Price Versus Value for Digital Products

July 10, 2008 at 8:06 pm 6 comments

As an introduction, I own my own online business, called Vanishing Point, which makes and sells digital content for use in artwork an animations. We like to think that the prices of our products are competitive with other websites. However, there is a large segment of the market who thinks that every website should participate in “price wars” and match (or beat) the prices of every other website. If one site charges $1.99 for their products, then a second site should match with either the same $1.99 pricing or a “90% off sale”. While this is good in theory, it’s very bad in practice.

The first issue is costs and expenses: digital products may not have the same “costs of goods sold” as physical products, though they do have the cost of the time it takes to develop, test, and upload the product. And like any other business, websites have expenses to cover, such as employee salaries, utilities, and the costs of computers and software.

As the prices of the products are lowered, the income for the site is also lowered. Yes, there are plenty of ways to increase income by adding more products or getting more customers, but is it in the best interest of the website to simply match pricing with another site?

For example, suppose a website can sell its digital products for $1.99. Should other websites match its pricing, even though they may sell similar (or better) products for $10 or $20 or even $30?

Value for the money

Personally, I think there is a huge difference in the perceived value of a $30 product versus a product priced at $1.99. I expect a lot more from the $30 product than a $1.99 one, even if the products are similar. And if I’m spending $30, I want to make sure I have a use for the product.

As a side note, I definitely think there is room in the market for both a $30 product and a similar $1.99 product. Almost by definition, the $30 version will have more features than the $1.99 version, and both products will fill the needs of customers. Some customers will need the $30 version for their animation projects and some will simply use the $1.99 version as a way to fill out their scene.

However, the issue here is that people expect the $30 feature-rich product to be priced at $1.99.

If the product is only $1.99, will people expect much (or anything) from it? Or will they throw it out and think, “Eh, I paid $1.99, so what if it doesn’t work”? Or will they purchase it, download it, and never use it, again thinking, “Eh, I paid $1.99, so what if I never use it.”

Either way, they haven’t put a value on the product: to them, $1.99 is a fair price for a disposable item.

The next issue is how the $1.99 pricing affects the perceived value of the market in general. Digital models are designed for use in a number of graphics programs, including 3D Studio Max, Lightwave, Poser, and Vue d’Esprit. Generally speaking, 3D Studio Max and Lightwave models are priced in the $40 to $50 price range, and usually more. Poser and Vue models are priced in the $10 to $15 price range, and sometimes less.

Poser and Vue models also usually include more features than the 3D Studio Max and Lightwave versions. For example, these models might have more moving parts or they might have more texture or color options. Animal models for use in Poser are always “rigged” and can be easily posed, but animal models for use in 3D Studio Max and Lightwave are usually not “rigged” in a similar manner.

Yet the Poser and Vue versions are priced significantly less than the 3D Studio Max and Lightwave versions.

And even though these models have more moving parts and have more color options, some people complain that a $15 price is “too expensive” when compared to a $1.99 price. Okay, yes, $15 is more than $1.99, but $15 is also less than $30.

Over the years, this “too expensive” thinking has caused the price-point for Poser models has been driven lower and lower. Many Poser users are hobbyists who may not have the money to spend on a $30 model. And unlike many 3D Studio Max and Lightwave users, they probably won’t be using it in a commercial project where they can charge the cost of the model to a client.

However, does this justify lowering the price to $1.99 instead of $10 or $15? And if the leading websites continue to price their products at $1.99 (or have “90% off” sales), what does that do to the larger market? Will customers expect every product to be this price? Will customers not buy unless the product is priced at $1.99?

Craftsmanship and the merchant’s income

This pricing method seems to ignore the concept of paying for the craftsmanship: how many hours did the merchant spend making his product? How many sales, at $10, will it take to pay for his efforts? How many sales will it take at $1.99?

Let’s say the merchant spent 30 hours making a car model. Now let’s say he only pays himself around minimum wage, but let’s use $6.00 an hour to keep things even. This means that the car model is worth $180 of his time.

Let’s also assume that he prices his car model at $10. He could probably charge more, but he figures this is a good balance between what he thinks it is worth and what he thinks customers will pay for it.

At the $10 price, he’ll have to sell 18 copies to pay for his time (assuming he gets the full amount). If he sells it through a brokering site and they give him a 50% commission, he’ll have to sell 36 copies.

If the site gives him a 50% commission rate but sells it for $1.99, he’ll have to sell 180 copies to pay for his time. Is this realistic? Can he (or the website) sell 180 copies?

Yet many customers only see the price tag (usually only the $1.99 price tag) and may not think about how the merchant is compensated for the time it took to make the car model.

Some websites avoid this issue by paying a merchant a large up-front payment for the product. In this example, they may pay the merchant $300 for his car model, which comes out to a rate of $10 an hour. Then, the website assumes all the risk of making back the $300 they spent on the model.

Will they make their money back? Probably, though it may a few months or more. Since they now own the product, they can price it at $24.95, then run a half-off sale (which is still more than the original $10 price), and then they can price it at $1.99.

This leads back to the original point of competing on price: if your website has to pay a merchant a 50% commission rate on his $10 product, will he agree to price the product at $1.99? His commission drops by one-fifth: from $5 to $1.

And if every product is priced at $1.99, where’s the incentive for merchants to innovate and make better products or better images? Why add realistically moving parts to your car model, or make a photo-real image to show it off, when it’s going to be priced the same as someone else’s plain chair model?

Don’t compete on price

Competing on only price is a losing battle: there will always be someone who can price their products lower than yours. If you decide to price your products at $1.99, what happens when your competitor prices his products at $1.50? Do you match his prices? What happens when a third competitor advertises that they’re selling everything for $0.25? At what point do you give up competing on price because you can’t make enough money to cover your expenses?

As a side note, you have no idea what’s going on behind-the-scenes at your competition. Maybe their $1.99 pricing is actually a “loss leader”. For example, maybe their parent company is making tons of money in a completely separate industry. Or maybe they have a consulting division which can cover any losses they may take from the $1.99 products.

If this is true and they’re actually losing money from their $1.99 pricing, does it make sense for you to match their pricing?

Instead, the solution is to focus on the other reasons why people should buy from you. Maybe you have a wider range of products or maybe you can offer “bundles” of similar or related products. Maybe your products include more features than what’s offered by your competitor. Or maybe you market your products to the people who want feature-rich products and who are willing to pay more than $1.99.

Or do you offer better customer service? Maybe you answer customer e-mails and questions quicker than your competitors do. Maybe you offer to help solve your customers’ issues rather than simply giving them a refund without even knowing what the problem is.

A good example of not competing on price is iTunes. People can get digital music files from a variety of sources, including getting them for free from not-so-legal sources. Yet iTunes has become the second-largest music retailer in the United States. Is it really because their prices are lower than everyone else’s? (You can’t get lower than “free”.)

Or have they figured out better ways to serve their customers?

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Entry filed under: Digital Goods, Vendor Advice. Tags: , , , , , .

Why do elitists look down on the use of Poser?

6 Comments Add your own

  • 1. Khai  |  July 10, 2008 at 8:39 pm

    Good article and I agree completely… the only problem being getting the customers to understand this… they just want cheap cheap cheap…

    Reply
  • 2. RobertValentine  |  August 11, 2008 at 5:27 pm

    I was originally going to post a large pose set for SP3 on Renderosity. For the longest time the average price for about 60 to 80 quality poses was around $12.95.

    Now they are selling them 420 for $8.00

    2 or 3, high quality and anatomically correct poses take about an hour or so to perfect and make sure they look good from every angle….therefore (at above price) you would get less then 2 cents per pose. Sorry…not worth my time.

    Price blasting doesn’t keep things competetive in the marketplace….it kills the marketplace.

    Reply
  • 3. Philgreg  |  October 2, 2008 at 10:01 am

    I’m a fan of JHs work, wwe are in the forum at 7th complex together and I frequent VP regularly. however,

    Price is an issue. I understand that artists make models and they deserve to be paid for them. However charging upwards of $10 per item is unrealistic especially in the current climate.

    why not charge something that will enable 20,000 people to be able to afford the item instead of just a few hundred people?

    When I get uv mapping sorted I’ll be selling all my props for a dollar. simply to attract volume sales. If i make $200 from making one prop.. its more than paid for my time.

    Reply
  • 4. Jen/Ruby Dragon  |  March 19, 2010 at 12:36 am

    Great article: and I agree with you, Mr. Hoagland.
    Not only have I been working in retail outlets (for nearly 10 years), I have been trying to “make my mark” as a Poser vendor for quite some time, as well. It’s been a struggle, and nothing I do seems to get anyone’s attention. It saddens me greatly, but what do you do? (Haha!) Everyone has their own view on things!

    In my humble opinion, customers in the past few years have seemed to develop this disease-like attitude: “Everyone wants things FASTER! FASTER! RIGHT NOW! I can’t WAIT! I want it NOW!” They want their services faster, their cars washed in 5 minutes, their cheeseburger meals in under 30 seconds. What I’ve come to learn, in my young life, is that if I don’t “take the time to do something properly, I won’t appreciate what I’ll come to have.”

    Sadly, I see this train of thought all the time, when it comes to pricing. Our local Wal-Mart store is a great example. A customer was boasting to us [today in fact], about how “they’ll buy [product] at Wal-Mart, they’re CHEAPER anyways, there!”

    I didn’t have the heart to tell him that I’m friends with people who work there, and they attest to the products there being so “inexpensive,” you truly do only “get what you pay for –” meaning, “If you want to spend little money, don’t get your heart set on big quality.”

    Digital modelers and artists have a huge task at hand: doing something they love, and yet they need to work with “what’s new, what people want, what’s in” and “what hasn’t been DONE yet!” It’s not an easy job, no matter how you look at it. (*Not speaking from experience, I don’t believe I’m a hugely great artist HAHAHA!) *These artists are worth their weight in gold as experienced, talented, creative, patient, independent, business people – whom I can only wish people will some day realize these things, without putting a greed-induced price tag on things.

    I do carry on, forgive me 🙂

    Reply
  • 5. My Views on File-Sharing « JHoagland’s Weblog  |  September 26, 2010 at 5:53 pm

    […] the price of your product. And, of course, lowering your price leads to more issues, such as the price versus value of your […]

    Reply
  • […] sales, I continue to wonder how this affects the overall marketplace. See my first blog about Price Versus Value for Digital Products for some of my early thoughts, but this time I want to talk more about pricing from a seller/ […]

    Reply

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