Pricing Strategy

Pricing strategy is how a business decides what to charge, and it is one of the highest-leverage decisions a founder makes, because price sets the ceiling on every margin downstream of it. Change the price of a product by 10% and, if costs stay flat, profit can move far more than 10%. Yet most new founders set price by guessing, copying a competitor, or marking up their costs by a comfortable-feeling amount, and the most common mistake by far is charging too little. Underpricing feels safe and generous. It is neither. It starves the business of the margin it needs to market, restock, and survive.

Price is not a reward you give the customer for buying. It is the number that has to fund the entire business after the product is made.

How It Works

The three ways to set a price

There are three basic approaches, and most good pricing blends them.

Cost-plus starts with what the product costs and adds a markup. It is the simplest method and the one beginners default to. Its weakness is that it ignores what the customer will actually pay, so it usually leaves money on the table or, worse, prices below what the market expects.

Competitive sets price by looking at what similar products charge. Useful as a sanity check, dangerous as a strategy, because it assumes competitors priced correctly and it turns pricing into a race that usually ends at the bottom.

Value-based sets price by what the product is worth to the customer, not what it costs to make. This is where the real money is. A serum that costs $8 to make can sell for $68 not because of the ingredients but because of what it does, how it feels, and what the brand signals. Value-based pricing is harder because it requires understanding the customer, but it is the only approach that captures the full worth of a strong product.

The markup math, and why it has to be bigger than it looks

The instinct is to double the cost and call it a price. For a business that sells direct, doubling is usually not enough. A product that costs $10 and sells for $20 has a 50% gross margin, and that margin still has to pay for marketing, shipping, returns, salaries, and everything else. Most healthy consumer brands aim for a gross margin of 60 to 80%, which means the retail price needs to be roughly three to five times the cost of goods, not two.

The math gets sharper the moment wholesale enters the picture. Retailers typically buy at half the retail price. So a product that costs $10 to make and is sold to a store at $20 (the “keystone” markup) leaves the brand only $10 of margin, and the store sells it to the shopper for $40. To be profitable in both its own store and a retailer’s, a brand usually has to price at four to five times its cost from the very beginning. Founders who price for direct sales only, then try to add retail later, discover their margins collapse.

Psychological pricing

Price is read, not just calculated. A few patterns hold across almost every category. Prices ending in 9 ($49 rather than $50) consistently sell better in value-driven categories, because the left digit anchors the perception. In premium categories the opposite is true: round numbers ($50, not $49.99) signal confidence and quality. Offering three tiers reliably sells more of the middle one, because a high-priced option makes the middle look reasonable. None of these tricks fix a badly positioned product, but they meaningfully shift behavior at the margin.

Premium versus discount, and why the middle is dangerous

A brand can win at the top of a market or the bottom, but the middle is where brands die. Premium pricing funds better products, better marketing, and higher margins, and it signals quality before the customer has tried anything. Discount pricing can work at scale, but it requires enormous volume to make thin margins add up, which is hard for a small business without a cost advantage. The riskiest place is the muddy middle: too expensive to win on price, too cheap to signal premium. Picking a side is usually safer than splitting the difference.

Real Example

A founder makes a candle for $6 in materials and labor. Cost-plus instinct says double it: $12. At $12, after paying $4 to ship it and a few dollars to acquire the customer, there is almost nothing left, and there is no room at all to sell through a boutique. Priced instead at $32, positioned as a small luxury with packaging and a story to match, the same candle carries an 81% gross margin, can absorb shipping and customer acquisition cost, and can still be sold to retailers at $16 while they mark it to $32. Same candle, same cost. The higher price did not just add profit, it made the business viable.

Go Deeper

• Gross Margin: The percentage price leaves behind after production, and the number every pricing decision has to protect.
• Retail Distribution: How wholesale markups work, and why selling through stores demands a higher price from day one.
• Average Order Value: Raising what each customer spends per order, the other half of the revenue equation.

Frequently Asked Questions

How do I price a product I am making myself?

Start with your fully loaded cost of goods, including materials, labor, packaging, and inbound shipping. Then, rather than simply doubling it, price for a gross margin of at least 60 to 70%, which usually means three to five times your cost. Finally, check that price against what customers actually pay for comparable products and what your positioning can support. If you ever plan to sell wholesale, price at four to five times cost from the start.

What is keystone pricing?

Keystone pricing is the retail convention of doubling the wholesale cost to set the retail price, a 50% margin for the retailer. For a brand, it means a store will buy your product at roughly half of its shelf price. This is why pricing only for direct-to-consumer sales and adding retail later so often fails: the wholesale price has to leave the brand a workable margin after the retailer takes its half.

Is it better to price high or low?

For most small brands, pricing too low is the bigger danger. Low prices starve the business of the margin it needs to market, restock, and survive, and they signal low quality. A higher price funds a better product and better marketing and is easier to discount later than a low price is to raise. The exception is a business with a genuine cost or scale advantage that can win on volume.

What is value-based pricing?

Value-based pricing sets the price by what the product is worth to the customer rather than what it costs to produce. A product that solves a real problem or carries strong brand meaning can command a price many times its cost. It is harder than cost-plus because it requires understanding the customer deeply, but it is the only method that captures the full value of a strong product.

How much should I mark up my product?

There is no universal number, but a useful floor for consumer products is a gross margin of 60 to 80%, which translates to a retail price of roughly three to five times the cost of goods. Brands that sell through retailers need to sit at the higher end, because a wholesaler will buy at about half the retail price. Marking up by only 2x is a common and costly mistake.

Sources

• Shopify, “Pricing Strategy: How to Choose a Pricing Strategy for Your Business”. Overview of cost-plus, value-based, and competitive pricing for small businesses.
• Harvard Business Review, “Pricing”. Research and articles on pricing strategy and value capture.
• U.S. Small Business Administration, “Calculate your startup costs”. Guidance on costs that pricing has to cover.