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Pricing Strategy

Developing a Pricing Strategy for my Supplement

Pricing products is one of the secrets of having a successful business. With my product only a few weeks away, it’s time to discuss how I completed my pricing strategy.

Pricing strategies aren’t easy, there are a number of factors that influence the price, that requires careful consideration.

There are many pricing strategies available these days, from the popular freemium (Often seen with SaaS applications) and upsell approaches, monthly recurring billing to the standard straight forward one-off purchase.

Determining the pricing strategy depends on a number of factors, mostly it’s down to your costs and marketing strategy, and ultimately your customer acquisition costs.

When launching a completely new product and brand from there is no denying it’s NOT going to be easy. There is no existing audience to leverage against a name or an existing reputation, so where do you start?

This article is going to look at how I determined the consumer price of my supplement by considering the audience and competition, costs, and different pricing bundles to offer.

Pricing Goods

Perceived Value and Actual Cost

There is a difference between the cost of a product and its perceived value.

Assumptions are made from the price of a product or service, whether it’s cheap or expensive. Think of the difference in buying a coffee from a service station or from your local upmarket coffee shop.

Marketing will influence price and price influences marketing Seth Godin – This is marketing

It should go without saying that selling a product at a higher price needs to have a higher perceived value if it’s going to sell in sufficient quantities.

So, how am I going to increase the perceived value of my Super Greens brand?

There is a growing trend, albeit slowly, for complete transparency in terms of ingredients label. This is achieved twofold; firstly through avoiding proprietary blends and clearly stating ALL the ingredients and their amounts on the label, secondly by third-party testing to confirm the presence of the former.

There is another part to this and that is ensuring that each serving contains the right dosages to support the claims.

You would be surprised, or maybe not if you have read any of my reviews, the number of supplements that overstate their claims compared to the ingredients’ amounts.

first gain a deeper understanding of its current price position relative to consumers’ perceptions. Checking its prices against competitors’ prices on comparable items will reveal actual price gaps. Harvard businesss review

Setting out to produce the cheapest super green supplement would have been a waste of time.

Not only do I believe this to be impossible unless I ordered vast amounts of products from my supplement manufacturer, I also think there is no value to doing this. I mean, what value am I providing to customers trying to shave a few dollars off the cheapest super green on the market?

There is a lot more to pricing power than just adjusting prices, so much so that simply reducing prices doesn’t always mean more sales. In fact, reducing prices too much may well devalue your product and reduce its perceived value.

Perceived value versus the cost

What is the Competition Charging?

When researching Super Green supplements, I found the price of a single tub varied from $30 USD to over $120 for a 30-day serving amount. I’ve discussed this before but some brands advertise as a monthly tub but to take the recommended serving and to get enough ingredients you need to take 2-3 servings per day (Green Vibrance is such an example).

I segmented the competition into three to identify the brands that were “cheap”, “average” and “premium” categories.

[table id=11 /]
PLEASE NOTE: Just because a brand is in the “premium” category DOES NOT MEAN its better than other brands in the “cheap” or “average” categories.

I did this to see if the premium brands had any additional “features” or ingredients that made it more of a premium brand. In reality, many of the cheaper brands had as many, if not more ingredients, albeit they were mostly in lower quantities.

Low ingredient amounts are not seen just in cheaper super greens though, many premium super greens fail to deliver the proper ingredient dosages as well. This is why I believe many supplement companies are using clever marketing tactics to disguise the fact there just aren’t enough of the ingredients to make them effective. – I discuss why in more detail in my article here.

Cheaper or Premium Super Green?

I am expensive T-shirtMy goal has always been to produce a premium supplement, something that I would be happy for my family and friends to see my name next to it. If my family are happy then I’m sure my customers will be; after all, as I’ve said before I will be taking this daily as well.

So, what makes my product premium?

Clearly slapping a higher price tag on the brand doesn’t immediately make it premium.

Premium products exude quality, it stands out and lives up to its claims. I believe my Super Greens brand does this, primarily in having ingredients in the correct dose with complete transparency about the full ingredients.

Once you have a quality product, you then need to think carefully about the design and branding and pitch it at a level expected of a premium product.

Aiming at the premium end of the market gives you your price range, and that is between $70 and $100 per month.

Having a higher price point also means being able to commit resources to supporting your customers and of course have premium products come with premium advertising budgets.

There is a clear advantage of focusing at this end of the market, we’re not looking to sell huge volumes to make a sustainable and profitable business. Selling 1,000 tubs per month would give you a turnover, that most businesses would be very happy with.

Having a higher price point also means being able to commit resources to support your customers and of course have premium products come with premium advertising budgets.

Who Are My Customers?

I outlined my target audience for my supplement brand in another article. But briefly, it’s aimed at both men and woman between the ages of 35 and 55 years of age, they are busy professionals that know the value of good nutrition and long-term health.

The main question is, can my target audience afford my supplement at the price point I aim to use?

Certainly, they can.

My target market is reasonably affluent, married with most likely both couples working in professional jobs.

What Are My costs?

So, although I want to be transparent in my journey of creating a new supplement brand from scratch, some parts need to be kept under wraps and are the case for my exact costs – as this information will be part of a possible course on the subject at a later date.

What I can say is, the per unit price of the supplement is not cheap, I have been very particular with ensuring ample quantities are contained within the formula, pushes the price up into the $12-$25 price range.

It is important to realize that the per-unit cost of manufacturing each tub is but one part of the cost of selling your supplement.

Other costs to factor in include; payment processing, fulfillment, returns, labor, such as customer support, shipping, and of course marketing. These additional costs can easily double or even triple your basic unit cost!

Determining price

How to Price Products

In an ideal world, you would know exactly what your customers are willing to pay for your product. When first setting out this isn’t the case, but the next best thing is to check out the competition, assuming there are competitors who are actually selling.

One of the most important numbers to know in ANY BUSINESS is to know your true costs for each unit, the accounting term is the Cost of Goods Sold (COGS) or the cost of doing business.

Source: https://www.investopedia.com/terms/c/cogs.asp

This metric is what tells you your overall company gross profit.

It is essential you know this if you don’t you run the risk of not being in business for long!

Mark-up

Mark-up is often misunderstood and often confused with margin. Mark-up is the amount by which the cost of a product is increased in order to derive the selling price. And margin is sales minus the cost of goods sold

When you know your per-unit price, how much do you mark up the price?

Traditional mark up prices vary incredibly from 2 times to 10 times your unit cost depending on type of product, if you manufacture yourself or drop shipping, and the competition.

Considering the Super Greens competitors in the market, a mark-up of 5-6 times the manufacturing cost is about right for this type of product.

Remember, it’s easier to lower prices than to increase them. Therefore, in my humble opinion, it’s much better to have slightly higher prices when first testing the market.

A really great read on how to price your products, check out this article on Inc.com

Pricing Bundles

A common pricing strategy is to offer similar products together or more of the same product in a bundle for a discounted price. This approach is great for encouraging a higher average order value (AOV) from customers as you persuading them that the discounts are just too good to ignore.

Considering the increase in the cost of customer acquisition online, then offering pricing bundles can be a great way to increase profit. This approach can also be used with an upsell path that persuades someone to buy even more of the same product for an even bigger discount.

Most super green competitors use two or three pricing bundles, where the price of a single tub looks higher and the three or six tubs give considerably better value.

Examples of Super Green Pricing Bundles

This one from Detox Organics that shows prices for one, two or three tub bundles.

Detox Organics Pricing

Another similar example from Yuri Energy Greens with one, three, and six jars. Note the different order and the option of recurring billing for each of the multi-jar bundles.

Energy Greens pricing

The last example is from Athletic Greens, they take a different approach with only two options, one-off trial price order and a recurring monthly subscription.

Athletic Greens pricing

Some brands also offer a recurring subscription option too, alongside one-off purchase options. Yuri Elkam Energy Greens takes this approach, but personally, I find there are too many options on offer and it can be confusing (see the below where I discuss the problem of too many choices!).

Athletic Greens takes a different approach and offers only two choices, you either want to try their product and so opt for the “trial pack”, or you sign up to the monthly recurring option to have this sent every month.

This approach is very clean and offers a simple choice for customers.

The Paradox of Choice

Confused Jackie ChanWe are often led to believe that having lots of choices is good for us. But can having too many choices mean the opposite, and actually be bad for us?

Or to be more precise and relevant here, is it bad for e-commerce conversions?

In a culture where the number of options available to us increases and frequently changes there is a very real phenomenon called the “Paradox of Choice”. Having too many choices can lead to a paralysis in decision making when purchasing.

This can be seen with the proliferation of review sites online (hey I even review some products on this blog!) and in print for consumer brands.

Multiple product bundles are a popular approach when selling supplements, as highlighted above. Considering the potential for confusing customers with offering too much choice, then two or a maximum of three pricing bundles makes sense.

Pricing Bundle Order is IMPORTANT

If you’re selling two or three pricing bundles, then the order they are presented to the buyer makes a HUGE difference to the conversion rate.

There is data to support structuring the most expensive first, then the recommended plan second with the cheapest option last helps to increase the number of purchases for the recommended plan conversions.

Why is this?

Well, it’s believed that a contrast effect is at play, which works by placing what looks like an expensive product nearer to what seems like a more appealing price.

I use the Energy Greens bundles example above and change this – it’s worth considering that how the price is displayed on these bundles will certainly influence conversion rate too. But you get the idea of the example here.

Pricing Bundle Suggestion

Neil Patel has an excellent article on how to make an expensive product look more appealing – not that I am saying my product is expensive!

Taking a look back at the pricing bundle examples above, the order of the pricing bundles would appear to be completely wrong. Both Detox Organics and Yuri Energy Greens show their cheapest one tub/jar first. The orders differ when comparing the most expensive package, with Detox Organics showing this last and Yuri Energy Greens placing this in the middle.

Based on the reported evidence, both these companies may find higher conversion rates if they changed their pricing bundle order – of course, all these things need to be split tested!

Straight Sales versus Ship and Save

Most Super Greens on the market seems to offer two purchasing options; the one-off purchase of one or more tubs, or the “Ship and save” option – mostly referred to as the monthly subscription option.

Although Amazon has been offering the “ship and save” model for some time, the continuity model got a bad name when some naughty supplement companies used this to trick the customer into signing up for this monthly recurring billing in the knowledge that people forget.

To make matters worse, when customers realized, they had been auto-enrolled into a monthly subscription and attempted to cancel, some companies made it incredibly difficult and near impossible to cancel.

It’s my firm belief that doing this is immoral, however, there is nothing wrong with continuity billing, as long as you do it the right way.

Recurring Billing ModelThe right way is being FULLY TRANSPARENT with your customers about when they will be billed, and for what and importantly when and how they can cancel without being shipped another month’s supply and being charged for it.

Many Super Greens offer the “Ship and save” option and as it’s a product that should be used continually to really reap the benefits this makes sense, it’s just the cancel process should be easy and transparent.

I mean who buys a multivitamin for just one month and stops?

There is another issue with the “ship and save” option and that is that many merchant processors don’t like it – especially if you’re a new merchant.

Too many dodgy free trials promoted by merchants and affiliates have caused too many upset customers from using less than honest marketing practices. This caused merchants and processors alike to lose money and as a consequence, it’s become a lot stricter when applying for this billing option.

In fact, some credit card companies have stopped offering this altogether for some business types. Mastercard are now not allowing continuity billing with physical products.

Advantages of the Recurring Billing Model

The main advantage of a recurring revenue model is having a consistent revenue stream, you’re not relying on always acquiring new customers for one-off purchases.

A more consistent revenue means scaling the business is easier, which makes reinvestment and growing much easier. It also makes the business a lot more attractive for external investors or for selling should I wish to exit.

A subscription-based modal also means that you have a larger customer loyalty base that can be leveraged, your loyal customers become your brand ambassadors and spread the word amongst their family and friends.

Drawbacks of Recurring Billing

The advantages of having recurring revenue are tempting but you can’t ignore the drawbacks of this model.

Implementing a recurring billing model is not straight forward, you will need a more complex billing system and the staff to manage it and the number of chargebacks could increase.

The number of customer chargebacks may well be higher too, and you need to be on top of customer support as delays in canceling customer billing will lead to upset customers and the unavoidable chargeback – You don’t want too many chargebacks, or you risk having your merchant account closed!

Lastly, as already highlighted above, some credit card and payment gateway companies are not keen on this billing method and won’t allow it.

Wrapping Up

There are many misconceptions regarding pricing strategy. It’s not about making it as cheap as possible, that is often described as a race to the bottom competing on price alone is a risky strategy.

My supplement is aimed at the premium market with a price point in the $70-$100 USD range and fits in with my intended target audience demographics and with the brands I have identified as my closest competitors.

When I first launch there will be three one-off purchase bundles; one tub, 3 tubs, and 6 tubs. So, the more tubs you purchase the cheaper it works out per tub. Eventually, I will integrate a recurring billing model, that offers a 15-20% discount for customers who sign up.

I am prepared to adjust the pricing and the layout of the bundles based on feedback from testing and customer reviews.

So, with the pricing set the next step is to integrate the shopping cart into the website and integrate the payment processing.

Adam Author

About the LifeHacker Guy

Hi, I'm Adam the founder of the LifeHacker Guy.

I have a First Class Honours degree in Sports Science from Brighton University, specialising in exercise physiology and nutrition. In my youth I was a competitive Triathlete and long-distance runner placing top 10 in most triathlon races I completed.

Since suffering from Chronic Fatigue Syndrome, I moved into web development, after a couple of years I then moved onto developing a number of online businesses. I've recently taken a sabbatical and I'm now looking to make big changes in my life, hopefully this may resonate with you - join me in my journey!

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