Yesterday, I wrote a little about how to sell in markets where there's lots of free stuff available. This is a big challenge for sellers of downloadable products. Since the cost of making and distributing additional copies of "virtual goods" is nearly zero, it's only a matter of time before somebody creates something similar to your product and gives it away for free.

What started off as annoyance for sellers has become a monster problem as consumers have gotten used to getting things for free. In the words of a book I'm reading, Predictably Irrational (which I highly recommend, by the way), your customers have set their "anchors" at the price they expect to pay. Getting them to move from their anchor to the price you're asking can be hideously difficult.

That's especially true when the anchor is set at "free". Predictably Irrational talks about several experiments that show how free is many times more powerful even than prices as low as a single penny.

So, what can you do if your customers are anchored to "free" (or too low a price) for products in your category?

Before we get into that, let's talk a little about the ethics of moving your customers' price anchors. It all starts with this question:

What is a fair price?

A few possible criteria for choosing a fair price for a product include:

  • How much it costs to produce and distribute.
  • How much value it gives the buyer.
  • How much a well-informed buyer would be willing to pay.
  • How many are available vs. how many people want them.
  • How much other alternatives cost.

Are those good criteria?

I think so, as long as they're applied properly. Let's discuss each one.

Reader Comment:
Nikole Fairview said:
It is seriously hard to compete with free, and from the looks of this post, the only way to do it successfully is by working hard, paying attention to every little detail and knowing your market intimately. I think in order to be successful with thi...
(join the conversation below)

How much it costs to produce and distribute.

The more competitive the market, the closer prices tend to move towards this number. If you try to skim off too large a profit margin, somebody else will undercut you and steal your sales.

But outside of commodity markets (where everybody's product is pretty much the same), the cost of production plus a "reasonable" profit margin is a terrible way to set prices.

  • How do you decide (and who decides) how much profit margin the seller deserves?
  • How do you figure fixed costs into the equation without knowing exactly how many of the product will be sold?
  • Should the price decline over time, once the initial cost of developing the product has been covered? If so, when should the price start dropping, and how fast? Why should people who buy earlier pay more than those who buy later?
  • If a product that's inexpensive to create delivers enormous value, why should the customer get a huge benefit while the producer earns only a small profit?
  • What if different producers have different costs? Different economies of scale (ie. costs savings based on how much they produce)? Those with higher costs can't demand higher prices just because they're less efficient.

Don't get me wrong. The cost of producing and distributing a product is an important factor in setting prices. But only when it's balanced with other factors. Simply by adding a profit margin to costs is a terrible way to set prices.

How much value it gives the buyer.

If the "right" price is supposed to balance the benefit of the transaction between the buyer and the seller, then the value the buyer gets should be a major factor. Producers of products that deliver big benefits deserve to profit from the value they create.

When you have a monopoly -- you're the only who selling a particular kind of product to a particular market -- you can push your prices up towards the amount of value the customer gets from your product. This is why people hate monopolies. The "greedy" seller gets most of the value that's created by the transaction.

Let me pause for a moment to clarify that last sentence. If two people make a trade, and each gets exactly the same amount of value as they gave (ie. if neither one could care less whether they made the trade or not), no value is created by the transaction. But if either or both is happier with what they got than what they gave, value is created. Makes sense?

Nearly all honest purchases and trades create value. Combining the two pricing criteria we've discussed so far, a "fair" price is one where the seller gets more money than it cost them to produce the product, and the buyer is happier with the product than with the money they paid for it. And the better those benefits are balanced between the two, the more "fair" the price is.

But there are other factors to consider. Let's continue.

How much a well-informed buyer would be willing to pay.

The better informed the buyer is, the better an idea they'll have of how much value they're going to get from the product. So they'll be able to make a better decision regarding how much they're willing to pay.

This is pretty much the same pricing criterion as how much value the product delivers. The difference is that it simply emphasizes the fact that the consumer is determining how much the product is worth.

How many are available vs. how many people want them.

If only 100 of a product can be produced, but 1000 people want one, the price is going to higher than if there are plenty to go around. That's fair in more than one way:

  • All other things being equal, the people who want the product the most will be willing to pay the most for it. So increasing the price ensures that those who get the most benefit from it get it. (Except that some people can simply afford to pay more, even if they value the product less...it's an imperfect world.)
  • If those who are willing to pay more get the product, then higher prices better balance the value distribution between the buyer and the seller -- the buyer gets more value, so the seller should get more profit.
  • Increasing the seller's profits may enable them to produce more later.

How much other alternatives cost.

This one is complicated. On the one hand, it makes sense to think that it's unethical to charge too much more than other sellers of similar products.

But is that true?

It's certainly not the whole story. Consider this: if it's unethical to charge too much more than someone else, is it also unethical to charge too much less than someone else?

Seriously.

If someone has worked hard and produced something of value, do they deserve to be compensated for their efforts, the risks they've taken, and the costs they've incurred? That feels right.

But if someone works hard to do something they're no good at, and eventually manages to produce a fine product, is society obligated to pay them for their efforts? Even if a comparable product is available for less from someone else? That doesn't feel right.

So how do you balance the two?

I don't think there's a perfect solution. Or necessarily even a very good one.

If somebody wants to give something they've produced away for free (for example Linux, Firefox, Apache, GMail, PHP, OpenOffice, an eBook, this blog post...), there's nothing wrong with that. But there's also nothing wrong with people selling the things they've created (Windows, MacOS, IIS, Microsoft Office...), even if there are free alternatives available.

But does the fact that free or low-cost alternatives exist have any bearing on what price is "fair"? It doesn't affect the amount of value the product delivers. It doesn't affect the cost of producing the product. And with virtual products, it doesn't necessarily affect how much product is available (unless quantities are being restricted artificially).

What it may affect is how much well-informed consumers are willing to pay. Not because it affects their value calculation for the product, but only because it gives them a less expensive alternative. So with well-informed consumers, the effect on prices is purely practical, not ethical.

What if the consumer doesn't know about free or low cost alternatives? Is it ethical to price as if they didn't exist? Is that deceptive?

That's the grayest area in this whole discussion. But I have to come down on the side of the seller in this case. No seller should be obligated to advertise for their competition. If the consumer doesn't put in the effort necessary to find the best available deal, as long as the price they paid is fair otherwise, that's their responsibility.

Moving Your Customers' Anchors

So far, we've established that in some markets, customer expectations are "anchored" to prices far below what would be a "fair" price by any criteria other than the prices of alternative products. If that's the case in your market, you needn't feel any moral dilemma about moving your customers' anchors back to where they belong, or finding ways to break free of their anchors.

So now we get to our main point.

How do you move your customers' anchors? According to the research cited in Predictably Irrational, it's nearly impossible to move an anchor once it's been set.

For example, I still compare today's TV prices to the $200 I paid for my 27" tube TV back in 1995.. And I still compare gas prices to the 97¢ my wife and I paid the first time we drove out to visit her family before we got married.

So a much more practical strategy is to find ways to break free of their anchors completely.

How do you do that?

Positioning.

You need your prospects to see your product in a different category from all the free stuff that's available online. If you can create your own category in the customer's mind, you have a chance to set your own anchors. Or you can position yourself in an established category where prices are anchored higher.

Consider how this has been done in internet marketing. There are actually several categories of anchors, with free slowly eroding the others' footholds. The other anchors are the standard price points that a lot of IM products sell for:

  • the $7 "cheap eBook" category
  • the $27 "smart guy but non-guru eBook" category
  • the $47 "guru's low-end eBook" category
  • the $97 "guru's high-end eBook/audios" category
  • the $197 "guru's low-end system/videos" category
  • ...
  • the $1997 "super guru's high-end product" category

All of these price points are (or at least originally were) based on how much value the customer expects to get out of the product. But here's something ironic. How much would the same information in a physical book typically sell for? Even the $97 eBook would usually go for under $20 in physical form.

What makes that even more ironic is the fact that publishing a physical book is considered more prestigious than publishing an eBook.

Why the price difference? Because internet marketing eBooks are in a different category than physical books, which pretty much all get lumped into the same category (or a smaller set of categories). And the price anchors for those categories were set in a completely different environment than the price anchors for internet marketing training eBooks.

Here's another irony for you. Audios usually have higher perceived value than eBooks, and videos have higher perceived value than audios. But how does the actual value of each compare?

  • Physical books can be carried and read virtually anywhere.
  • Physical books can be marked up more easily than any other format.
  • Text-based products, especially physical books, can be skimmed more easily than any other format.
  • Text-based products can be consumed much faster than audio or video.
  • Text-based products usually contain less filler than audio or video products (which are often simply recordings of live presentations, and contain lots of rambling, interpersonal connection building, and other non-meat content).
  • Text-based products often contain more total content than audios and videos. (A typical audio or video may be one or two hours long. But a typical book takes much longer to read, even though you can read faster than a presenter can speak).

Audio and video products do have their unique benefits, but the advantages of text-based products are undeniable.

Despite the irony, the prices charged for downloadable products may very well be entirely "fair". If a $97 eBook helps you make an extra $5000 this year, who got the better deal -- you or the seller? The typical price of a physical book feels fair, since that's where our anchor is set. But the actual value of many books is much, much higher than what most people would be willing to pay.

How to Position Your Products to Get a Fair Price

Here are a few approaches you might take to get out of categories where prices are anchored too low:

  • Don't fight it -- give away products that are in low-anchor categories, and use them to generate leads for your higher priced products.
  • Position your products against things with higher price anchors. For example:
    • If your compare your marketing training eBook to a college course, $97 will look like a steal.
    • Position yourself as the fairly priced alternative to an expensive product that's being sold by a guru. When you do this, you take advantage of the heavy lifting they've done to differentiate their product from the free stuff.
  • Bundle the product with something that has a higher anchor price.
    • Produce audios or videos, sell at the audio or video anchor price, and tack on the transcripts or a related eBook as a bonus rather than selling it as a primary product.
    • Create software or a service that's related to your product, and use your info product as the training component of it.
  • Build relationships with your customers. Prove your worth and build goodwill. That moves your product from the category of "risky eBook" (or whatever it may be) to the category of "trusted friend's wisdom and experience". Also, they'll see their purchase as part of the relationship rather than just an isolated transaction.

Positioning your product where anchor prices haven't been dropped to zero can help you get a fair price for the value you're delivering. Just be sure you really are delivering fair, or better yet, excessive value for the price you're charging. If you use these techniques to fool people into paying more for your product than it's worth, you'll get more refunds, ruin relationships, and damage your reputation.