Is the Price Right? Pricing Strategies for Interne

Is the Price Right? Pricing Strategies for Internet Businesses

by: Simit Patel

You may have the greatest product/service in the world, but you won’t get anywhere if it isn’t priced properly. In this article, weกll explore various pricing strategies so that you can find the one that is best for your business.

Generally speaking, there are three primary pricing strategies Internet firms employ: POPS, CAPS, and VAPS. Each strategy is explored below. If properly implemented, these strategies can help firms under price their competitors while being just as profitable.

Physical Object Pricing Strategy (POPS). This pricing model works well if you are selling a physical good that needs to be shipped to your customer. For instance, merchants like Amazon.com and WalMart fall into this category.

In order for such firms to determine their prices, they need to start with a base level of what it costs them to produce and deliver one additional unit (this number is known as the marginal cost). For instance, WalMart sells microwave ovens. What does it cost them to produce an additional microwave oven? What does it cost them to buy it from their supplier, put it in their store, get the customer to come to the store, and execute a transaction with their customer?

To determine their final price, firms should add a percentage increase to the marginal cost. This percentage increase is known as the operating profit margin. To find out what percent they should use, they should look for similar firms, and try to price accordingly. Amazon, for instance, has an operating profit margin of 6% at the time of this writing. Competing retailers should look to have a similar operating profit margin preferably lower if they are able to.

KEY IDEA: Firms that can develop the most efficient business processes will be able to minimize their cost, which in turn will allow them to keep prices low while still retaining attractive margins. This will allow them to offer lower prices but still enjoy the same level of profitability.

Cost of Acquisition Pricing Strategy (CAPS). POPS works very well if your primary cost is the cost of the actual good that you are delivering. But firms that are selling a product/service where the primary cost is marketingbased meaning the costs associated with getting visitors to your site may benefit from utilizing CAPS to determine their final price. CAPS involves firms answering two key questions:

1. What will cost it to get people to my site?

2. What percentage of my site visitors will make a purchase?

The answer to question #1, divided by the answer to question #2, tells the firm its cost per acquisition. The operating profit margin can then be added to determine the final price.

Example: A retailer may find that on average it costs $0.10 to get a visitor to the site, and the percentage of site visitors that make a purchase is 1%. From there, we simply do the math: .10 / .01 = $10. With a cost per acquisition of $10 and assuming competitors have an operating profit margin of 20%, the final price should be set to $12.

KEY IDEA: The key here is obviously to minimize the cost per acquisition. To do this, firms need to place a high priority on increasing the percentage of visitors that make a purchase. The siteกs conversion rate is the most important metric.

Value Added Pricing Strategy (VAPS). For businesses in which the marginal cost is zero for instance, the sale of digital products like ebooks and online courses or businesses in which there is not much of an established precedent, VAPS can be an excellent pricing strategy. This is simply a more ad hoc strategy in which the good is priced based on how much value it offers to the consumer. There is no real formula to this strategy, which can be comforting or disturbing, depending on your preference.

KEY IDEA: VAPS works best when you can create a business model that allows you to charge a different price to different clients. For instance, if you are selling consultation services or customized products, you can offer your client a quote based on how much the product is worth to them.

About The Author

This Article was written by Simit Patel, the Managing Director of The ActoNetwork, a company devoted to helping small businesses succeed on the web. The ActoNetwork publishes a free 102 page Internet Marketing eBook and has a free Internet Marketing Workshop for online entrepreneurs available at http://www.actonetwork.com.

[email protected]

This article was posted on August 1

by Simit Patel

Is Click Fraud Really a Problem?

Is Click Fraud Really a Problem?

by: Tommy Maric

Click fraud is currently a major topic in online advertising. Many argue that it presents a threat to the stability and viability of payperclick (PPC) advertising, the key revenue generator for both Google and Overture. In actuality, click fraud is not a significant issue at all.

Click fraud occurs when ads are clicked for reasons other than a genuine interest in learning more about the product or service advertised. Click fraud occurs in two forms. In one instance, fraud arises from competitors trying to sabotage each other. One competitor clicks on the ads of another just to drain the budget of that company. The other instance occurs when webmasters (or people associated with the webmaster) repeatedly click Google AdSense ads (which are syndications of others’ ads) on their own web pages in order to generate more revenue. While both Overture and Google have developed sophisticated technologies to detect click fraud, their systems are, and may never be, foolproof.

The real question is how much does click fraud actually damage the PPC industry? Gross fraud, i.e., when one person or technology consistently and repeatedly clicks on an ad, aside, which Overture and Google can easily detect, we believe that click fraud has no real impact on the industry. The following explains why.

Efficient market theory says that it is impossible to ขbeat a marketข because prices already incorporate and reflect all relevant information. As the PPC industry has matured, efficiency has begun to take root. That is, the price of each keyword has been driven up to the point where it reflects the highest price an advertiser is willing to pay for a click.

For instance, a book retailer may pay $1.00 per click based on internal metrics. These metrics dictate, for example, that on average 30% of clickers purchase a book and the average profit per sale is $4.00. So, for every 100 clicks ($100 cost), they make 30 sales ($120 revenue) and generate a $20.00 (20%) profit. Note that years ago, the same retailer may have been able to pay only $0.50 per click, but as the market matured and more retailers began advertising, competitive bidding forced the price up to $1.00 where the highest return the most advertisers can make is 20%.

The key point is that click fraud is already taken into effect when advertisers select the highest amount they will bid. For instance, there is no difference whether an advertiser pays $0.83/click for 121 clicks with 21 being fraudulent, or $1.00/click for 100 clicks when there is absolutely no fraud. In either case, the advertiser pays $100 and generates a profit of $20, and Overture and/or Google make $100. What changes is the advertiser’s yield (e.g., the percent of clickers who purchased the book) which in turn effects their highest bid price. That is, with fraud, 30 out of 121 clickers (24.8%) purchased the book, and without fraud 30 out of 100 clickers (30%) purchased it. Without fraud, the bid price in an efficient market will rise from $0.83 to $1.00.

In summary, online advertisers must focus on analyzing and improving their internal metrics (e.g., conversions) and not worry about click fraud as it is already incorporated into keyword bid prices. Hopefully, the frivolous lawsuits and refund requests spawned by apparent click fraud will end as those in the industry recognize this undeniable fact.

About The Author

Tommy Maric is the manager of TopPayingKeywords.com. TopPayingKeywords.com is designed to help webmasters maximize their profits using Google’s Adsense™ program. Through extensive research, TopPayingKeywords.com develops uptodate databases of the most popular keywords and their accompanying bid prices. For more information, please visit http://www.toppayingkeywords.com.

Contact:

877TOPWORD

(8778679673)

tommy@[email protected]

This article was posted on April 13

by Tommy Maric