How to Price Your Product or Service

Pricing is a strategic decision, not a calculation

Most businesses price by adding a margin to their costs and checking that the result is roughly competitive. This approach leaves enormous value on the table and often leads to prices that are simultaneously too high for some customers and too low for others.

Pricing is one of the highest-leverage decisions in business. A 10% price increase on the same revenue base has a far greater impact on profit than a 10% reduction in costs — yet most businesses spend far more time managing costs than managing price.

The four main pricing approaches

Cost-plus pricing is simple and ensures you're always covering your costs, but ignores what customers are actually willing to pay and what competitors charge.

Value-based pricing sets price based on the value delivered to the customer rather than the cost of delivery. It requires deep understanding of your customer's economics but typically produces higher prices and better customer relationships.

Competitive pricing uses market rates as the anchor. Useful as a reference point but dangerous as a primary strategy — it commoditises your offering and starts a race to the bottom.

Psychological pricing uses price presentation to influence perception. Ending prices in 9, anchoring with a higher price, or offering three options where the middle option is designed to be chosen — these techniques work, but they work best in combination with a sound underlying pricing strategy.

How to test your pricing

The most reliable way to know if your pricing is right is to raise it on new customers and measure the impact on conversion rate. If conversion barely changes, you were underpriced. If it drops significantly, you've found your ceiling.

Most businesses are underpriced. They've set their prices based on what felt comfortable, not based on what the market will bear. The discomfort of raising prices is almost always worth it.