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Choosing the right price for your digital products is one of the most critical, yet difficult, aspects of your business strategy.

Most merchants understand that over-valuing a product kills sales. It is also fairly well understood that under-pricing cuts the unit revenue without any guarantee of a significant gain in sales volume. But few people are aware of a third (but equally important) pricing observation; that compromise pricing can be as harmful as either of the other two blunders.

To understand why this is the case, we need to examine the principles that lie behind effective pricing strategy. In general, merchants adopt one of two key philosophies when they price a product. They either set the price at a low level (which produces a low margin but high sales volume), or they choose a high price level (which trades off volume in order to gain margin).

These two approaches are known respectively as "penetration pricing" and "pricing for profit." The former strategy is typically used by new competitors in a market, or by existing retailers that need to quickly establish a position of dominance after a product launch. The latter technique is favored by established businesses with mature products, where the objective is to earn the maximum profit yield from an existing dominant market position.

It is clear that, whether the strategy is to price low or high, going too far in either direction can be self-defeating. But mid-way pricing is equally ineffective, as it compromises both strategies; it unnecessarily discounts the product without doing so sufficiently to generate a significant improvement in volume.

As a vendor of digital merchandise, you are at a distinct advantage over traditional merchants, since there are no marginal costs associated with your business. Regardless of how low you choose to price your product, you are still guaranteed to show a gross profit on every sale. In contrast, a merchant of physical goods has real fulfillment costs (product manufacturing, damaged and unsold inventory, storage, shipping and handling) that impose a fixed lower price limit below which each sale represents a loss. This advantage affords you great flexibility in your pricing, but even if you use this flexibility to pursue a penetration pricing strategy, you should still be aware of the risk of counter-productive price-cutting.

Some ClickBank merchants use an experimental approach to pricing. Their aim is to establish the most profitable price through trial an error. Although this is understandable, even logical, it can be a customer-relations nightmare. You should think carefully before over-pricing a product and subsequently being forced to reduce the price in order to stimulate demand. Nobody likes to return to a website and see that a product they already purchased is now being offered at a lower price.

The opposite approach is to steadily increase prices from a low level, and is usually less of a cause for concern. Some merchants launch their products with a deliberately low introductory price - a benefit that they emphasize in their sales pitch. The time-limited, or volume-limited, nature of this technique can be a powerful incentive to buy, and it also allows the merchant a trial period in which to observe sales behavior before setting a definitive price to meet his longer-term strategic objectives.