When planning to start a business, one common question is: “How much should I charge?” This becomes especially challenging when you see competitors offering similar products or services at lower prices. As an aspiring entrepreneur, you might wonder if you need to match those prices or how to justify charging more.

That takes us to the point of this article. What is a pricing strategy? It’s your plan for setting prices that attract customers while ensuring your new business can survive and grow. Without one, you risk undervaluing your offerings or pricing yourself out of the market. How do you create a pricing strategy that reflects your true value when competitors might be cutting corners to offer lower prices?

Your pricing strategy forms the foundation of your business model. It affects everything from your profit margins to how customers perceive your brand before you even open your doors. Setting prices isn’t about picking numbers that sound good. It means understanding your startup costs, researching your target market, and setting a solid long-term business vision. With a thoughtful pricing strategy, you create a sustainable path for your new business from the beginning.

Understanding Pricing Models

These are different pricing tactics that serve different business needs, and choosing the most competitive pricing strategy depends on your product, market, and business goals – especially when dealing with lower-priced competitors. Here are some of the most common ones:

Competitive pricing uses market rates as benchmarks. If similar products sell for $25-30, you might price yours at $27 to match the market or $23 to undercut competitors. This model works in crowded markets but can lead to price wars. When faced with lower-priced competitors, you must decide whether to match them or differentiate. Retail products, standardized services, and commodities often use competitive pricing. When setting pricing, don’t just look at advertised prices but also discounts, bundles, and loyalty programs competitors offer. A local gym might set membership fees based on other gyms’ pricing while adding unique classes to stand out.

Cost plus pricing adds a fixed percentage to your production costs. For example, if it costs $10 to make your product, and you want a 50% margin, you price it at $15. This model ensures you cover costs, but it doesn’t account for what customers value or what competitors charge. When competitors price lower, this model helps you identify if they’re potentially losing money or cutting corners. Cost-plus works well for physical products with clear manufacturing costs, such as handmade goods, furniture, or food products. For service-based businesses, include your time cost at a realistic hourly rate—not minimum wage, but what your expertise is truly worth.

Cost based pricing determines prices primarily by calculating the total costs involved in producing, delivering, and selling your product or service, then adding an amount to achieve your desired profit. Unlike strict cost-plus pricing that uses a fixed percentage markup, cost-based approaches can use various methods to add profit on top of costs. This provides a foundation that ensures you cover expenses while making money. Cost-based pricing works well for manufacturing, construction, and service businesses with predictable costs. The main weakness is that it focuses entirely on your internal factors without considering what customers value or what competitors charge. A restaurant using cost-based pricing might calculate food costs, labor, rent, and utilities, then add profit to determine menu prices.

Discount pricing offers products or services at prices lower than the standard market rate. This can take many forms, including temporary sales, loyalty programs, bulk purchase discounts, or everyday low prices. Retailers often use this strategy to increase sales volume, clear inventory, or attract new customers. While effective for driving immediate sales, excessive discounting can erode perceived value and train customers to wait for sales rather than paying full price.

Value based pricing sets prices based on perceived customer value. If customers believe your service saves them $1,000 in time, they might happily pay $200 for it, even if it costs you just $50 to provide. This approach helps you justify higher prices than competitors by focusing on the unique benefits you deliver. Instead of competing on price, you compete on value. Consulting services, specialized software, or premium products often use this model. To implement it, quantify your solution’s benefit to customers—time saved, revenue increased, problems solved—then price accordingly. A wedding photographer might charge $3,000 because they capture irreplaceable moments, not because their equipment and time cost $800.

Premium pricing sets prices deliberately higher than competitors to create a perception of superior quality or exclusivity. Luxury brands use this approach to signal prestige and uniqueness. This strategy relies on strong branding, exceptional quality, and creating an aspirational image that justifies the higher price point. It works well for products or services where status or image is part of the value proposition but requires consistent quality and experience to maintain positioning.

Surge pricing or dynamic pricing adjusts prices based on demand changes. Rideshare companies charge more during rush hour when demand exceeds driver availability. This balances supply and demand but may frustrate customers if not communicated clearly. Beyond ridesharing, seasonal businesses use a dynamic pricing strategy. For instance, holiday decorations cost more in November than in January, or a vacation rental might charge 50% more during summer months or local festivals when demand peaks. To implement this model, identify your peak periods and set price tiers accordingly.

Hourly pricing charges are based on time spent delivering a service. Professional services like legal advice, consulting, or specialized labor often use this model. It creates a clear connection between work performed and payment received. However, it can incentivize taking longer to complete tasks and creates less predictable costs for customers compared to project-based or flat-rate pricing.

Penetration pricing sets initial prices low to gain market share quickly. Many subscription services offer discounted first-month rates to attract new users. This helps acquire customers but may attract price-sensitive buyers who leave when prices increase. This strategy works for new market entrants with sufficient funding to sustain initial losses. The goal is to build a customer base rapidly and then gradually raise prices. Meal kit services often offer steep discounts for first-time users, then transition to regular pricing once customers experience the convenience and quality.

Price skimming starts with a high initial price and gradually lowers it over time. New technology products often launch at premium prices for early adopters, then reduce prices as the market matures. This approach maximizes profit from customers willing to pay more to be first, then captures more price-sensitive segments later. It works well for innovative products with few competitors but requires a steady stream of new features to maintain premium perception.

Freemium pricing offers basic features for free while charging for premium capabilities. Many software companies provide limited functionality at no cost and then charge for advanced features or increased usage. This creates a low barrier to entry, allowing customers to experience your product before purchasing. The challenge is converting enough free users to paying customers to offset the costs of supporting the free tier.

Setting Your First Prices

Before you start calculating your prices, it’s a good idea to start with some market research. Be sure to focus on businesses similar to yours in size and target market, and pay special attention to the quality difference between higher and lower-priced options.

Some tips for setting your prices include:

1. Research Your Competition: For example, if you’re starting a lawn care service, visit competitors’ websites to compare their basic mowing package prices. Call as a potential customer to learn about service details—do they include edging and cleanup? How often do they come? Create a spreadsheet comparing features and prices to identify market standards and gaps.

2. Calculate Your True Costs: Next, calculate your costs thoroughly. Include direct costs like materials and labor plus indirect costs like rent and utilities. Don’t forget opportunity costs and the value of your time. Ignoring this could mean never being profitable enough to hire someone should the business need to hire staff to replace you.

For instance, a home baker starting a cookie business would calculate:

Direct costs per dozen cookies:

• Ingredients: $3.50
• Packaging: $1.25
• Labels: $0.75
• Total direct costs: $5.50

Indirect costs (monthly):

• Kitchen utilities estimate: $75
• Equipment depreciation: $25
• Website/marketing: $100
• Business insurance: $50
• Total monthly indirect: $250

If you estimate selling 100 dozen cookies monthly, that’s $2.50 in indirect costs per dozen. Your total cost per dozen is now $8.00. If competitors charge $10, don’t automatically assume they’re operating on a 20% margin. They might have lower costs from bulk purchasing ingredients, more efficient processes, or different equipment. They might also be underestimating their true costs by not accounting for equipment depreciation or valuing their time properly.

3. Test and Refine Your Pricing Structure: Once you understand your costs and the competitive landscape, it’s time to validate your pricing with real customers. You might test different price points or explore various pricing structures like tiers or packages.

For services or products with different feature levels, consider creating clear pricing tiers. A web designer starting a new business might test:

• $1,200 package with 5 pages and basic SEO
• $1,800 package with 8 pages and intermediate SEO
• $2,400 package with 10 pages and advanced SEO

By tracking which package potential clients inquire about most often, the designer can refine their pricing before fully launching. If most inquiries come for the lowest tier, but clients frequently ask for additional services, it signals an opportunity to adjust package contents or pricing.

Some businesses benefit from strategic tiered pricing, particularly the “good-better-best” approach. Research shows that when given three choices, most people select the middle option. A personal trainer might offer:

• Starter: $40/session, workout guidance only
• Standard: $60/session, workout guidance plus nutritional advice (highlighted as “most popular”)
• Premium: $80/session, workout guidance, nutritional advice, and monthly progress assessment

This makes the $60 option feel like the best value while giving price-sensitive clients a way to work with you and leaving room for premium services for those who want the full experience.

Not every business needs tiers. If you sell a single product or a standardized service, a straightforward pricing approach might work better. The key is ensuring your price reflects both your costs and the value you provide, then testing with real customers before finalizing.

Common Pitfalls to Avoid: Avoid matching competitors without understanding your cost structure, undercharging to make quick sales, or overcomplicating your pricing model. Simple, transparent pricing builds customer trust. Many new business owners fear charging “too much,” but underpricing is typically more dangerous for business sustainability. Remember, you can always offer discounts or promotions, but raising prices later can be challenging.

Using Pricing to Position Your Business

A last point to discuss is the psychological impact of pricing. Pricing signals your market position. A coffee shop charging $6 per cup positions itself as premium, while one charging $2 signals affordability. Your price should match your intended image and target customer expectations.

Different prices attract different customers. Budget prices attract price-sensitive customers who may switch when cheaper options appear. Premium prices attract customers who value quality and service over saving money. Choose based on your ideal customer profile.

The same product or service at different prices creates different perceptions of quality. In blind tests, people often rate identical wines higher when told they cost more. This psychological effect means pricing affects not just who buys your product but how they experience it.

Strategic pricing also helps differentiate from competitors. If all local bakeries charge similar prices, offering premium options or volume discounts can set yours apart. Differentiation prevents direct price comparisons and protects your margins.

Your pricing communicates your business values. A sustainable clothing brand charging higher prices can explain the ethical manufacturing processes behind their costs. Transparent pricing builds trust with values-aligned customers.

Next Steps

Now that you understand the fundamentals of pricing strategy, it’s time to put this knowledge into action for your business. Develop your pricing strategy by mapping costs, researching competitors, identifying target customers, and choosing a model that aligns with your goals. Create a clear structure with transparent terms and plan for future adjustments based on market feedback. Review prices quarterly as markets change, costs fluctuate, and customer expectations evolve. Test small price adjustments before implementing major changes to understand their impact on sales.

Effective pricing extends beyond numbers—it communicates value to customers who need what you offer. When you set prices strategically, you not only ensure profitability but also position your business in the market. Start with research, make data-driven decisions, and remember that pricing, like other aspects of your business, requires ongoing refinement as you grow.