Pricing Your Product: How to Set Prices That Sell Without Undervaluing Yourself

Why Most Founders Price Wrong

Common mistakes:

Mistake 1: Cost-plus pricing

What founders do:

• Calculate costs: $5 to make/deliver product
• Add margin: $5 × 2 = $10 price
• "I'm making 50% margin!"

Why it fails:

• Ignores value to customer
• Competitor might charge $50 for same thing (you left $40 on table)
• Races to bottom (someone undercuts you at $9)

Example:

• iPhone costs ~$500 to manufacture
• Apple sells for $1,000-1,500
• Not 2× markup—they charge based on VALUE (status, ecosystem, experience)

Mistake 2: Underpricing to "gain customers"

Founder logic:

• "I'll charge super low, get tons of users, then raise prices later"
• "Once we have 10,000 customers, we'll increase prices"

Why it fails:

• Attracts wrong customers (price-sensitive, churn when you raise)
• Can't raise prices easily (existing customers revolt)
• Never profitable (need millions of users to survive on $5/month)
• "Cheap" brand perception (hard to shake)

Example:

• Startup charges $5/month
• Competitor charges $50/month
• Customer thinks: "$5 = toy, $50 = serious tool"
• You get customers who can't afford $50 (worst customers—complain, churn)

Mistake 3: Matching competitor prices

Founder sees competitor charges $99, so they charge $99

Why it fails:

• Makes you commodity (same price = must compete on features only)
• No differentiation
• Race to bottom (competitor drops to $79, you follow, repeat)

Better: Charge different (higher OR lower with clear reason)

The Four Pricing Strategies

Understanding your options:

Strategy 1: Cost-Based Pricing ❌

Formula: (Costs × Markup) = Price

Example:

• Costs $10 to deliver SaaS per user/month
• 5× markup = $50/month price

When it works:

• Commodity products (gas, milk, basic materials)
• Retail (physical goods with thin margins)

When it fails:

• SaaS/software (costs ≈ $0 after initial build, infinite margin possible)
• Services (your time = variable value)
• Premium products (Rolex costs $200 to make, sells for $10,000)

Bottom line: Almost never use this for startups

Strategy 2: Competitive Pricing

Formula: Price = Competitor's price ± adjustment

Example:

• Competitor charges $50/month
• You charge $45/month (undercut) or $55/month (premium positioning)

When it works:

• Entering crowded market (need reference point)
• Similar features/value

When it fails:

• You're significantly better/worse (should price accordingly)
• Commoditizes you

Use as starting point, not final answer

Strategy 3: Value-Based Pricing ⭐⭐⭐⭐⭐

Formula: Price = % of value customer receives

The right way to price:

Ask: "How much value does customer get from my product?"

Example 1: Email marketing software

• Your tool helps customer generate $10,000/month in sales
• You can charge $100-500/month (1-5% of value)
• Customer thinks: "I pay $100, make $10,000 = great deal!"

Example 2: Project management tool

• Saves company 10 hours/week (50 hours/month)
• Employee costs $50/hour
• Savings: 50 hours × $50 = $2,500/month
• You can charge $200-500/month

The key: Quantify value in dollars (revenue gained or costs saved)

How to calculate value-based price:

Step 1: Identify customer ROI

• Revenue increase (your tool drives sales)
• Cost savings (your tool saves time/money)
• Risk reduction (your tool prevents losses)

Step 2: Quantify in dollars

• "Our tool saves 20 hours/month" = 20 × $hourly_rate

Step 3: Price at 10-30% of value

• If you save customer $1,000/month, charge $100-300/month
• Customer pays $100, receives $1,000 = 10× ROI (they're thrilled)

This is how enterprise SaaS companies justify $10,000/month prices

Strategy 4: Psychological Pricing

Using buyer psychology:

Tactic 1: Charm pricing ($99 vs $100)

Research shows:

• $99 sells significantly more than $100
• Brain processes $99 as "$90-something" (left-digit effect)
• $9.99 vs $10 = 24% sales increase (studies)

Use:

• $9, $29, $49, $99, $199, $499, $999
• NOT $10, $30, $50, $100, $200, $500, $1,000

Exception: Luxury products (round numbers signal quality—$500 better than $499 for premium)

Tactic 2: Decoy pricing (anchoring)

Offer three tiers:

Example:

• Basic: $29/month (limited features)
• Pro: $99/month ⭐ MOST POPULAR (everything)
• Enterprise: $299/month (overkill for most)

What happens:

• $299 makes $99 seem reasonable (anchoring)
• Nobody buys Basic ($29 looks "too limited")
• 80% buy Pro ($99)—your goal all along

Without $299 tier:

• $99 seems expensive (no anchor)
• More people choose $29 (lose revenue)

Decoy pricing increases average revenue per customer by 30-40%

Tactic 3: Price tiers (good, better, best)

Always offer 3 options:

Why it works:

• Too many choices paralyze (5+ tiers = decision fatigue)
• Too few choices limit revenue (only 1 tier = leaving money on table)
• 3 tiers = sweet spot

Psychology:

• Humans avoid extremes (too cheap, too expensive)
• Pick middle option (Goldilocks effect)

Design middle tier as what you want most people to buy

Step-by-Step Pricing Process

How to actually set your prices:

Step 1: Calculate value to customer

Interview 10-20 potential customers:

• "What problem does this solve for you?"
• "How much time/money does this problem cost you currently?"
• "If our tool eliminated this problem, what would that be worth?"

Example responses:

• "I spend 10 hours/week on this task" (10 hours × $50 = $500/week saved)
• "We lose $5,000/month due to this issue" (your tool saves $5,000/month)

Your price ceiling: 10-30% of monthly value

Step 2: Research competitor pricing

Find 5-10 competitors:

• Note their prices
• Calculate median (middle value)

Example:

• Competitor A: $49/month
• Competitor B: $99/month
• Competitor C: $79/month
• Competitor D: $129/month
• Competitor E: $59/month
• Median: $79/month

This gives you market context (not final price)

Step 3: Determine your positioning

Ask: Where do we fit?

Budget option:

• Fewer features, simpler
• Price: 30-50% below median ($40-50/month if median is $79)
• Customer: Small businesses, individuals

Mid-market:

• Good features, fair price
• Price: At or slightly above median ($79-99/month)
• Customer: Growing companies

Premium:

• Best features, white-glove service
• Price: 50-100% above median ($120-150/month)
• Customer: Enterprises, companies that value quality

Pick ONE positioning (can't be "best AND cheapest")

Step 4: Set initial pricing

Combine all factors:

Formula:

• Start with value-based price (10-30% of customer value)
• Check against competitor median (adjust if way off)
• Apply positioning (+/-% based on budget/mid/premium)
• Use psychological pricing ($99 not $100)

Example:

• Value to customer: $500/month saved
• 20% of value = $100/month (value-based)
• Competitor median = $79/month (you're 25% higher)
• Positioning: Premium (justified)
• Psychological: $99/month (not $100)
• Launch price: $99/month

Step 5: Design tiering

Create 3 tiers:

Starter: $49/month

• Core features only
• 1 user
• Email support

Pro: $99/month ⭐ MOST POPULAR

• All features
• 5 users
• Priority support
• (This is what you designed, Starter is stripped-down version)

Business: $199/month

• Everything in Pro
• Unlimited users
• Dedicated account manager
• Custom integrations
• (Anchor to make $99 seem reasonable)

Result: Most buy $99, some upgrade to $199 (higher average revenue), few buy $49 (better than losing them)

Step 6: Test and iterate

A/B test pricing:

Test 1: Price points

• Show 50% of visitors: $79/month
• Show 50% of visitors: $99/month
• Measure: Conversion rate × price = revenue per visitor

Math:

• $79: 5% conversion = $3.95 revenue per visitor
• $99: 4% conversion = $3.96 revenue per visitor
• Winner: $99 (more revenue despite lower conversion)

Test 2: Tiering structure

• Test 3 tiers vs 2 tiers
• Test tier names (Starter/Pro/Enterprise vs Basic/Advanced/Premium)

Run tests for 1-2 weeks minimum (need statistical significance)

When to Raise Prices

Pricing isn't permanent:

Signals it's time to increase:

✅ High conversion rate (>15% of trials convert = you're too cheap) ✅ Low churn (<5% monthly = customers love it, would pay more) ✅ Inbound requests ("Do you have enterprise tier?" = demand for higher price) ✅ Feature expansion (you've added significant value since launch) ✅ Profitability challenges (can't reach profitability at current price)

How to raise prices:

For new customers:

• Just change pricing page (easy)
• Announce: "New pricing effective [date]"

For existing customers:

• Grandfather existing (keep old price—builds loyalty)
• Or phase in gradually (6-month notice, 20% increase)
• Never surprise them (churn risk)

Example message: "Due to new features and increased value, pricing will adjust to $149/month for new customers starting June 1. As a thank you, existing customers remain at $99/month permanently."

Common Pricing Questions

FAQs:

"Should I offer discounts?"

Annual discount: YES

• Charge 10-12 months for 12 months ($99/month = $999/year instead of $1,188)
• Locks in revenue upfront (cash flow)
• Reduces churn (paid for year, won't cancel)

Introductory discount: MAYBE

• "First 3 months 50% off" can work for enterprise sales
• Risk: Attracts deal-seekers who churn after discount ends

Coupon/promo codes: RARELY

• Trains customers to wait for deals
• Devalues brand

"How do I price against free competitors?"

Free competitors exist—you must differentiate:

Options:

1. Better features/support (free tool is basic, yours is premium)
2. Business vs consumer (free for consumers, paid for businesses)
3. Freemium yourself (free tier, paid for advanced features)

Don't try to compete on free—compete on value

"Should I show pricing publicly?"

For SMB/self-serve (under $500/month): YES

• Customers want to know price before booking demo
• Hiding price = friction, lower conversions
• Builds trust

For enterprise ($10,000+/month): MAYBE

• "Contact us" can work (prices vary by customer size)
• But test showing starting price ("Plans start at $10,000/year")

Price products using value-based strategy charging 10-30% of customer value delivered (if saving $500 monthly charge $50-150 monthly) not cost-plus markup ignoring actual worth. Research competitor median pricing providing market context then position 30-50% below for budget option, at median for mid-market, or 50-100% above for premium positioning. Design three-tier structure with decoy pricing: Starter $49 (limited), Pro $99 marked MOST POPULAR (target tier), Business $199 (anchor making $99 seem reasonable) increasing average revenue per customer 30-40%. Apply psychological charm pricing ($99 not $100) leveraging left-digit effect increasing sales 24%. A/B test price points measuring conversion rate times price equaling revenue per visitor determining optimal pricing. Raise prices when conversion exceeds 15%, churn below 5%, or significant features added—grandfather existing customers maintaining loyalty announcing 6-month advance notice new customer pricing preventing surprise churn.