finance
Pricing
Setting the price for your product or service. The highest-leverage business decision you make.
Definition
Pricing is the act of deciding what a customer pays. It is also the single most under-optimized lever in most service businesses. A 10% price increase typically drops straight to the bottom line - far more than a 10% cost cut, which is harder to achieve. Three common pricing approaches: cost-plus (markup over cost), competition-based (anchored to market), value-based (anchored to outcome delivered). Value-based pricing is almost always the most profitable but requires the discipline to articulate outcomes in dollars. Most founders under-price by 20-40% relative to value delivered.
Cost-plus, market, and value-based pricing
Three approaches dominate. Cost-plus: calculate fully loaded cost per unit or per project, add a margin target (typically 30 to 70 percent for services), and quote the result. Safe but leaves money on the table because it ignores willingness to pay. Market-based: research what competitors charge and price within the range, usually at the median or slightly above. Fast but anchors you to the cheapest competitor and forfeits premium positioning. Value-based: quantify the dollar outcome you deliver for the customer (revenue lift, cost saved, hours reclaimed, risk avoided) and capture 10 to 30 percent of that value as your price. Hardest but produces 2 to 5x higher prices than cost-plus for the same work.
Why most US service founders are underpriced
Three forces drive systematic underpricing. One, founder discount: solo founders quote based on what they would pay personally, which is far below what businesses pay for the same outcome. Two, anchoring to early customer prices: the first 5 customers were friends and underpaid; every subsequent quote anchors to that level. Three, fear of losing the deal: founders concede on price preemptively before the buyer pushes back. The diagnostic test: raise prices 25 percent on the next 10 quotes and measure conversion rate. If win rate drops less than 25 percent (most do not drop at all), you were underpriced. This experiment has saved more US service businesses than any other single intervention.
Pricing tiers and packaging
Three-tier pricing (good, better, best) outperforms single-price quotes in nearly every US service context. Reasons: anchoring (the high tier makes the middle look reasonable), choice (different buyers self-select into different tiers), and upsell (some buyers naturally pick best). Structure: low tier should be deliberately limited to push serious buyers toward middle; high tier should have premium features that justify 2 to 3x the middle price; middle tier is the target where 60 to 70 percent of buyers should land. Avoid four or more tiers because choice paralysis sets in. Update tier pricing annually as your value delivery improves.
Raising prices on existing customers
The hardest pricing conversation is raising rates on a customer who has been paying the old rate for two years. Best practice. One, give 60 to 90 days notice. Two, frame as scope or quality enhancement, not just a cost-of-living adjustment. Three, grandfather large customers at a 20 to 50 percent discount to new rates for one year. Four, expect 10 to 20 percent of customers to push back; offer a 12-month renewal at current rates in exchange for a longer commitment. Five, accept that 5 to 10 percent may leave; the remaining 90 percent at higher rates produces more revenue and better unit economics than the original mix. Skip this exercise and inflation quietly eats your margin.
FAQ
How do I know if I am underpriced?
Three diagnostics. One, your win rate is above 70 percent on quotes you send. High win rate signals leaving money on the table; healthy win rate is 25 to 40 percent for B2B services. Two, prospects rarely push back on price. If nobody negotiates, your price is below their reference range. Three, you cannot afford the help you need (assistants, contractors, software) because margins are too thin. All three suggest a 15 to 30 percent price increase will not hurt conversion materially and will dramatically improve unit economics.
Should I publish prices on my website?
For productized services and SaaS, yes. Transparent pricing accelerates sales cycles, qualifies leads automatically, and signals confidence. For custom enterprise services where scope varies wildly, no, because published prices anchor too low or scare off small projects. Compromise: publish starting prices (Engagements start at 15K) or a price range. The data on US B2B websites suggests transparent pricing increases qualified inquiries by 20 to 40 percent while reducing total inquiries; net result is higher quality pipeline.
How often should I raise prices?
On new customers, every 6 to 12 months by 10 to 20 percent until you see meaningful conversion rate impact. On existing customers, annually by 5 to 15 percent at renewal, framed as inflation plus value enhancement. Major repricing every 2 to 3 years to reset the anchor. The biggest mistake is keeping prices flat for 5 years because it feels safe; inflation alone eats 15 to 25 percent of real margin over that period, and competitors who raised prices invest more in marketing, talent, and product.
What is value-based pricing in practice?
Value-based pricing starts with a quantified outcome conversation in discovery. Sample questions for a US service founder: what is the revenue impact of solving this problem, what is the cost of leaving it unsolved, how many hours per week does the current process consume, what does that time cost loaded. From the answers, calculate annual value (e.g., 200K of saved cost plus 100K of incremental revenue equals 300K of value). Price at 10 to 30 percent of value (30K to 90K in this example), not at cost-plus (which might suggest 15K). The discovery conversation is harder than sending a rate card; the pricing power is dramatically higher.
Should I discount to close deals?
Rarely, and only with structure. Unconditional discounts train the market that your prices are negotiable and erode anchor pricing. Conditional discounts that trade discount for value to you (longer commitment, faster start, prepayment, case study rights, referral commitment) preserve anchor and add value. Cap discounts at 10 to 15 percent; beyond that you are signaling your list price is fiction. The strongest position is no discount, with a smaller scope at full unit price as the negotiation lever.
In your business
- →Test 10-20% price increases on new customers first - retain existing rates until proven
- →Anchor pricing to outcome (ROI for the customer), not to your cost
- →Review pricing every 6 months - costs and value drift