How to price your product: A step-by-step guide

Am I charging too much? Will I regret trying to charge this much, or should I have been charging more right from the start? If you’ve asked yourself questions like these, believe me, you’re not alone. Everyone who has started a business or launched a product has asked themselves the same questions. And almost all of us made at least some of the same mistakes, so don’t sweat that too much either.

Now, I am going to explain how to price a service or product so that it doesn’t leave you out of pocket (we did that the first time around!). At the end of this post, you should feel like you’re ready to put a number on your product.

What is product pricing?

Product pricing is the process of determining how much to charge for your product or service. It’s more than just adding up costs and slapping on a profit margin; pricing is a strategic decision that influences how your brand is perceived, how competitive you are in your market, and ultimately, how profitable your business becomes.

Different businesses approach pricing in different ways depending on their industry, target audience, and market demand. For example:

• Luxury brands often set higher prices to create a sense of exclusivity and premium value.
• Mass-market retailers typically focus on competitive pricing to appeal to price-sensitive consumers.
• Service-based businesses may use hourly rates, project-based pricing, or value-based pricing depending on the client and scope of work.
• Tech and subscription businesses often rely on tiered or freemium models to capture different segments of the market.

The right approach depends on your goals, the unique value you offer, and how your target customers perceive that value.

Before we go on, there are two things I want to say really loud and really clear:

1. The bad news. There is no magic bullet. There is no hard, fast and certain rule that will always work, every time. There are rules of thumb, guidelines and experience, but no magic formula. But you knew that already, right?
2. The good news. Dozens of makers just like you have been in exactly this situation and are now running successful businesses and seeing their vision generate a profit. In fact, some of them have even been kind enough to share with us what they have learned along the way. You just might be surprised!

Which pricing strategy should you use?

Choosing the right pricing strategy can make or break your business. Below are some of the most common approaches, with examples to help you decide which might fit best for your product or service.

Cost-plus pricing

This is the simplest approach, where you calculate your costs and then add a set percentage markup for profit.

• Example: A bakery spends $2 making a loaf of bread and charges $4, doubling the cost to ensure a profit margin.

Competition-based pricing

Here, you set your price based on what your competitors charge, adjusting slightly higher or lower depending on your positioning.

• Example: A coffee shop located near Starbucks might set prices just below Starbucks to attract budget-conscious customers while maintaining quality.

Value-added pricing

This strategy sets prices based on the perceived value your product or service brings to customers, rather than just the cost to produce it.

• Example: Apple charges premium prices for iPhones, not just for the technology but for the brand reputation, design, and customer experience.

Dynamic pricing

Prices change based on demand, market conditions, or even customer behavior.

• Example: Airlines adjust ticket prices daily (sometimes hourly) based on seat availability, booking windows, and demand trends.

Don’t forget that you have to pay taxes, you pay a percentage on transactions through online payment providers, and remember to note down server costs, software licenses, office space, expenses, taxes, fees, salaries – everything.

Don’t forget free accounts or trials that you are giving away to attract potential customers – sometimes a freemium product can be a double-edged sword.

When you’re done, look over the list and see what’s missing. Nine times out of 10 it’s you. Even if you’re not paying yourself a salary while you’re bootstrapping, your time is still worth money. You’re spending it blogging and posting to social media, communicating with clients, or doing research. That’s an expense, so cost out your time and add that to your total costs.

You still don’t have the pricing strategy in place, but now you have a starting point. Even getting this far is more than we did on our first round of pricing.

Maybe that’s why our first round of pricing for Quaderno was a failure. We didn’t carry out any of the steps in this guide – the first time. We set our price point on what we thought our clients would be willing to pay. With no data to support it. We based our whole pricing strategy on a kind of vague feeling, and that turned out to be an expensive mistake.

Common pricing models

While strategies determine how you decide on a price, pricing models are about how you structure and deliver those prices to customers. The right model can improve customer retention, increase perceived value, and maximize revenue. Here are a few popular ones:

• Subscription-based pricing: Customers pay a recurring fee (monthly, quarterly, or annually) for continued access to a product or service.
  Example: Netflix and Spotify charge monthly subscriptions for unlimited access to their content libraries.
• Tiered pricing: Different packages are offered at varying price points, often targeting different types of customers or usage levels.
  Example: SaaS tools like HubSpot or Zoom provide multiple tiers, from free plans to premium packages with advanced features.
• Freemium model: A basic version is offered for free, while more advanced features or services are locked behind a paid plan.
  Example: Canva offers free design tools, but premium elements and features require a paid subscription.

One of the biggest mistakes we made at Quaderno in our early days was to have just one pricing tier. That makes accounting way easier, especially if you have no money to count. It’s not great in terms of conversion, and in fact it was a really poor business decision on our part, so why did we do it? Because we took for granted that we only had one kind of potential user.

Having a really successful pricing strategy is difficult partly because you need to segment your audience – which means understanding them. They don’t all have the same needs, and they aren’t all willing to pay the same.

Let’s take a look at how Buffer did it. Their ‘Awesome Plan’ – that’s the name of their basic plan, priced $10, and the most subscribed one by far according to their open revenue dashboard – was their only plan until just a few months ago.

Suppose Buffer has two clients. One is a blogger who wants to measure how many times his tweets are clicked, or check which post got the most views on WordPress. The other is a digital marketing pro for a big corporation. He’s channeling thousands of dollars, the work of several employees, and the future of his company’s products, through his hands every day. Understandably he’s called on to show some pretty sophisticated data to demonstrate ROI and measure strategy success. These two people have wildly different needs and wildly different budgets.

Same price for everyone? Makes absolutely no sense.

And – I guess – that’s what took them to build Buffer for Businesses. Same basic product, but now with different features within different pricing tiers. Boom, revenue peak.

We also have tiered pricing on Quaderno, but we start with the highest price first. Why? Because it’s more likely that people end up somewhere in the middle, as you can read in this interesting article about pricing page design.

How to calculate product pricing, step by step

Now that you understand strategies and models, let’s break down the actual process of calculating the right price for your product.

1. Add up variable costs per product

Start by identifying all the costs directly tied to producing one unit of your product — materials, packaging, shipping, and labor. This ensures you’re not losing money on each sale.

2. Add in your profit margin

Decide how much profit you want to make on each product. Add a percentage markup to your variable costs. This step ensures that you’re building in profitability from the start.

3. Factor in fixed costs

Fixed expenses like rent, utilities, insurance, or salaries don’t change with the number of products you sell, but they need to be covered. Spread these costs across the estimated number of units you expect to sell.

4. Adjust accordingly

Finally, compare your calculated price against what the market is willing to pay and what your competitors are charging. You may need to raise your price to reflect your value or lower it slightly to remain competitive.

What is your product worth to your customer?

Your customers don’t care about your costs. People don’t pay the cost of a new iPhone because they sympathise with what Apple went through to make it, and they won’t buy your product because you worked hard on it. It’s all about WIIFM – What’s In It For Me? What value does your product supply? That’s what your customers are paying for. Never for a second should you think that your costs are the basis of your pricing – they’re just something you need to know before you figure it out.

It sounds strange, but the value of your product can change depending on who’s using it. Knowing what your product can do and who it can help should set you up to successfully price your product, and figuring out who exactly is paying for your product is the way to:

1. Increase the price-per-unit of your product. You know why your customers need your product, so you know how much they’re likely to be willing to pay for it.
2. Optimise your revenue by designing in pricing tiers, allowing you to target more than one subgroup of customers more precisely.

A great example of quantifiable value is supplied by Andrew Culver over at Churnbuster. Churnbuster addresses one of the key money sieves in ecommerce, failed payments, in this case through Stripe. Andrew knows just what his product is worth to his customers.

Andrew uses a mix of price points to appeal to different groups of customers with different needs, but he’s not shy about talking about value, or about charging for it. And neither should you be.

Figuring out how much value you provide isn’t always easy, though, so product makers tend to stick to industry standard rates when pricing their products plus the cost of producing them.

What Others (Smarter Than Us) Have To Say

Some weeks ago I emailed 4 founders, entrepreneurs with tons of experience on the software business, and asked them what advice they would give to anyone starting out building a pricing strategy.

Charge more. The overwhelming problem with most pricing which founders (particularly engineers) start with it is that it is too low. You’d be surprised in B2B how finding the right customer and speaking the right language can make a difference of, literally, 1000X in the price you can charge. Even before you’re that sophisticated, at least throw a $249 or $499 a month plan into the mix and see if anyone buys it, perhaps justifying it with XYZ *plus* 2 hours of your time in getting set up. It doesn’t take too many of these to really move the needle. Patrick McKenzie / Kalzumeus

Ask potential customers if they would be willing to pay $X for what you plan to offer. Always ask about a specific amount and observe their reaction. Adjust X up and down as you talk to new people, essentially performing a real-life split test. Once you’ve gathered as much data as possible from potential customers and your competitors take your best guess and run with it. You can change pricing later (I’ve done it several times). Just be sure to grandfather in your existing customers to your old pricing since anything else will feel to them like a bait and switch. Rob Walling / Drip

I think pricing is inextricably linked to the audience, market, product, i.e. positioning of the company. A price point of $10/mo or $1000/mo could both be valid for a similar product if the audience, expectations, and market are different. Jason Cohen / WP Engine

Our tendency is always to price products too low. Whatever you’re planning on pricing your product at, multiply it by two and test out that price. If a few members of your audience start complaining about the price being too high, you know you’ve found the perfect price point. Ryan Delk / Gumroad

Want to dive deeper into whether you should include taxes in your SaaS pricing? Check out our full post, Should You Include Taxes in Your SaaS Pricing? Pros & Cons, to explore the advantages and disadvantages of each approach.