Pricing Strategies: How to Price Your Product Right

Why Pricing Is Critical (Beyond Just Revenue)

Pricing affects everything:

Price communicates:

Quality perception:

• High price = Premium, exclusive, high-quality (assumption)
• Low price = Budget, mass-market, possibly inferior (assumption)
• Mid price = Good value, accessible quality

Example:

• Rolex $10,000+: Luxury, status symbol
• Timex $30: Functional, affordable, everyday
• Same basic function (tell time), vastly different perceptions

Target customer:

• High price attracts affluent buyers willing to pay premium
• Low price attracts price-sensitive, budget-conscious buyers
• Mid price attracts value-seekers balancing quality and cost

Wrong price = wrong customers = mismatch = failure

Brand positioning:

• Price positions you in market (luxury, mid-tier, budget)
• Changing price changes positioning (risky)

Profit margins:

• Small price changes = big profit differences
• Example: Product costs $20 to make
  • Sell at $40 = $20 profit (100% margin)
  • Sell at $50 = $30 profit (150% margin)
  • 25% price increase = 50% profit increase

Price is most powerful profit lever

Step 1: Understand Your Costs (The Foundation)

You must know your numbers:

Calculate total costs:

1. Direct costs (Cost of Goods Sold - COGS):

Physical products:

• Raw materials
• Manufacturing/production
• Packaging
• Shipping to you (if applicable)

Example (handmade candle):

• Wax: $2
• Wick: $0.50
• Container: $3
• Label: $0.50
• Total COGS: $6

Digital products/Services:

• Software subscriptions (design tools, hosting)
• Contractor/freelancer costs
• Content creation costs

2. Variable costs (per unit):

• Payment processing fees (Stripe ~3%)
• Shipping to customer
• Customer acquisition cost (CAC) - marketing per sale

Example:

• Payment processing (3% of $30 = $0.90)
• Shipping: $4
• Total variable: $4.90

3. Fixed costs (overhead, spread across units):

• Rent, utilities
• Salaries (yours + employees)
• Software subscriptions
• Insurance
• Marketing (portion not per-sale)

Example monthly overhead: $3,000

If selling 100 units/month:

• Fixed cost per unit: $3,000 / 100 = $30

If selling 500 units/month:

• Fixed cost per unit: $3,000 / 500 = $6

Higher volume = lower per-unit overhead

Break-even calculation:

Total cost per unit:

• COGS: $6
• Variable costs: $4.90
• Fixed costs (at 100 units): $30
• Total cost: $40.90

Break-even price: $40.90 (you make $0 profit)

This is your floor—never price below this long-term

Pricing Strategy #1: Cost-Plus Pricing

Most straightforward approach:

Formula:

Price = Cost × (1 + Desired Markup %)

Or

Price = Cost + (Cost × Markup %)

Common markup ranges:

Retail products: 50-100% (2x cost) Restaurants/Food: 200-400% (3-4x cost) SaaS/Software: 80-90% gross margin (5-10x COGS) Luxury goods: 1,000%+ (10x+ cost)

Example:

Product costs $40.90, want 100% markup:

Price = $40.90 × 2 = $81.80

Round to $82 or $79.99 (psychological pricing—more later)

Pros:

✅ Simple, straightforward ✅ Ensures profitability (if costs calculated correctly) ✅ Predictable margins

Cons:

❌ Ignores customer willingness to pay (might underprice) ❌ Ignores competitive landscape ❌ Doesn't account for value delivered

Best for: Commoditized products, B2B contracts, wholesale

Pricing Strategy #2: Value-Based Pricing

Price based on perceived value to customer:

Concept:

Not "what does it cost to make?" But "what is it worth to the customer?"

How to determine value:

1. Quantify benefit (if possible):

Example (productivity software):

• Saves 5 hours/week
• User's hourly rate: $50
• Weekly value: 5 × $50 = $250
• Monthly value: $250 × 4 = $1,000

You could charge $100/month (10% of value created) and it's still incredible ROI

2. Compare to alternatives:

What does customer currently pay for this outcome?

Example (meal kit delivery):

• Alternative: Restaurant meals ($20-30 per person)
• Or: Grocery shopping + cooking (3 hours time)
• Value: Convenience + time savings

Price at $10-15/meal = cheaper than restaurant, easier than cooking

3. Emotional/intangible value:

What is the transformation worth?

Example (weight loss program):

• Financial benefit: Maybe none directly
• Emotional: Confidence, health, attractiveness
• Priceless to some people (willing to pay $100s or $1,000s)

Pros:

✅ Maximizes revenue (capture more value) ✅ Aligns price with customer benefit ✅ Less price sensitivity (value > price)

Cons:

❌ Hard to quantify value (especially emotional) ❌ Requires deep customer understanding ❌ Can seem "expensive" without education

Best for: Differentiated products, B2B solutions with clear ROI, coaching/consulting, SaaS

Pricing Strategy #3: Competition-Based Pricing

Price relative to competitors:

Three approaches:

1. Match competitor pricing:

• Price similarly to competitors
• Compete on other factors (service, features, brand)

Example: Gas stations (all within cents of each other)

2. Undercut competitors (penetration pricing):

• Price lower to gain market share quickly
• Attract price-sensitive customers

Example: Generic brands vs. name brands (Walmart Great Value vs. Tide)

Risk: Race to bottom, unsustainable margins, attracts wrong customers

3. Premium pricing (above competitors):

• Price higher, signal superior quality
• Justify with better features, service, brand

Example: Apple vs. Android phones (Apple charges premium)

How to research competitor pricing:

✅ Direct competitors: Check websites, call for quotes ✅ Amazon: Search category, see price ranges ✅ Google Shopping: Price comparison aggregator ✅ Mystery shopping: Buy competitors' products

Create competitive pricing map:

Identify gap or position relative to competitors

Pros:

✅ Market-tested (you know people pay these prices) ✅ Safe (not wildly over/underpriced) ✅ Easy to research

Cons:

❌ Ignores your unique value ❌ Commoditizes you (just another option) ❌ Assumes competitors priced correctly (maybe they didn't)

Best for: Commoditized markets, similar products, limited differentiation

Pricing Strategy #4: Penetration Pricing

Start low, gain market share, raise later:

Strategy:

Launch at low price to:

• Attract customers quickly
• Build user base, testimonials
• Gain market share from competitors
• Create switching costs (lock-in)

Then raise prices once established

Example: Netflix

• Early days: $7.99/month (incredibly cheap)
• Built massive user base (50M+ subscribers)
• Gradually raised: $9.99 → $12.99 → $15.49+
• Users stayed (habit formed, content library valuable)

Pros:

✅ Fast customer acquisition ✅ Viral growth potential (word-of-mouth) ✅ Barriers to new competitors (you're established)

Cons:

❌ Low/negative margins initially (burn cash) ❌ Hard to raise prices (customer backlash) ❌ Attracts price-sensitive customers (who leave when price increases) ❌ Trains market to expect low prices

Best for: Two-sided marketplaces (Uber, Airbnb), subscription businesses, network effects businesses

Pricing Strategy #5: Skimming Pricing

Start high, lower over time:

Strategy:

Launch at premium price:

• Capture early adopters (willing to pay premium)
• Maximize profit per unit
• Position as exclusive, cutting-edge

Lower price over time:

• Reach broader market
• Compete as product matures

Example: Apple iPhone

• Launch: $999 (premium, early adopters buy)
• 6 months later: $899
• 12 months later: $799 (when new model launches)
• 18+ months later: $699 or discontinued

Pros:

✅ Maximize revenue from willing customers ✅ Recover R&D costs quickly ✅ Premium positioning initially

Cons:

❌ Limits market size initially (only affluent buyers) ❌ Invites competition (high margins attractive) ❌ Can alienate customers who bought at high price (feel cheated)

Best for: Innovative products, tech gadgets, products with short lifecycles

Pricing Strategy #6: Freemium Pricing

Basic free, premium paid:

Strategy:

Offer free tier:

• Core functionality at no cost
• Attract large user base
• Low barrier to entry

Charge for premium features:

• Advanced features
• Higher usage limits
• Priority support
• No ads

Example: Spotify

• Free: Ads, shuffle only, limited skips
• Premium $10.99/month: Ad-free, on-demand, downloads, high-quality audio

Conversion rates:

Typical: 2-5% of free users convert to paid

Requires: LARGE free user base to generate revenue

Example:

• 100,000 free users × 3% conversion = 3,000 paid
• 3,000 × $10/month = $30,000 MRR

Pros:

✅ Massive user acquisition (free = no barrier) ✅ Try-before-buy (reduces purchase friction) ✅ Network effects (more users = more value)

Cons:

❌ Must support many free users (server costs, support) ❌ Low conversion rates (97-98% never pay) ❌ Hard to find right feature split (too generous = no conversions, too restrictive = no one uses free)

Best for: SaaS, apps, digital products with low marginal cost per user

Pricing Strategy #7: Tiered Pricing

Multiple price points for different needs:

Strategy:

Offer 3-4 tiers:

• Basic: Core features, budget-conscious
• Standard/Pro: Most popular, balanced value
• Premium/Enterprise: All features, high-touch

Example: SaaS company

Starter: $29/month

• 1 user, 1,000 contacts, email support

Professional: $99/month ← Most popular (design intent)

• 5 users, 10,000 contacts, phone support, integrations

Enterprise: $299/month

• Unlimited users, unlimited contacts, dedicated manager, API access

Psychology: Decoy pricing

Make middle tier look best:

Starter: $29 (limited, feels restrictive) Professional: $99 (only $70 more, much better value!) Enterprise: $299 (makes Pro seem reasonable)

Most customers choose middle tier (as designed)

Pros:

✅ Captures different customer segments (price sensitivity varies) ✅ Upsell path (start Basic, upgrade later) ✅ Higher revenue potential (some pay 10x others)

Cons:

❌ Complex to manage (different feature sets) ❌ Cannibalization risk (too much in cheap tier) ❌ Decision paralysis (too many choices)

Best for: SaaS, subscriptions, memberships, professional services

Psychological Pricing Tactics

Small changes, big impact:

1. Charm Pricing ($9.99 vs. $10) ⭐⭐⭐⭐⭐

Why it works: Left-digit bias (brain reads $9 as "$9-something" vs. $10 "double digits")

Research: Can increase sales by 24%

When to use: Consumer products, lower-priced items ($1-100)

When NOT to use: Luxury goods (use round numbers for prestige)

2. Prestige Pricing (Round numbers) ⭐⭐⭐⭐

$100 vs. $99.99:

• $100: Clean, premium, luxurious
• $99.99: Cheap, discount, bargain-hunting

Use for: Luxury products, high-end services, where quality > price matters

3. Anchoring ⭐⭐⭐⭐⭐

Show higher price first:

~~$200~~ $100 (50% off!)

Brain anchors on $200, $100 feels like steal

Applications:

• Original price crossed out
• "Was $X, now $Y"
• Bundle pricing (individual items total $300, bundle $199)

4. Price Framing ⭐⭐⭐⭐

Change how price is presented:

Annual subscription: ❌ "$120/year" ✅ "Just $10/month" (feels smaller)

Or reverse for higher perceived value: ✅ "$1,200/year" (sounds substantial, premium)

5. Decoy Pricing ⭐⭐⭐⭐

Add third option to make target option attractive:

Without decoy:

• Small: $3
• Large: $5

(People split 50/50)

With decoy:

• Small: $3
• Medium: $4.50 ← Decoy (bad value)
• Large: $5 (only $0.50 more than medium!)

(70% choose Large)

6. Bundling ⭐⭐⭐⭐

Combine products for perceived value:

Individual:

• Product A: $20
• Product B: $15
• Product C: $10
• Total: $45

Bundle: $35 (feels like $10 savings, great value)

Increases average order value (AOV)

Testing and Optimizing Pricing

Don't set-and-forget:

A/B testing price:

Test different prices with different customer segments:

Example:

• 50% see $79
• 50% see $89

Measure:

• Conversion rate (which converts better?)
• Revenue per visitor ($79 × higher conversion vs. $89 × lower conversion)
• Customer quality (which price attracts better long-term customers?)

Van Westendorp Price Sensitivity Meter:

Survey questions:

1. At what price would this be too expensive?
2. At what price would this be too cheap (you'd question quality)?
3. At what price would this be expensive but you'd consider it?
4. At what price would this be a bargain?

Plot responses, find optimal price range

Willingness-to-pay surveys:

Ask potential customers: "What's the maximum you'd pay for this solution?"

Aggregate responses, find median/mode

Common Pricing Mistakes

Mistake 1: Pricing too low

Problem: Unsustainable margins, attracts wrong customers, signals low quality

Fix: Calculate true costs, price for profit, don't fear higher prices

Mistake 2: Copying competitors blindly

Problem: Ignores your unique value, commoditizes you

Fix: Use competitors as reference, but price based on YOUR value

Mistake 3: Never raising prices

Problem: Inflation erodes profits, leaving money on table

Fix: Annual 3-5% increases standard, grandfather existing customers if needed

Mistake 4: Too many options

Problem: Decision paralysis, confused customers

Fix: 3 tiers maximum (basic, standard, premium)

Mistake 5: Discounting too often

Problem: Trains customers to wait for sales, devalues product

Fix: Rare, strategic discounts only (Black Friday, launch, abandoned cart)

Price products using cost-plus (cost × markup percentage—simple, ensures profit), value-based (price = customer willingness to pay, ROI delivered—maximizes revenue), competition-based (match, undercut, or premium positioning relative to market), penetration (start low, gain share, raise later—Netflix model), skimming (start high, lower over time—iPhone model), freemium (basic free, premium paid—2-5% conversion typical), or tiered (3-4 price points—basic, professional, enterprise). Apply psychological tactics: charm pricing ($9.99), prestige pricing ($100 rounds), anchoring (show original price crossed out), decoy pricing, bundling. Test via A/B testing, surveys measuring willingness to pay. Avoid pricing too low, copying competitors blindly, never raising prices.