Pricing Strategy: A Complete Guide for Founders
Most founders underprice. Some overprice. Few get it right on the first try. That’s fine. Pricing is a process, not a decision. The goal isn’t to find the perfect price immediately. It’s to develop a systematic approach to pricing that you can iterate on.
This guide covers the major pricing strategies, when to use each, and how to avoid the common mistakes that cost founders money.
Why Pricing Matters More Than You Think
A small change in price has outsized effects on profit.
Consider this: A business with 30% profit margins increases price by 10%. What happens to profit?
- Revenue: Up 10%
- Costs: Same
- Profit: Up 33%
Now imagine dropping price 10% to increase volume. You’d need to sell 50% more units just to maintain the same profit. Most businesses can’t do that.
The math is clear: Pricing power is profit power.
The Three Core Pricing Strategies
Every pricing strategy falls into one of three categories. Each has its place depending on your market, product, and stage.
1. Cost-Plus Pricing
Calculate your costs. Add a margin. That’s your price.
The formula:
Price = Cost × (1 + Markup %)Example:
- Product cost: $50
- Desired margin: 40%
- Price: $50 × 1.4 = $70
Pros:
- Simple to calculate
- Guarantees margins (if costs are accurate)
- Easy to explain and defend
- Good for commodity markets
Cons:
- Ignores what customers will pay
- Ignores competitor pricing
- Leaves money on the table if you’re delivering high value
- Difficult when costs are variable
Best for: Physical products, commodities, contracting/service businesses with clear cost structures.
Not for: Software, digital products, or anything where the value delivered far exceeds production cost.
2. Competitive Pricing
Look at what competitors charge. Price accordingly.
Three approaches:
| Strategy | Description | When to Use |
|---|---|---|
| Price matching | Same as competitors | Commodity markets with no differentiation |
| Price undercutting | Below competitors | New entrant trying to gain market share |
| Premium pricing | Above competitors | Clear differentiation or brand advantage |
Pros:
- Grounded in market reality
- Customers have reference points
- Lower risk of major pricing errors
- Useful competitive intelligence
Cons:
- Assumes competitors priced correctly (they often didn’t)
- Can trigger price wars
- Ignores your unique value proposition
- Following, not leading
Best for: Markets with established pricing norms, products with direct competitors, entering a new market.
Not for: Innovative products, unique services, or markets without clear comparables.
3. Value-Based Pricing
Price based on the value you deliver to customers, not your costs.
The approach:
- Understand the customer’s problem
- Quantify the value of solving it
- Capture a portion of that value as your price
Example:
Your software saves a business 20 hours per week. At $50/hour, that’s $1,000/week saved, or $52,000/year. Charging $500/month ($6,000/year) captures about 11% of the value created. That feels fair to both parties.
The 10x rule: Your product should deliver at least 10x its price in value. If your product costs $100/month, it should deliver $1,000/month in measurable value. This makes the purchase decision easy.
Pros:
- Maximizes revenue when value is high
- Aligns your success with customer success
- Supports premium positioning
- Creates better customers (they value what they pay for)
Cons:
- Requires deep understanding of customer value
- Value can be hard to quantify
- Different customers may perceive different value
- Requires confidence to charge accordingly
Best for: Software, consulting, services, any product where value created exceeds cost.
This is where most founders should focus. You’re probably delivering more value than you’re capturing.
Pricing Psychology: What the Research Shows
Pricing isn’t purely rational. Psychology matters.
Anchoring
The first number people see becomes a reference point. Use this deliberately.
How to apply:
- Show your highest tier first
- Display the original price before showing discounts
- Present expensive options to make moderate ones feel reasonable
Example: Showing a $299/month “Enterprise” tier makes the $99/month “Professional” tier feel accessible, even if you expect most customers to choose it.
Charm Pricing (The “.99” Effect)
Prices ending in 9 outperform round numbers in many contexts.
- $99 feels meaningfully cheaper than $100
- $29.99 outperforms $30 for consumer products
- The effect is strongest for impulse purchases
When to use round numbers instead:
- Premium products (luxury positioning)
- B2B sales (signals confidence)
- High-price items where .99 feels gimmicky
Price-Quality Inference
Customers assume higher prices mean higher quality, especially when they can’t evaluate the product directly.
Implication: If you’re underpricing, customers may assume your product is inferior. Sometimes raising prices increases sales.
The Decoy Effect
Adding a third option can shift preference toward the option you want customers to choose.
Classic example:
- Small: $3
- Large: $7
Add a medium:
- Small: $3
- Medium: $6.50
- Large: $7
Suddenly the large looks like a great deal. The medium is the decoy.
Pain of Paying
Each purchase triggers a small pain response. Reduce it:
- Subscription pricing spreads payments over time
- Bundling combines multiple pain points into one
- Annual billing has one pain point vs. twelve
- Free trials delay the pain of paying
SaaS Pricing Deep Dive
Software pricing has unique considerations. Here’s what works.
Common SaaS Pricing Models
| Model | Description | Best For |
|---|---|---|
| Flat-rate | One price for all customers | Simple products, early-stage |
| Per-seat | Price per user | Collaboration tools, productivity |
| Usage-based | Pay for what you use | APIs, infrastructure, variable usage |
| Tiered | Multiple packages at different prices | Most SaaS products |
| Freemium | Free tier + paid upgrades | Consumer products, wide funnel |
Tiered Pricing Best Practices
Most SaaS products should have 3-4 tiers.
The standard structure:
-
Entry/Starter ($9-49/month)
- Core features only
- Individual users or small teams
- Goal: Get users in the door
-
Professional/Growth ($49-199/month)
- Most features
- Where most customers should land
- Your “recommended” tier
-
Business/Team ($199-499/month)
- All features plus team capabilities
- Priority support
- For growing companies
-
Enterprise (Custom pricing)
- Custom contracts
- SLAs, security features, SSO
- High-touch sales process
Name your tiers clearly. “Basic, Pro, Enterprise” or “Starter, Growth, Scale” communicate who each tier is for.
The Freemium Question
Freemium can work, but it’s not free (to you):
- Support costs for free users
- Infrastructure costs
- Low conversion rates (typically 1-5%)
- Attracts customers who don’t want to pay
Freemium works when:
- Product has viral/network effects
- Free users create content that attracts paid users
- Large potential market to filter
- Marginal cost per user is very low
Freemium fails when:
- Free tier is too generous (no reason to upgrade)
- Support burden exceeds marketing benefit
- Product requires onboarding/setup time
Alternative: Free trial with credit card required. Higher intent users, better conversion rates.
Pricing Page Best Practices
- Lead with annual pricing (show monthly as alternative)
- Highlight the recommended tier
- Use feature comparison tables
- Show savings for annual commitment
- Include social proof on the page
- Add FAQ section addressing common concerns
When and How to Raise Prices
You’re probably undercharging. Here’s how to fix it.
Signs You Need to Raise Prices
- Customers never complain about price
- Close rate is over 80%
- Competitors charge significantly more
- Customers get obvious ROI
- You’re growing but not profitable
- Support burden is too high for what you charge
How to Raise Prices Safely
For new customers:
- Just do it. Change the price on your website.
- Test different prices if you have traffic
- Monitor conversion rates, not just complaints
For existing customers:
-
Grandfather existing customers (safest)
- New price for new customers only
- Existing customers keep old price indefinitely
- Simple, no confrontation
-
Announce with notice period
- 30-60 days notice
- Explain the reason (new features, increased costs)
- Offer annual lock-in at old rate
-
Raise on renewal only
- Monthly customers see new price at renewal
- Annual customers see it after their term
- Gradual transition
What to expect:
- Some churn is normal (usually 1-5%)
- Net revenue should increase if price increase > churn
- You should retain 90%+ of customers
If you’re losing more than 10%, you raised too much too fast, or you’re serving price-sensitive customers.
Price Increase Communication Template
Subject: Important update to your subscription
Hi [Name],
I wanted to let you know about an upcoming change to [Product] pricing.
Starting [Date], your subscription will be $X/month (previously $Y/month).
Here’s why we’re making this change: [Brief reason - new features, team growth, continued investment]
What this means for you:
- Your price will change on your next billing date after [Date]
- Lock in the current annual rate before [Date]
- All existing features plus [new benefits] included
Questions? Reply to this email.
Thanks for being a customer.
Common Pricing Mistakes
Mistake 1: Pricing Based on Time Spent
Your value isn’t your time. It’s the outcome you deliver.
An expert who solves a problem in 1 hour creates more value than someone who takes 10 hours. Don’t penalize efficiency.
Better approach: Price based on the outcome or deliverable, not the hours.
Mistake 2: One Price for Everyone
Different customers have different willingness to pay. Capture this with:
- Multiple tiers
- Usage-based components
- Enterprise pricing for large companies
- Geographic pricing for different markets
Mistake 3: Competing on Price
Being the cheapest is a race to the bottom. Unless you have structural cost advantages (you probably don’t), someone can always undercut you.
Better approach: Compete on value, not price. Be the best option for a specific type of customer.
Mistake 4: Not Testing
Your first price is a guess. Treat it as a hypothesis.
Simple tests:
- A/B test different prices (if you have traffic)
- Test price changes with different customer segments
- Survey customers about willingness to pay
- Talk to lost deals about price objections
Mistake 5: Hiding the Price
In most markets, not showing prices loses customers:
- Creates friction
- Signals “expensive”
- Attracts tire-kickers who contact you then disappear
- Wastes your sales team’s time
Show prices unless: You’re doing genuine enterprise sales with custom contracts.
Pricing for Services and Consulting
Service pricing has unique challenges.
Hourly vs. Project-Based
| Hourly | Project-Based |
|---|---|
| Client pays for time | Client pays for outcome |
| You bear no scope risk | You bear scope risk |
| Incentivizes slow work | Incentivizes efficiency |
| Easy to calculate | Requires accurate scoping |
| Limits earning potential | Unlimited earning potential |
The progression: Most consultants start hourly, then move to project-based as they improve at scoping work.
Value-Based Pricing for Services
If your consulting saves a client $1 million, should you charge $10,000 or $100,000?
Questions to ask:
- What’s the problem costing them now?
- What’s the upside of solving it?
- What’s the risk if it’s not solved?
- What have they tried that didn’t work?
Then price based on a percentage of value created, not time spent.
Typical value capture: 10-20% of measurable value created. If you save them $500K, $50-100K is a reasonable fee.
Retainer Pricing
Retainers provide predictable revenue. Price them based on:
- Minimum commitment level
- Availability/response time expectations
- Scope of included work
- Value of having you “on call”
Don’t discount too much for retainers. The commitment goes both ways.
Setting Your Price: A Framework
Use this process to set or evaluate your pricing.
Step 1: Understand Your Costs
Calculate your fully-loaded cost to deliver.
- Direct costs (materials, hosting, labor)
- Indirect costs (support, infrastructure, overhead)
- Customer acquisition cost
This is your floor. Never price below this long-term.
Step 2: Research Competitors
Document what similar products charge.
- Direct competitors
- Alternative solutions
- Status quo (what customers do now)
This gives you market context.
Step 3: Quantify Customer Value
What’s your product worth to customers?
- Cost savings
- Revenue increase
- Time saved
- Risk reduced
- Emotional benefits
This is your ceiling.
Step 4: Choose Your Position
Where between floor and ceiling do you want to be?
- Premium (near ceiling): Strong differentiation, brand
- Mid-market: Balance of value and accessibility
- Value (near floor): Volume strategy, efficiency
Step 5: Structure Your Pricing
- How many tiers?
- What differentiates each tier?
- Monthly vs. annual?
- Usage-based components?
Step 6: Test and Iterate
Launch, measure, adjust.
- Track conversion rates
- Monitor churn
- Gather feedback
- Test alternatives
Tools and Calculators
Use these tools to model your pricing decisions:
- Pricing Elasticity Calculator - Model how price changes affect demand
- Profit Margin Calculator - Understand margin vs. markup
- Break-Even Calculator - Know your minimum viable volume
- Customer Lifetime Value Calculator - Factor LTV into pricing decisions
Bottom Line
Pricing is a lever. Most founders underutilize it.
Key takeaways:
- Value-based pricing captures more revenue than cost-plus
- Your first price is a guess - plan to iterate
- Psychology matters - use anchoring, tiers, and framing deliberately
- You’re probably undercharging
- Price increases, done right, improve your business
Start by understanding the value you create. Then capture a fair portion of it. That’s the foundation of good pricing.