What it means
Deciding what to charge for your product or service is one of the most important choices you will make as a manager. A pricing strategy is not just about picking a number out of thin air to cover your expenses.
It is a planned approach that reflects the value you provide to your customers, the strength of your brand, and the landscape of your competitors. There are several common ways to approach this.
Cost-plus pricing involves calculating how much it costs to make an item and adding a standard markup for profit. While simple, it often ignores what customers are actually willing to pay.
Value-based pricing flips this by looking at how much a problem your product solves is worth to the buyer. Competitor-based pricing looks at what others in the market charge and positions your offer slightly above, below, or right alongside them.
Getting this right matters because price directly impacts your revenue and profit margins. Charge too little, and you leave money on the table or struggle to cover costs.
Charge too much, and customers walk away to competitors. Your pricing strategy should also evolve over time as your business grows, your costs change, and new competitors enter your market.
In daily practice, non-finance managers work closely with finance teams to review pricing models regularly. They test different price points, offer tiered packages, or introduce seasonal discounts to see how buyers react.
By treating pricing as a dynamic strategy rather than a static label, you can protect your bottom line while keeping your customers happy. Pricing a product is like setting the ticket price for a concert.
If you price tickets too high, the venue sits empty and musicians make no money. If you price them too low, you sell out instantly but miss out on funds needed to run the tour.
In practice
Real-world examples
Example 1
A local coffee shop calculates that each latte costs $1.50 in ingredients and packaging. They decide on a cost-plus strategy, adding a 200 percent markup to sell each cup for $4.50, covering rent and staff wages.
Example 2
An accounting firm shifts from hourly billing to value-based pricing. Instead of tracking hours, they charge a flat fee of $1,200 to set up cloud software, because they know it saves the small business client weeks of administrative work.
Example 3
A software startup launches a cloud tool with a tiered subscription model. They offer a free basic version, a standard tier at $15 per month, and a premium tier at $50 per month to capture different customer budgets.
Think of it
Pricing a product is like setting the ticket price for a concert. If you price tickets too high, the venue sits empty and musicians make no money. If you price them too low, you sell out instantly but miss out on funds needed to run the tour.
Formula
Calculation
Markup Pricing Formula = Unit Cost + (Unit Cost x Markup Percentage)
Example: if a product costs $20 to make and you want a 50% markup, the calculation is $20 + ($20 x 0.50) = $30 selling price.
Markup and margin are not the same thing. The $10 profit is 50% of the cost ($10 / $20) but only one third of the selling price ($10 / $30 = 33.3%). If you wanted a 50% gross margin instead, the price would be $20 / (1 - 0.50) = $40, which is a 100% markup on cost.Case study
Seen in the real world
GreenLeaf Meal Prep, a fictional delivery service, initially priced its healthy lunches at $7 based purely on ingredient costs. However, it found itself struggling to break even after factoring in kitchen rent and delivery drivers. The manager reviewed the pricing strategy and realised the business was ignoring the high value it provided to busy professionals who wanted to save time. It shifted to a value-based subscription model, charging $10 per meal when bought as a weekly bundle. It also introduced a premium organic tier at $13.
By aligning prices with customer convenience rather than just raw ingredients, average order value increased by 40%, and GreenLeaf achieved its first profitable quarter within six months. The numbers explain why. If the full cost per meal, including kitchen and delivery, was about $8.50, the original $7 price lost $1.50 on every meal. The $10 bundle price earned $1.50 per meal, and the premium organic tier, with ingredients costing about $1 more per meal, earned $13 - $9.50 = $3.50, so even a modest share of customers choosing the premium tier lifted profit sharply. The business did not need to cut costs; it needed to charge for the value it delivered.
Watch out
Common mistakes
- Copying competitor prices without understanding your own cost structure.
- Ignoring customer perception of value and relying solely on a basic markup.
- Failing to review and update prices as supplier costs and inflation rise.
Questions
People also ask
How often should we review our pricing strategy?
You should review your pricing at least once a year, or whenever significant changes occur in your supply costs, inflation rates, or competitive landscape.
Is a lower price always better for sales volume?
No. Lower prices can sometimes signal poor quality to consumers, reducing demand rather than increasing it.
What is the difference between cost and value?
Cost is what it takes for you to make a product, while value is how much the customer believes the solution is worth to them.