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How to Price Digital Products – 8 Pricing Models

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Key Takeaways

  • Subscription-based pricing allows customers to purchase companies’ offerings for a set duration, commonly on a monthly or yearly commitment. It is suitable for online courses, software, community access, and streaming services.
  • Usage-based pricing charges customers based on actual usage but presents scaling and revenue prediction challenges.
  • Per-user pricing offers simplicity and scalability but may lead to revenue loss due to shared logins and might not accurately reflect product value.
  • Tiered pricing provides various package options, aiding upselling opportunities, scalability, and maximizing customer lifetime value.
  • Fixed or flat-rate pricing simplifies communication but might not suit complex SaaS companies with feature-rich software.
  • Competition-based pricing references competitors’ pricing and is suitable for established marketplaces but can lead to a race-to-the-bottom pricing model.
  • Value-based pricing is based on perceived value and customer satisfaction, allowing for higher prices but potentially narrowing the audience.
  • Cost-based pricing considers production and distribution costs, ensuring a justified price point, but may lead to low pricing and hinder scaling.

Subscription-based Pricing Model

The subscription-based pricing model allows individuals or businesses to buy and enroll in a vendor’s offerings for a set duration in exchange for a predetermined fee. Typically, customers commit to these subscription services monthly or yearly.

There are four different and most commonly used types of subscription pricing models. Usage-based, per-user, tiered, and fixed or flat-rate pricing.

The subscription-based pricing model works best for online courses, community access, business tools, software, streaming services, and platform access. For content or tools that are constantly developed or give new value to customers.

Usage-based pricing

Usage-based pricing models, often referred to as “pay-as-you-go,” charge customers based on their actual product or service usage, which is more common in IT and telecommunications companies than in SaaS businesses.

While such models are considered fair to customers as they pay in proportion to their usage, they pose challenges for sellers. Scaling is challenging because pricing cannot vary based on business size, potentially resulting in smaller businesses paying more and larger enterprises paying less based on usage.

Moreover, predicting revenue and forecasting becomes complex as it’s challenging to anticipate a customer’s future usage patterns.

Per-user pricing

Many businesses opt for a per-user pricing model because it offers simplicity and scalability as their customer base expands. This approach, based on the number of users, aligns with a company’s growth, necessitating plan upgrades.

It simplifies revenue forecasting for sellers and is commonly employed by SaaS companies. However, it has drawbacks, such as the potential for revenue loss due to employees sharing login information.

Furthermore, per-user pricing may not accurately reflect the value of the products or services offered, as the price for a specific number of users doesn’t necessarily align with the inherent value, which factors like increased sales, user adoption rates, and customer satisfaction levels should influence.

Tiered pricing

A tiered pricing model offers customers various package options and features, allowing them to select the most suitable one. It’s commonly employed by SaaS companies and e-commerce businesses, offering flexibility to both buyers and sellers.

Buyers can choose from different pricing packages, while sales teams can seize upsell opportunities by presenting additional package options. This model is favored for its scalability, broader market reach, and the potential to maximize customer lifetime value through plan upgrades.

To implement a tiered pricing model effectively, businesses should ensure distinct differences in features or access levels among packages to help customers understand pricing and product value.

Fixed or flat-rate pricing

The fixed or flat-rate pricing model offers subscribers a single price for all products or services, with access to all features and monthly or annual charges. This model suits companies with products of limited capabilities but may not be affordable for smaller businesses or comprehensive enough for enterprises.

It simplifies pricing communication and is effective for products addressing common pain points. However, it may not be suitable for complex B2B SaaS companies with diverse customer needs, as setting a fixed price for feature-rich software is challenging.

What to consider when choosing a subscription-based pricing model:

  • What pricing model do your competitors use?
  • Is the pricing model in alignment with your operational or production costs (fixed and variable)?
  • Who are your idea or current customers?
  • Does the subscription pricing model suit the digital product you are offering?

Competition-Based Pricing Model

how-to-price-digital-products-competition-based-pricing-example-pricing
Competition-based pricing is mostly visible in established marketplaces. All of the products shown in the image are from different creators and companies. Image credits.

Competition-based pricing model is a model that involves setting prices for digital products based on competitors’ pricing. To use this pricing model, you need to do thorough market research on your competitors and use their pricing as a reference point for determining the prices of your products.

The competition-based pricing model is best suited for already established marketplaces where your product is one of many. A good example would be Creative Fabrica, Etsy, or Gumroad. In the mentioned marketplaces, elevating your brand isn’t easy, and asking for significantly higher prices (compared to your competitors) will most likely hinder your sales.

Ways to do market and competition research:

  • Research the average price point your competitors use to sell their products.
  • Read competitors’ product descriptions and see what they are offering.
  • View competitor’s product images, branding, fonts, colors, etc.
  • Does your competitor use video or images to do marketing?
  • Are your competitors executing any active Meta or Instagram campaigns?

After doing extensive analysis, how can you differentiate your digital product from the rest of the market? What can you offer in terms of pricing that customers would opt to buy from you?

Pros

  • Low-risk approach.
  • In line with your competitors.
  • Easy and fast pricing model to execute.

Cons

  • It can easily become a race-to-the-bottom pricing model.
  • The price might not reflect the true value your digital product offers.
  • You attract specific pricing level-oriented customers.

Value-Based Pricing Model

Value-based pricing sets your digital product price based on the perceived value of your product rather than production costs. It prioritizes quality and customer satisfaction, allowing higher prices to reflect customer benefits.

The most common form of value to customers is the overall satisfaction they experience from acquiring and using your product. Buyers seeking higher-value products should expect to pay more, while those aiming for lower prices must be willing to forgo certain benefits.

Example: A block of brick: How you use the brick determines the value of the brick—paperweight vs. building a home.

Pros

  • You can set the price according to the real value the product offers.
  • You can easily control the profit margin.
  • You can ask above the average market price.
  • It has a larger profit range than with other pricing strategies.
  • You can attract high-price-oriented customers (which tend to be higher-value customers).

Cons

  • Higher pricing narrows down the audience.
  • Your perceived value can differentiate from your customer’s perceived value.
  • Asking too high a price can hinder sales.

Cost-Based Pricing Model

In the cost-based pricing model, prices for digital products are determined based on the actual production or distribution costs involved in creating and delivering the product.

Even though we talk about digital products, they still have production and distribution costs.

For example, selling your digital product through a service like Podia does accrue costs. Also, creating the actual product with some design software like Adobe or Canva will cost you every month.

Costs to consider when executing a cost-based pricing model:

  • Sales taxes for digital products.
  • File hosting fees and general platform fees.
  • Sales transaction fees (Stripe, PayPal, platform).
  • Software expenses (Grammarly, Adobe, Canva, etc.) (for creating the digital product).

Pros

  • A justified and reasoned price point.
  • Does not require market research.

Cons

  • It can be hard to make a profit with this model.
  • You might forget to take into consideration all possible business expenses.
  • The price point can become low, hindering scaling your business.

Brand-Based Pricing Model

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The top example is from Creative Market, and the bottom is from Oliur. Both are selling Lightroom presets, one with a clear brand advantage and one without it.

The brand-based pricing model revolves around setting prices for products or services based on the perceived value and reputation of the brand itself. Rather than relying solely on production costs or competitor benchmarks, this approach leverages the brand’s image, recognition, and consumer trust to justify premium prices or create a sense of exclusivity.

The brand’s strength is pivotal in influencing customer perception, allowing you to command higher prices and cultivate a loyal customer base.

When you price your digital product low, you send a signal to the customer. When you price your digital product high, you send a different signal to the customer.

Pros

  • The brand’s image easily justifies higher prices.
  • No absolute limit to the asking price.
  • Increasing brand value enables you to increase prices.
  • Higher pricing can increase the brand’s perceived value.

Cons

  • It takes a lot of time and effort to build a brand.
  • Brands’ views of themselves vs. the view of the customer might differ, which creates price variations and challenges in implementing the brand-based pricing model.
  • Lower pricing can decrease perceived brand value.

Offer-Based Pricing Model

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Having an offer-based pricing model can create urgency and fear of missing out on the prospect. The offer can be an evergreen one.

An offer-based pricing model is used when you want to entice your customers with a limited-time offer or a sale, creating urgency inside the prospect.

By customizing offers and discounts, you can entice customers, maximize sales volume, and foster long-term loyalty. This pricing approach aims to create a win-win situation where customers feel valued and you can optimize revenue generation.

Different offer types to use with an offer-based pricing model:

  • Tripwire: Selling a low-ticket item (irresistible offer) before upselling the main digital product.
  • Upsell, downsell, cross-sell: Offer another digital product with a reduced price after the checkout or if the prospect is leaving your checkout page.
  • Bundle: Combining multiple digital products to be sold as one product.
  • Sales, promotions, and discounts: Flash sale, holiday sale, Black Friday sale, limited-time offer, one-time offer (OTO), self-liquidating offer (SLO (used when running ads)).

Pros

  • Offers are always considered better deals.
  • Creates urgency and FOMO (fear of missing out).
  • Can increase sales volume.

Cons

  • Cuts profits.
  • It can devalue your brand’s image.
  • Can attract price-oriented customers vs. value-oriented customers.

Pay What You Want Pricing Model

how-to-price-digital-products-competition-pay-what-you-want-model-example
Gumroad is one platform enabling you to offer digital products with the pay-what-you-want model. Image credits.

Pay-what-you-want (PWYW) pricing lets customers decide what to pay for your product. This inclusive model gives customers the power of choice and can attract unexpected buyers who love your content. The key is being a content creator with a significant following to sell digital products.

Pay what you want pricing model is about sales psychology and how willing people are to set a price by themselves for your product.

If customers see your product worth paying for, they can set a price before the checkout process.

Pros

  • You get market feedback for your product, which can automatically signal which price is correct for that particular product.
  • Customers determine the price of your product.

Cons

  • You might make $0 sales more than you would like.
  • You need a significant following to make this pricing model worth it.

Option-Based Pricing Model

how-to-price-digital-downloads-competition-option-based-pricing-example
The option-based pricing model enables you to customize the digital product offering to different customer needs. Even though the example is about membership, the deliverables are mostly digital products. Image credits.

Option-based pricing is all about giving different options while keeping the core offer roughly the same. In option-based pricing, you usually create three different pricing tiers (low, middle, and high). While the three options are all different, the core product tends to be the same.

Customers create associations with prices:

  • Low: I’m better than that.
  • High: I don’t need that much. The most bought option (unsurprisingly) is the middle-priced product. In option-based pricing, it’s all about customers association with pricing tiers.
  • Middle: I’m fine at this level.

Pros

  • Customers love options.
  • You can customize the digital product offering to suit different customer needs.
  • You can increase profit margins with a high-priced option.

Cons

  • It can become unmanageable if there are too many options.
  • Options can create confusion among the customer.

Feature image credits.

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Okuha

Digital Artist

I’m a digital artist who is passionate about anime and manga art. My true artist journey pretty much started with CTRL+Z. When I experienced that and the limitless color choices and the number of tools I could use with art software, I was sold. Drawing digital anime art is the thing that makes me happy among eating cheeseburgers in between veggie meals.

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