Pricing strategy basics: cost-plus, value-based, competitor and good-better-best

Price is often set once, early, by looking at costs or copying a competitor, and then left alone. Yet a small change in price usually moves profit more than the same change in volume, because every extra pound of price falls straight through to margin. It is worth understanding the main methods and using them together.

Cost-plus pricing

Work out what one unit costs to make and deliver, then add a set margin. It is simple, easy to explain and guarantees that each sale covers its costs, provided you have counted them all.

Where it goes wrong: it ignores what customers would pay. A product that saves a client a great deal of money may be priced far below its worth, while a commodity may be priced above what the market accepts. Treat cost-plus as your floor, not your answer.

Value-based pricing

Start from the outcome the customer gets and what it is worth to them: time saved, revenue gained, risk avoided, or simply how much they enjoy it. Price is then set as a share of that value.

How to do it: talk to customers about the problem in their own terms. How much does it cost them today? What do they spend on workarounds? What happens if it is not solved? The answers give you a rough ceiling.

Where it goes wrong: value differs a lot between customers, and it is easy to overestimate. It needs evidence from real buyers, not a spreadsheet alone.

Competitor pricing

Look at what buyers would compare you with and set your price in relation to it: at the same level, above it with a clear reason, or below it with a plan to stay profitable. Include indirect alternatives too. For a bookkeeping tool, the alternative might be a spreadsheet and a few hours of the owner’s time.

Where it goes wrong: you inherit competitors’ mistakes, and you may start a race to the bottom. Use competitor prices as the reference point buyers will have in mind, not as your target.

Good-better-best tiers

Offer three versions of the product at rising prices. The basic tier lets price-sensitive buyers in. The top tier captures customers who value the product most. The middle tier is often where most buyers land, partly because it looks reasonable next to the other two.

Make the differences between tiers clear and tied to things customers care about, such as usage limits, support level or speed, rather than a long list of small features.

Putting them together

An example (illustration only)

The figures below are invented. A consultant offers a monthly reporting service to small online shops.

• Cost to deliver, including tools and time: £150 a month. With a 40% margin, the floor is about £250.
• Comparable freelance services charge £300 to £500.
• Clients say the reports save them about a day a month and help them cut wasted ad spend. They value that at well over £1,000 a month.

Tiers might be: Basic at £300 (monthly report), Standard at £550 (report plus a monthly call), Premium at £950 (weekly reports and ad account review). Each sits above the floor, near or above competitors, and well below the value clients describe.

Testing a price

• Quote a price to new prospects and watch how many say yes. If almost everyone agrees at once, the price is probably low.
• Try a higher price with a small group of new customers before changing it for all.
• Ask buyers who said no what they were comparing you with.
• Keep existing customers on their current price for a period when you raise prices for new ones, and tell them clearly.

Common mistakes

• Leaving out variable costs such as payment fees, returns or support time, so the floor is too low.
• Pricing by fear of losing a sale rather than by evidence.
• Tiers so similar that buyers cannot see why they would pay more.
• Discounting so often that the list price stops meaning anything.
• Never reviewing prices as costs and the product change.