Wednesday, March 07, 2007

Business Musings: The Zen of Pricing

Uhg, its been a while hasn't it? *brushes the dust off her blog and dredges out the spam* There we go.

So where was I? Oh yes, the zen of pricing.

So I run a small mall where the rent is fairly cheap and the prim alotment reasonable, and mostly I tend to attract small or new businesses as a result. This is fine, I have no problem helping people with their businesses, especially people who are new to business in SL in general. I actively monitor my mall daily, trying to greet as many as my renters as possible. I like to be on good relations with them, and they with me hopefully. I always check out their products to make sure they are in line with the mall's policies as well as their vendor systems and whatnot.

One thing I notice, particularly about new businesses is a lack of thought regarding pricing. Pricing is a pretty big consideration. Actually, its probably one of the biggest, because a good price is going to dictate how people shop for your stuff and what sort of people are going to buy it. Also, I find a lot of new businesses are all glamored with the notion of 'secondlife can make you rich!" and think that people will pay 500L for a t-shirt. Sorry, probably not going to happen.

Let's put things into perspective, and particularly to new business owners, really think about this when deciding on the prices of your items.

There are re-occuring themes in the kinds of products I see people begin selling. The most common I see are T-shirts and furniture. As a result there are a LOT of people selling T-shirts and furnature. Most of it is obviously made by beginners, and its not exactly designer quality. But that's not a bad thing, some are reasonably cute and perhaps witty, or maybe just interesting. But there are a LOT of the same out there, and I'll be damned if I'm going to pay 150L-500L for a t-shirt. I can get an entire outfit by a much better designer for that price.

Your customers are not idiots, nor are the majority of them rich. If you look at the Economic Statistics that are provided by Linden Labs, you will find that the vast majority of the transactions that go on in today's SL economy are below 100L. The decrease in transactions when you get above that starts getting pretty significant. You also have to keep in mind that most people, unless they are paid members, don't get a stipidend anymore. They have to camp/dance/gamble/beg/work/pay real money to get money in the game. Their money is precious to them, and they don't want to spend it in big amounts on a whim. When you are first starting out, people don't know you or your products and likely your products won't be as good as established vendors, so you can't realistically charge the prices of established vendors and expect people to come beating down your virtual doors to pay huge prices for a silly t-shirt or poorly textured bit of furnature. Remember, unlike in real life, you have a virtually unlimited inventory. After you've made back your upload costs and paid for your retail space, everything is profit.

Another very important aspect of pricing is what your competition is doing. Because you are new and your products are probably not as polished as people who've been in the business, your biggest advantage is your pricing. You are also asking customers to take a risk on an unknown. They don't want to spend a lot of money to find themselves scammed or with a crappy product. You need to spend some time in the shoes of your perspective shoppers and see what the median value is for the product you are offering by different vendors. People like a good value for their money, a bargan is even better. If people feel your product is a good value for the price, they will likely give you a try. People are also lazy. If they can use or buy your product for less time and effort than it would take them to make it themselves, they probably will.

Prices generally are not arbitrarily set IRL, they shouldn't be set that way in SL either. They take into account the costs of the business and manufacturing with various 'markups' between the manufacturer, the distributer and the retailer. Sometimes there is as much as a 200% markup on the product by the time it gets to shelves in a store. While you shouldn't have that much markup on a product, it is a good way to factor a minimum price for an item. Lets go with our T-shirt example.

What's a fair minimum price?
Assuming you are using a template and a previewer, lets say you only have to upload the texture for the shirt once. That costs 10L. Lets say you've rented a storefront in a mall for 50L a week, which is about 7L a day. So lets say the cost of the shirt to you is 17L, cost of upload+cost of rental. Lets add a 50% markup. 50% of 17 is about 8.5, which makes the price 25.5L. Lets round down to make than an even 25L.

You can sell one shirt and make back the cost of your upload and your day's rent plus an additional 8L which is your profit.

But here's the kicker. The next shirt you sell is still 25L, but you've already made back your 10L for upload, so you are only making up your daily rental cost which is 7L. So now, with every t-shirt you sell, you are making 18L of profit. You are now making well over your 50% margin on each shirt. The price is firmly within the 'most often purchased' price bracket, and we can assume that you probably have more than one shirt for sale. With a price of 25L, most people are comfortable purchasing a couple of items from a shop, even a new one. The likelyhood of sales is very good as it is cheap enough to be in the 'impusle buy' category, where people just see it and buy it, without having to save up for it or come back later with a friend to buy it for them. If people have to go and come back, your likelyhood of sales as a new vendor go down fairly drastically.

Some items, like skins or avatars might take a lot more than one texture to upload or many hours of labor, and possibly outside fees to scripters or other artists. While some of these can be delt with by profit sharing, the entire cost of the avatar or skin should be factored into the price. This is why entire avatars and skins tend to be fairly expensive. I've spend well over 300L on uploads alone for a few I've done. But people tend to be willing to pay more for full avatars or skins because they are expensive in general, but are not so willing to pay the same kind of money for a T-shirt or a table and chair they could make themselves.

Pricing Levels
This is of course not to say that everything you make should be 'cheap' so to speak. If you want to have some expensive items in your store, that's fine. The more affordable items will bring shoppers around to look at the more expensive ones. Vendors often use freebees or 1L items to bring shoppers into a store or as a 'free sample' to build trust with customers that their products are quality products that they want to buy.
However, even with 'expensive' items, you have to keep in mind the market pricing for such things, keeping yourself inline or below what your competition is offering is important for you when building a clientbase. Remember, you can always increase your prices on new offerings as you go along and improve your skills and niche in the market you are tapping.
Other pricing tricks with expensive items is putting it a few L below an even number, so for example, offering something at 799 looks more attractive than 800, or 99 looks better than 100, although I'm personally a fan of even numbers.

Everyone loves a deal
Another way to offer your products at a higher price for a single purchase is to group your items into sets and offer them at a slightly lower price than if you bought them individually. For example, lets say you have 5 elemental t-shirts. (Earth, Air, Fire, Water, Metal). You sell them each individually for 25L (as noted above.). People like to buy things in groups and get a deal. This is how bulk sales work in the real world. Buy in quantity, get a better price. So say we create the 'Elemental Pack', which is all 5 t-shirts in one purchase. Normally it would cost 125L to buy all the shirts individually, so, we sell the package for 110L. This way it becomes a better value to buy them as a bundle for a higher price than individually. This creates further value for the customer to buy in 'sets' from your store, increases your 'big sales' while still creating value for your customers and profit for you.

Can you make profit with lower prices?
Yes, yes you can. Why? Because you sell more. Case in point: Walmart. It also works in secondlife. I can attest to it as I sell eyes for 25L. I sell a LOT of eyes for 25L. I make more than enough to pay for my land, my premium membership, and I have leftovers. Could I make a living? Probably, if I offered more products more frequently. I just don't have time to be as serious about my SL business as I'd like. As you sell more, people show your stuff around. They ask people where they got it, people pass along landmarks or names of shops and other people find your stuff. If you are good maybe even some of the fashion bloggers will stop by and see some of your wares. Its not going to happen overnight, and its also not going to happen without work promoting, writing classifieds, creating mailing groups to track customers, making lots of new and cool products, refining your skills, and doing some personal marketing, but its a good start and greatly increases the chance of people actually buying your stuff when they visit your store.


At 3:17 PM, March 07, 2007, Blogger Matthew said...

Awesomely useful post. Thanks


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