Baird Hall
Cut your price by 1% and, for the average company, operating profit drops about 8%. The same leverage runs the other way when you raise it. No other number on your income statement moves profit that hard for so little effort, and yet price is usually the last thing a team works out. Few people have pressed that point harder than Hermann Simon, who built the world's largest pricing consultancy:
Prices get the least attention, but have the greatest impact.
This guide walks through the whole decision:
- what product pricing is, and the strategies and models to choose from
- how to pick the right one for your business
- how to calculate an actual number
- how to set a price your customers keep paying, rather than one they cancel over
What is product pricing?
Product pricing turns what a product is worth into a number a customer will pay. Your cost sets the floor. What buyers believe the product is worth sets the ceiling. Good pricing lives in the gap between them, which is usually wider than founders expect.
Two terms get used interchangeably, though they do different jobs.
| Term | What it decides |
|---|---|
| Pricing strategy | The logic behind the number, such as cost, value, or the competition |
| Pricing model | How you package and charge, such as a subscription, seats, or usage |
You pick one strategy to set the level, then a model to collect it. A value-based strategy can be delivered through a freemium model, a per-seat model, or usage billing. Sort the strategy first.
The main pricing strategies
Most companies lean on one of these, then borrow from a second. A few that matter most get a note below the table.
| Strategy | How it sets the price | Where you see it |
|---|---|---|
| Value-based | On the value the customer perceives | Superhuman |
| Cost-plus | A fixed markup on unit cost | Everlane |
| Competitor-based | Matched or pinned to rivals | Best Buy |
| Penetration | Low at launch to win share fast | Disney+ |
| Price skimming | High at launch, lowered over time | Apple |
| Premium | Held high as a signal of quality | Rolex |
| Economy | Stripped down for a low price | Mint Mobile |
| Dynamic | Moved with demand, often in real time | Uber |
| Psychological | Ended in 9 to read as a deal | Most retail |
| Bundle | Several products sold for one price | Microsoft 365 |
Value-based pricing
This is the one most experts push you toward, because it ties the price to the only thing the customer cares about. Set the number by researching what buyers will pay, then price to the value they feel. Mark Stiving, who wrote Impact Pricing, names the catch:
Buyers don't pay for the value you create. They pay for the value they can see.
So value-based pricing is half research and half communication. You find the ceiling, then you make the value visible enough that the price feels fair.
Cost-plus pricing
Add up what a unit costs, add a markup, and you have a price. It is the simplest method and the easiest to defend to a finance team, which is why so many companies default to it. The trouble is that it ignores the customer completely. Thomas Nagle, author of the field's standard textbook, put the flaw sharply:
Cost-plus pricing leads to overpricing in weak markets and underpricing in strong ones.
A rare version of cost-plus works as marketing. Everlane publishes the cost of each garment, then shows its markup next to what a traditional retailer would charge. The math itself becomes the pitch.
Dynamic pricing
Move the price with demand and you capture more when people want the product most. Airlines and rideshare run on it. It also carries the most reputational risk of any strategy here. When Wendy's mentioned testing "dynamic pricing" in 2024, customers read it as surge pricing on burgers. A rival ran a "no urge to surge" jab, and the company walked it back within days. The pricing model was never the problem. The word "dynamic" set off the backlash before any price actually changed.
Bundle pricing
Package several products into one price and the bundle can be worth more to the buyer than the parts bought separately. Microsoft 365 sells the apps, a terabyte of storage, and security for one figure, and most buyers take the suite over any single app.
Microsoft 365 plans. Source.
One quirk of psychological pricing is worth the detour, because it has hard evidence behind it. In a field experiment, a dress priced at $39 outsold the same dress at $34.
In catalog tests by Anderson and Simester, the 9-ending price beat the lower price on the same item. The left digit does the work. Source.
Pricing models for subscriptions
If you sell software, the model matters as much as the strategy, because it decides how your revenue grows with each customer. Four cover most of the field.
Freemium
A free tier pulls people in, and feature limits nudge them to upgrade. Spotify runs the classic version.
Tiered
Good, better, and best plans let buyers sort themselves by need. Most SaaS pricing pages use it.
Usage-based
The bill scales with what the customer consumes. Twilio charges per message sent.
Hybrid
A flat fee for a base, then usage on top. Common in modern developer tools.
Spotify keeps a free ad-supported tier under four paid plans, so the free listener is a future subscriber rather than a lost one.
Usage billing ties the price to consumption. Twilio charges a few thousandths of a dollar per message segment, so a customer who sends more pays more, with no plan to outgrow.
Twilio SMS pricing. Source.
The hybrid model splits the difference. Vercel charges a flat seat fee that includes a usage credit, then bills overages past it, which keeps the base predictable while heavy users pay their way.
Vercel plans. Source.
Whichever model you pick, the segments underneath it should follow what people will pay. Madhavan Ramanujam, a partner at Simon-Kucher, is blunt about the order of operations:
You should build segments based on differences in your customers' willingness to pay for your new product.
How to choose a pricing strategy
There is no strategy that wins everywhere. The right one depends on your costs, your market, and how much your customers already trust you. A few questions point you at the answer.
Do you know what customers will pay? If yes, price to value. If you have no data yet, start near a competitor and adjust as you learn.
Is your product clearly better, or clearly cheaper? Better points to premium or value-based. Cheaper points to economy or penetration.
How do customers get value? All at once suits a flat subscription. A little at a time suits usage or hybrid billing.
Are you entering a crowded market? A low launch price buys share fast, as long as you have a plan to raise it later.
How to calculate your price
Cost-plus gives you a floor in one line. Work out the full cost of one unit, then divide by one minus the margin you want.
unit cost ÷ (1 − target margin) = price
A widget that costs $6 to make, at a 60% target margin, prices at $15. That number covers your costs, but it says nothing about what the widget is worth. Treat it as the floor, then run a value check on top. Ask a sample of customers four price-sensitivity questions:
- the price so low they would doubt the quality
- the price that feels like a bargain
- the price that starts to feel expensive
- the price so high they would never buy
The band between a bargain and too expensive is your room to move. Price toward the top of it when the value is visible, and lower while you are still earning trust.
The price you can actually keep
A price is not finished when a customer agrees to it. In a subscription, they re-agree every month, and the number you picked shows up later as retention or as churn. Price is the reason customers give more than any other when they leave.
Across two million cancellation surveys, budget was the most common reason customers gave for leaving, ahead of usage, missing features, and everything else. Source.
That pressure grows as you scale. In Churnkey's data, the share of consumer customers who cite price as their reason for leaving climbs from about 24% near $1M in revenue to 34% between $5M and $20M.
Cheap plans carry their own risk. In the same data, the lower the price, the higher the total churn.
The good news is that a customer citing price is not gone. The right offer at the moment of cancellation buys back months of revenue, and some offers hold far longer than others.
Added customer lifetime by offer, across 3M+ cancellation sessions. Source: churnkey.co/blog/discounting-at-cancellation/
One founder saw exactly this once he could tell price problems apart from product problems.
What really helped was finally seeing why people were churning. Realizing that less than 1% were leaving for competitors, and that most cancellations came from budget or usage reasons, gave us clarity. Those are things we can actually work on.
Churnkey turns a price complaint into a save, and recovers the payments that fail on their own.
See when price is the reason they leave
Cancellation Insights show how often customers cite cost and which plans it hits, so you can tell an overpriced tier from an underused one.
Offer a smaller plan instead of losing them
A downgrade, a pause, or a discount at the cancel screen can keep a customer who balked at the price. Together these save 20 to 40% of the revenue a subscription would otherwise lose.
Recover the payments that fail on their own
Not every lost customer chose to leave. Precision Retries build on Stripe's smart retries and recovered 55% of failed payments against 51% for Stripe alone, and 0.7 days faster.
How to raise a price without losing customers
Higher prices are healthy when you handle the change with care. The cautionary tale is Netflix, which repackaged its plans in 2011 in a way that raised the combined price about 60%, then lost roughly 800,000 subscribers in a quarter and reversed course within weeks.
Netflix US subscribers by quarter, 2011. Source.
A few habits keep an increase from becoming an exit.
- Give existing customers plenty of notice, and tie the change to something you added.
- Grandfather loyal users at their old rate, or step them up slowly.
- Raise the price on new customers first and watch how sign-ups respond.
- Offer a smaller plan so customers can downgrade instead of canceling.
FAQ
What is product pricing?
Product pricing is how a company sets what customers pay. The number reflects what the product costs to make, what it is worth to the buyer, and what competitors charge. In a subscription, customers judge that price every billing cycle, so it shapes retention as much as revenue.
What are the main product pricing strategies?
The common ones are value-based, cost-plus, competitor-based, penetration, price skimming, premium, economy, dynamic, psychological, and bundle pricing. Most companies combine two, such as a value-based level delivered through a tiered model.
What is the difference between a pricing strategy and a pricing model?
A strategy is the logic that sets the number, such as value or cost. A model is how you package and collect it, such as a subscription, per-seat, or usage billing. You choose a strategy first, then a model to deliver it.
How do I calculate a price for my product?
Start with a floor. Take the full cost of one unit and divide it by one minus your target margin. That gives a price that covers your costs. Then ask customers what they would pay, and raise the price toward that number when the value is clear. Your cost sets the minimum. The value customers see sets the maximum.
How much margin should a product have?
It varies by industry, but software often targets high gross margins because the cost to serve one more customer is low. Rather than anchoring on a fixed markup, price to the value customers perceive and let the margin follow.
What is the best pricing strategy for SaaS?
Value-based pricing works well for most SaaS, usually delivered through a tiered plan. AI companies increasingly lean on usage-based pricing, where the bill tracks tokens, actions, or compute, so the price climbs with the value a customer draws. Whatever you pick, watch how each plan affects churn. The best price is the one customers keep paying.
How often should I review my pricing?
At least once a year. Review it again whenever you add real value or your costs shift. Willingness to pay moves as your product and market change, so revisit pricing whenever they do.
Can I use more than one pricing strategy at once?
Yes. Most companies blend them, for example a penetration price at launch that moves toward value-based pricing as the brand earns trust, or a premium flagship tier above an economy entry plan.