How Firms Set Prices
Pricing is where strategy meets arithmetic. The main families:
Cost-plus: start from unit cost, add a markup.
Simple and safe — but blind: it ignores what customers would willingly pay and what competitors charge.
Value-based: price from the customer's perceived value downward, not from cost upward. A software tool that saves a client 10,000€ a year can price near that value even if it costs pennies to serve.
Penetration: launch low to win adoption fast, then rely on volume, habit, and network effects. Fits mass markets with price-sensitive buyers and scale economies.
Skimming: launch high to harvest the eager early adopters, then step the price down through successive customer layers. Fits novel products with patent protection and prestige appeal — think each new phone generation.
Price discrimination: charge different prices for the same product where willingness to pay differs and resale between segments is hard — student cinema tickets, early-bird flights, business vs economy. Done right, it converts consumer surplus into revenue and can serve customers a single price would exclude.
The economics underneath: optimal pricing always balances margin against volume. Raising price gains margin on kept customers but loses the marginal ones; the sweet spot depends on price elasticity — how sharply demand reacts. High elasticity punishes high prices; low elasticity forgives them.
The pricing families
| Strategy | Anchors on | Best when |
|---|---|---|
| Cost-plus | Your unit cost | Stable costs, low information |
| Value-based | Customer's perceived value | Value is high and demonstrable |
| Penetration | Low launch price | Mass market, scale economies |
| Skimming | High launch price | Novelty, patent, prestige |
| Discrimination | Willingness to pay per segment | Segments separable, no resale |
Common pitfall: Cost-plus feels safe because it "guarantees" a margin — but if the marked-up price sits above what customers will pay, the margin is guaranteed on sales that never happen.