How to Price Your Product: The Ultimate Guide for First-Time Entrepreneurs

Photo by Angèle Kamp on Unsplash

Pricing is one of the major roadblocks that entrepreneurs face when building a business. If you price your product or services too low, you lose revenue, if you price too high, you lose customers. It’s a tricky spot, right? That’s why it’s essential to find that sweet spot with pricing that keeps both your business and your customers happy.

So how do you decide how much to charge your customers for your product? This is where you apply a pricing strategy or framework.

What is a Pricing Strategy?

A pricing strategy is the method that a business uses to decide how much to charge for its products or services. It is the thinking or reasoning behind your price point or price tag. Different businesses use different strategies based on their goals. You are going to learn about these strategies and also see examples of businesses that have used them to successfully come up with their “sweet spot” pricing.

Why Does the Price of Your Product Matter?

If you’re building your first business or product, you might spend more time focusing on perfecting the design or features of the product and push pricing to the end of your to-do list so it eventually becomes a last-minute decision.

This is quite wrong because your pricing affects everything about your business or product, including:

• How people perceive your brand
• Whether you can sustain the business long-term
• How quickly you can scale or reinvest in your product
• Even the kind of customers you attract

Your pricing is a message to your customers. People judge how valuable your product is and make assumptions about the kind of experience to expect from your service, just from how it’s priced.

So you see that pricing in itself can become a core part of your strategy for sustaining your business. If you price your product too low, you might undervalue yourself so much that you can’t make a profit or grow, and if you price it too high, you can scare off potential customers. So to sustain your business, you need to find that sweet spot.

Luckily, several strategies can help you decide on a good price point for your products or services.

“Pricing is the only element in the marketing mix that produces revenue; the other elements produce costs.” - Philip Kotler

9 Pricing Strategies for Businesses

“Price is not the key differentiator; it’s the strategy behind price that matters.” - Robert J. Dolan

To set your price, you can use the following strategies:

1. Cost-plus pricing

Cost-plus pricing is also called markup pricing. It is one of the simplest and straightforward ways to set your prices.

Using this strategy, you start by calculating how much it costs to produce or deliver your product, including materials used, labor, packaging, shipping, and every other expense. Then you add a percentage markup on top of that cost to make a profit.

For example, if it costs you $100 to make a product, and you want a 30% profit margin, you’d sell it for $130.

The formula to get your price point following this strategy is: Selling Price = Cost Price + (Cost Price × Markup Percentage)

Advantages of the cost-plus pricing strategy

• It’s simple and easy to use
• It’s guaranteed that your cost will be covered
• You can easily estimate how much profit you’ll make per product, which helps with budgeting and forecasting
• It’s easy to explain to others, like partners and investors

Disadvantages of the cost-plus pricing strategy

• It doesn’t take customer perception and demand into account
• It doesn’t consider market prices or your competitors

This pricing strategy is not ideal for SaaS or tech products because in software or tech, your costs are usually low compared to the value you provide. So cost-plus pricing could undervalue your product because it doesn’t capture things like time saved or convenience, which are often what customers are really paying for. However, cost-plus pricing still works well for certain types of businesses, like manufacturing businesses, retail and wholesale businesses, etc.

2. Value-based pricing

Value-based pricing is when you set your price based on how much your product or service is worth to the customer, not on how much it costs you to make or deliver it. The value-based pricing strategy focuses on perceived value, not the production cost.

Following this strategy, if your software saves a business $100 every month in time and resources, charging a part of that sum, like $30, is reasonable. Even if your actual costs are only $5, the value delivered justifies a higher price.

This pricing strategy is ideal for businesses like SaaS and tech products or creative and service businesses where results (not the effort) matter most to clients.

Advantages of the value-based strategy

• You have a higher profit potential

Disadvantages of value-based pricing

• It’s harder to calculate than cost-plus pricing
• It requires more research and a deeper understanding of the market and your customers

3. Competitive pricing

Competitive pricing is simply when you set your prices based on what your competitors are charging. It’s a very market-aware approach to pricing your products.

You study your market and note the average price and offerings of your competitors, then decide where you want your business to sit. You may decide to match their prices in order to stay level and then compete on quality or service, undercut them to attract price-sensitive customers, or just charge more to position yourself as a premium or higher-value option compared to your competitors. In any case, your competitors are the benchmark.

Advantages of competitive pricing

• It’s a good choice if you’re new to the market
• It’s easy to implement since you’re using existing businesses as the standard
• You remain aligned with the market standard

Disadvantages of competitive pricing

• It makes you blend into the crowd
• It assumes everyone operates under the same conditions and ignores your unique costs and value
• It starts a race to the bottom if all you (and other businesses) do is lower your price to become the cheaper option compared to competitors
• It doesn’t give you much control over your pricing choice or strategy

4. Penetration pricing

Penetration pricing is when a business sets its prices very low at the start to quickly attract customers, gain market share, and build awareness, especially when entering a competitive market.

The idea of penetration pricing is simple. You start by offering your product at a lower price than competitors to get people to notice you, try your product, and then switch from alternatives. Once you’ve gained enough loyal customers or recognition in the market, you can gradually raise your prices to normal or profitable levels.

For example, imagine you launch a new delivery service on your campus. While existing players charge $6 per delivery, you start at $3. Soon, people say, “Hmm, this is cheaper. Let me give it a try,” and they do. Once they experience your service and see its value, you can then slowly increase your prices while keeping many of them on board.

In short, penetration pricing trades short-term profit for long-term growth.

Advantages of penetration pricing

• Because the entry cost is low, customers are more willing to try your product
• It discourages competition because competitors may hesitate to lower their prices to match yours, especially if they can’t afford to
• It’s easier to build brand awareness and loyalty

Disadvantages of penetration pricing

• You might sell at very thin margins, or at a loss, in the beginning
• It may be difficult to raise prices later
• You might attract an audience that cares about low bargains instead of long-term loyalty
• It’s unsustainable if you don’t have a financial cushion

5. Premium pricing

Premium pricing, also known as prestige pricing, is when a business intentionally sets its prices higher than competitors to create a perception of superior quality or exclusivity.

People often associate a higher price with higher value; premium pricing capitalizes on this. By pricing a product or service above average, you send a message that it’s not for everyone; it’s for those who want the best.

Brands like Apple and Rolex use this pricing strategy. They don’t compete on being the cheapest or most affordable; in fact, they intentionally try to be more expensive, and then they compete on other grounds like design, innovation, experience, emotional appeal, but not on price.

Advantages of premium pricing

• You make more profit since you’re charging more per unit
• It positions your brand as quality and exclusive
• You attract customers who value quality over price, which could build loyalty

Disadvantages of premium pricing

• You have a smaller customer base
• People have higher expectations that you constantly have to meet
• Premium pricing is not recession-proof

6. Freemium pricing

Freemium pricing combines “free” and “premium.” It’s when you offer a basic version of your product for free, while charging users to unlock extra perks like advanced features, extra capacity, or better support.

The idea is to attract as many users as possible with the free plan, then convert a portion of them into paying customers once they see the value.

Tools like Canva and Notion use this pricing strategy. They let users do a lot for free, but if you want extras like more storage, team collaboration, or premium templates, you’ll need to upgrade.

Advantages of freemium pricing

• Freemium has a low barrier to entry
• It’s easier to build awareness and attract sign-ups
• You have upsell potential
• You can gather more valuable user feedback because you have a larger user base
• Happy free users can help you spread the word to others, aka, marketing

Disadvantages of freemium pricing

• It has low conversion rates. The average freemium conversion rate is about 2-5% depending on the sector
• The operational costs can become more expensive
• It’s hard to balance free vs. paid features

Freemium works best with products that have low marginal costs, i.e, it doesn’t cost much to serve extra users.

7. Subscription pricing

Subscription pricing means customers pay a recurring fee, monthly, quarterly, or yearly, to keep using your product or service. It’s one of the most common pricing models in SaaS and membership-based businesses.

Instead of a one-time purchase, users “subscribe” for continuous access and support. Businesses like Netflix and Adobe use subscription pricing, where users pay regularly to enjoy ongoing value.

Advantages of subscription pricing

• You can predict revenue more easily
• Higher customer lifetime value (LTV)
• It is more scalable

Disadvantages of subscription pricing

• There is a high churn risk as customers can cancel anytime, so retention becomes as important as acquisition
• It requires consistent value delivery
• It’s more complex to manage

8. Tiered pricing

Tiered pricing means offering multiple pricing plans at different levels, each with its own set of features and benefits, so customers can choose the one that best fits their needs and budget. Tiered pricing works because it gives options. Instead of one flat price, you create tiers like basic or pro, with each tier offering more value at a higher price.

Advantages of tiered pricing

• It appeals to different customer segments
• It encourages people to upgrade as they use your product
• You capture more revenue by letting customers self-select what they’re willing to pay
• You can easily adjust features or add new tiers based on feedback

Disadvantages of tiered pricing

• Too many options can overwhelm new customers
• Managing multiple plans means more work for your team

Tiered pricing is great when you have distinct customer groups, e.g., freelancers, small businesses, and large enterprises, that all make use of the same product in different capacities.

9. Dynamic pricing

Dynamic pricing is a strategy where the price of a product or service changes automatically based on real-time conditions like demand, customer behavior, competitor prices, or even the time of day. Instead of sticking to one fixed price, businesses using dynamic pricing adjust their prices frequently to stay competitive and maximize profit.

It’s the reason your Uber ride costs more during rush hour or why flight prices go up when you check back later. The system looks at what’s happening in the market and instantly recalculates what the product should cost.

Advantages of dynamic pricing

• You earn more during high-demand periods and stay competitive during slow times
• Customers may buy earlier (or at specific times) if they know prices fluctuate
• It responds to market changes quickly

Disadvantages of dynamic pricing

• It can breed distrust if customers notice prices constantly changing
• It requires strong data systems, analytics, and algorithms, which may not be available if you’re just starting out
• It’s harder to predict revenue

Factors That Influence Your Pricing

1. Cost of production

Your cost of production is the foundation of your pricing. It includes everything it takes to create and deliver your product or service. Your cost determines your minimum viable price, which is the lowest amount you can charge without losing money. If your selling price doesn’t cover your total costs, your business won’t survive long, no matter how good your product is.

2. Customer perception of value

Your customer’s perception of value is what makes them decide whether your product or service is worth it to them. If customers believe your product improves their life, saves their time, or boosts their status, they’ll be willing to pay more.

3. Market demand

Market demand shows how much people want what you’re selling and how many alternatives they have. When demand is high and supply is limited, prices can go up. When demand drops or the market is flooded with similar options, prices tend to fall. Understanding your demand patterns helps you adjust prices intelligently.

4. Competitors’ pricing

Customers compare. Always. If your price is way higher than competitors’, they’ll expect to see why, through features, brand story, or quality. If it’s lower, they may assume your product is inferior.

5. Target audience

Your target audience determines how much people can and are willing to pay. Different customer groups have different price sensitivities. The more you know about your audience’s income level, lifestyle, pain points, and priorities, the better you can align your pricing with what they’re ready to spend.

6. Business goals

Your pricing should match your goals, not just your costs or your competitors. Your price point should support what you are trying to achieve right now with your business.

7. Regulations and industry standards

In some industries like telecommunications, energy, healthcare, or finance, there are laws and ethical guidelines that limit how prices can be set or increased.

Conclusion

Many entrepreneurs treat pricing as an afterthought, but it’s one of the most strategic decisions you’ll ever make. The right price drives growth and keeps your business alive. The wrong one can cost you customers or profit. So think of pricing as both an art and a science, one that deserves your attention, research, and confidence.

If you need someone to discuss pricing with, you can chat with Anna, anytime.