Glossary
What Is a Pricing Strategy?
Updated · Team Fonda
Short answer
A pricing strategy is the method a business uses to decide what to charge. The three basic approaches are cost-plus (your cost plus a markup), competitor-based (in line with what others charge) and value-based (what the result is worth to the customer).
Key takeaways
- Your costs set the lowest price you can survive on. The value to the customer sets the highest price they will accept.
- Cost-plus is the simplest method, competitor-based keeps you inside the range buyers expect, and value-based can support the highest price.
- Charging too little is an easy mistake to make when you are new, and a low price is hard to raise later.
- Test a price with real customers before you commit to it.
What a pricing strategy means in plain words
A price is a number. A pricing strategy is the reasoning behind it. Without one, founders tend to pick a figure that feels polite and hope it works. With one, you can explain why you charge what you charge, and you know what to change when sales or profit disappoint.
Pricing sits next to your revenue model. The revenue model decides how you get paid, such as monthly or per item. The pricing strategy decides how much.
The main pricing strategies
| Strategy | How the price is set | Works well when |
|---|---|---|
| Cost-plus | Your cost per unit plus a fixed markup | You sell physical goods with clear costs |
| Competitor-based | Close to what similar offers charge | Customers compare options side by side |
| Value-based | A share of what the outcome is worth to the buyer | You save the customer time or money they can measure |
| Penetration | Low at first to win customers, then raised | You can afford thin margins for a while |
| Premium | Deliberately high to signal quality | Your brand, craft or service is clearly different |
| Tiered | Several packages at different prices | Customers have different needs and budgets |
Cost-plus formula
Price = cost per unit x (1 + markup percentage). A $10 cost with a 60% markup gives a $16 price.
Markup and margin are not the same thing. Markup is profit as a share of cost, margin is profit as a share of price. The markup calculator and the profit margin calculator show both for any price.
A worked example: three ways to price the same service
These numbers are made up to show the method. Say you start a bookkeeping service for local trades businesses. Each client takes you about five hours a month, and you want to earn at least $40 an hour after your own software costs.
- Cost-plus: five hours at $40 is $200, plus $20 of software per client, plus a 25% markup. Price: $275 a month.
- Competitor-based: you call around and find other bookkeepers nearby quote between $250 and $400. You choose $300 to sit in the lower half.
- Value-based: in interviews, owners tell you they lose a full day a month to paperwork and that a day on a job earns them about $600. You price at $350 and still leave them better off.
Three methods, three prices. The cost-plus figure tells you the floor. The competitor range tells you what the market already accepts. The value figure tells you how high you could go. A sensible first price sits above the floor and is backed by something a customer said.
Why it matters for a first-time founder
Price is one of the first things you can test, well before you have a product. When you interview potential customers, ask what they pay today to solve the problem and what the problem costs them. Those answers are the raw material for value-based pricing. The guide on how to validate a startup idea explains how to run those conversations.
Price also decides whether the business can work at all. It feeds straight into your gross margin and your break-even point: a higher price means fewer sales needed to cover your costs. If you sell your time, the freelance rate calculator helps you find the hourly figure that covers your living costs.
Common mistakes
- Pricing by gut feeling. If you cannot say how you reached the number, you cannot defend it.
- Undercutting everyone. A low price attracts the customers most likely to leave for a lower one, and leaves no money for marketing.
- Counting only material costs. Your time, payment fees, refunds and support all belong in the cost.
- Asking "would you pay for this?" People say yes to be kind. Ask for a pre-order, a deposit or a signed letter of intent instead.
- Never revisiting the price. Costs change and you learn more about customers. Review pricing at least once a year.
Frequently asked questions
What is the simplest pricing strategy for a new business?
Cost-plus is the simplest, because you only need your own costs. Check the result against what competitors charge so that your price is not far outside the range customers expect.
Should I charge less than competitors when I am new?
Not automatically. A slightly lower price can help you win first customers, but a very low one can make buyers doubt the quality and is hard to raise. A better offer for early customers is a time-limited discount on your real price.
How do I know if my price is too low?
Warning signs are that nobody ever questions the price, you are fully booked but short of money, or your margin leaves nothing for marketing. If every customer says yes immediately, try a higher price with the next few.
Can I change my prices after launch?
Yes. Many businesses raise prices for new customers first and keep existing customers on the old price for a period. Give notice and explain what they get for the money.