Pricing Foundations
Pricing is where strategy meets arithmetic. Cost-plus starts from unit cost and adds a markup: . It feels safe, but ignores willingness to pay and competition.
| Strategy | Anchors on | Best when |
|---|---|---|
| Cost-plus | Unit cost | Stable costs, low information |
| Value-based | Perceived value | Value is high and demonstrable |
| Penetration | Low launch price | Mass market, scale economies |
Value-based pricing anchors on what customers willingly pay, pricing downward from that value. A software tool saving 10,000 euros yearly can price high despite pennies in delivery cost.
Penetration pricing launches low to win fast adoption through volume and network effects, fitting price-sensitive mass markets with scale economies.
Common pitfall: Cost-plus guarantees a margin on paper, but if the final price exceeds customer willingness to pay, that margin applies to zero sales.
Advanced Strategies
| Strategy | Anchors on | Best when |
|---|---|---|
| Skimming | High launch price | Novelty, patent, prestige |
| Discrimination | Willingness to pay | Segments separable, no resale |
Skimming launches high to harvest eager early adopters, then steps prices down for subsequent layers. Think of successive phone generations with strong patent or prestige protection.
Price discrimination charges different prices for the same product when segments differ and resale is prevented. Examples include student tickets or business class. It turns consumer surplus into revenue.
Optimal pricing balances margin against volume. Raising price gains margin on kept customers but loses marginal buyers. The sweet spot depends on price elasticity: how sharply demand reacts. High elasticity punishes high prices, while low elasticity forgives them.