How to price your product

Pricing is the single highest-leverage lever most founders ignore. A 10% price increase usually moves bottom-line profit 20–50%, while a 10% volume increase might move it 5%. Yet most first-time founders set price by looking at competitors and shaving 20% — the fastest way to underprice a good product. This guide walks through the four pricing methods, when each fits, and the common traps that cost real money.

The four pricing methods

Cost-plus (markup) — calculate unit cost, add a margin. Simple, math-safe, but ignores what customers will pay. Example: unit cost $15, 60% markup → $24 price. Works when costs are well-understood and you’re not trying to capture the full value of what you’re selling.

Competitor-based — price relative to market comps. Fine for commodity products where customers compare specs. Dangerous for differentiated products because you’re anchoring to someone else’s cost structure, not your own value.

Value-based — price based on the dollar value created for the customer. Requires understanding their ROI. Example: SaaS that saves 20 hours/week of a $60/hour employee creates $62k/year of value. Charging $12k/year for it is ~20% of value created — a reasonable capture rate.

Dynamic / tiered — different prices for different segments or usage levels. The SaaS standard: three tiers with 10:1 price ratio (Starter, Team, Enterprise). Lets price-sensitive and price-insensitive buyers self-select.

Step 1 — know your unit economics

Before picking a method, know your floor:

COGS (cost of goods sold) — direct cost to deliver one unit. For physical products: materials + manufacturing + shipping + fulfillment. For SaaS: hosting + support + payment processing per customer.

Variable CAC — cost to acquire one customer (ads, affiliate fees, sales commissions).

Contribution margin = Price − COGS − Variable CAC. Must be positive. Ideally, covers fixed costs at reasonable volume.

Target margin — by business type:

Ecommerce / DTC: 40–60% gross margin.

SaaS: 70–85% gross margin.

Services: 50–70% gross margin, depending on leverage.

Below these, you’re almost always underpricing.

Step 2 — triangulate with willingness-to-pay data

Even for value-based pricing, you need customer-side evidence. Three cheap methods:

Van Westendorp Price Sensitivity Meter. 4 questions: “At what price is it so cheap you’d question quality? cheap but still acceptable? expensive but worth it? too expensive to consider?” Intersection of curves reveals a price range most customers accept.

Conjoint analysis (for feature-price tradeoffs). Show customers pairs of price/feature bundles; see which they pick. Reveals how much each feature is “worth.” More work but gives the clearest data.

A/B price test on landing pages. Show half of visitors $29/mo, half $49/mo. If conversion at $49 is less than 59% of conversion at $29 (29/49), you’re making less money at $49 and should price lower. Otherwise, price higher.

The 10%-up experiment

If your prices have been stable and you have no hard data, this tells you a lot cheaply: raise prices 10% on new customers, watch conversion for 4–6 weeks. Three outcomes:

Conversion unchanged → you were underpriced. Keep the new price. Plan another 10% test in 3 months.

Conversion dropped <10% → still worth it. Higher revenue/visitor despite fewer conversions. Keep the new price.

Conversion dropped >10% → you’ve hit or crossed your ceiling. Roll back, optimize value message, or retry in 6 months with better positioning.

The tiered-pricing playbook (SaaS)

Three tiers, 10:1 price ratio. Standard structure:

Starter / Solo: $15–30/month. Individuals or tiny teams. Feature-limited. Purpose: low-friction entry, word-of-mouth amplification.

Team / Pro: $50–200/month. SMBs. Core features + collaboration. The workhorse tier where most revenue comes from.

Enterprise / Business: $500–5000+/month. Custom pricing. SSO, audit logs, SLA, dedicated support. Often closed by sales team, priced per-engagement.

Common mistake: too many tiers. More than 4 tiers creates decision paralysis and reduces conversion. Even 3 tiers work best with clear feature differentiators (e.g., seats, API calls, storage).

Anchoring and decoy pricing

Show the highest tier first. The $5,000/mo Enterprise tier makes the $200/mo Pro tier look reasonable. Without the anchor, $200 looks expensive.

Decoy effect: a $89 middle tier that’s “only slightly worse” than $99 top tier drives customers to the $99 because it looks like a better deal. Apple used this heavily with iPhone storage tiers.

Discounts and promotions — the margin killers

A 20% discount on a product with 50% margin requires 67% more volume just to keep the same total profit. Because fixed costs don’t drop with price, the math of discounting is usually worse than founders expect.

Cleaner alternatives to discounting:

Value-add bundles — add something to the offer instead of cutting price. Protects the price point.

Annual prepay — give 2 months free (17% discount) for annual upfront. Locks revenue, reduces churn, price anchor stays intact.

Segmented pricing — student / nonprofit / small-business discounts don’t cannibalize your main segment.

Price increases — on existing customers

At some point you’ll raise prices on existing customers. The playbook that minimizes churn:

(1) Grandfather customers on old pricing for a defined window (6–12 months). They keep their rate during that window; new customers see the new rate immediately.

(2) Pre-announce the increase with 30–60 days’ notice, in direct email from a founder or executive. Explain why.

(3) Tie to value improvements. New features, SLA, integrations shipped since last price. Bundle the increase with something customers actually want.

Typical churn from a well-executed 10–20% increase: 2–5% of accounts. Revenue impact is almost always net positive.

The “you can always come down” rule

You can always lower a price. Raising one is much harder. Launch 10–20% higher than you’re comfortable with. If it doesn’t convert, drop. If it does, you’ve captured more value and signaled higher quality.

Founder underpricing is so common that seasoned investors often push portfolio companies to raise prices as their first piece of advice. The upside is usually there; the downside (some churn) is almost always smaller than expected.

Run the numbers

Plug cost, target margin, and fees into the pricing calculator for a margin-accurate price. Pair with the break-even calculator to validate volume assumptions, and the profit margin calculator for the margin view across your product line.