communicate our value proposition. We’re still developing this, but we’ve come a long way.

But this isn’t an article about creating a proper narrative on your value proposition. This article is for people wanting to sell plugins and things they should consider when setting their prices.

This article can also benefit those who feel they are being overcharged for some plugin. It won’t convince that the price is right for you, but if you are the reasonable and rational human being that I think you are, you will at least understand the complexity of pricing.

Factors that should be considered in every pricing decision

1. The cost of support

This is honestly one of the most misunderstood aspects of pricing. Support costs you time and money. This is something that all of us know instinctively and yet it doesn’t seem to get properly factored into our prices.

If you have support staff it’s fairly easy to know if your support is costing too much. In simple terms, if your product costs $30 and you pay your support person $30/hr, as soon as you spend more than one hour supporting one customer, that transaction becomes unprofitable. Assuming the customer needs to and does renew each month/year, profitability is determined by Lifetime Value – Cost of Support. Each transaction is a gamble because you have no way of knowing how much support a customer may need.

If you don’t have dedicated support staff and developers handle support (this includes you), your costs become even more complicated. One big thing is that you or your developers’ hourly rate is probably much higher than a support person’s. This means if a developer spends the same amount of time with a customer you are not only unprofitable, it’s costing you money.

There is also opportunity cost. This is basically what it costs you to do support instead of doing something else like building a new product, feature, or stability to current products. These are all things that could bring in more money, but if you are spending time in support instead of building those revenue earning things, you are paying an opportunity cost.

There is so much more that could be discussed here so I’ll just leave you with this. Your prices have to be high enough to cover your support costs. My guess is, you don’t have a good handle on how much support is or will cost you, so spend some time here in consideration when setting prices.

2. The cost of development

You have probably spent hundreds if not thousands of hours building your product. It would be silly not to consider that when pricing. This isn’t a one to one correlation exactly, but the amount of time and knowledge that you have placed into your product are absolutely factors of the cost of a product. If you can’t earn more than the time you’ve invested in building your product, you can’t possibly be profitable. A profitability goal of any product is to earn way more than you could ever earn building it for a single client. How much more is up to you and your own goals.

If you don’t think about this when pricing then as with the above support costs, you will certainly find yourself struggling not only in the short run, but the long run also.

Another part of development costs is how much it would cost someone else to build the thing for themselves. This is part of a value proposition. If it takes a hundred hours to build, your customers likely couldn’t afford a custom solution. This doesn’t mean that you can charge near custom prices, but it does mean that the value of your product might be much higher than you give it credit for. Especially if your product solves a major pain point or fills a common need for enough people.

3. The cost of commerce

These are costs that many people just starting out often underestimate or overlook entirely. Here are just a few of them:

  • Payment processing fees – Whether you use PayPal, Stripe, or some other processor, someone is going to take a cut of every single sale you make to cover processing costs. Not factoring that into your price can sting.
  • Refunds and chargebacks – These costs can bite you hard if you aren’t careful. Refunds aren’t too bad, but if you think support costs can eat into your profits, think about what happens when you spend that same time on support and then end up giving the money back. Chargebacks are even worse because you may have provided support and now you are losing that time, the money from the sale, and being charged a fee ($20 to $40) due to chargeback. Ouch.
  • Commerce software – If I were a betting man, and to be an entrepreneur you kind of have to be, there isn’t a free commerce solution that is going to meet all your needs out of the box. This means you are going to be buying plugins or services to round out your online store. I personally spend (gladly) about $1,000 a year to keep my store running the way I want it. That actually is pretty cheap, but those costs can add up.
  • Sales, VAT, and other taxes – This could probably also go under the next category, but as it’s so specifically related to commerce I’ll mention it here. Depending on where you are located and the laws in that area, there are all kinds of taxes required to run a commerce business. Not factoring them into your pricing can cause you lose a lot of money. Not realizing you owe them at all can cost you huge fees in the form of penalties.

4. The cost of running a business

When I started my first business I had no idea everything that was needed. There were requirements on federal, state, county, and the city levels. I assumed there would be federal requirements so I started my research and filings. All of a sudden I started receiving mail from the state, county, and city saying that I owed them all these various fees and had to submit all kinds of filings. It was very overwhelming and these are the kinds of things that make you just want to give up.

In most cases these fees are determined by your revenue, but if you don’t have pricing right and hold back money to cover these fees it can be even more overwhelming than it already is.

And then there are all of these costs:

  • Professional Services – Lawyers, accountants, etc. These professions are vital to your success and I would highly recommend that you secure them. They will help you to not get caught unaware of laws, taxes, or regulation. They will provide counsel so that you can make wise decisions about your business. They are not cheap, but they are worth the expense.
  • Administration costs – While professional services can take much of the burden off your shoulders, there is much more to running your business than just legal and accounting factors. Staffing, project management, continued education, sales and marketing, etc. There is so much that goes into your business and it all takes time and money. Your pricing has to take all of these things into consideration.

There’s more that can be said about business costs, but I don’t want to overwhelm you any more than I may already have. Instead let me offer you one more consideration about pricing, although certainly not the last.

5. What’s are your competitors charging?

Especially in a larger market where a variety of pricing models may exist to guide you, this can be a goldmine of information about what does and doesn’t work. I’m only going to give you one thought on this, though. Assuming you have a product that is comparable or better to the competition:

If the biggest competitor is charging more than everyone else and still growing… charge more.Click To Tweet

I know this is counter-intuitive and may be a little over simplified so let me expound just a little. If people are happy to buy the most expensive product in the space, then it’s entirely possible that there is still room in the higher end of that space. You may have heard it said that the right price is the one that people are willing to pay. Be sure to test that theory in order to have the most profitable company possible.

I’m not saying you should gouge your customers with higher prices for no reason. I’m saying that the space may not have been tested thoroughly enough and you may be underestimating the value your product actually provides.

When we launched Ninja Forms we launched with the cheapest price point in the space. Now, depending on your needs, we are the most expensive. Raising our prices higher than the competition is part of what made us a contender and now a thriving business.

What are some of your biggest considerations when setting prices?