My first pricing decision was denominated in fruit snacks. In elementary school I ran a small product line — mechanical-pencil springs popped out and glued onto regular pencils, stick-on erasers, grippers — and the model with the cool eraser cost more fruit snacks than the basic one. Nobody taught me that. The premium tier felt obvious: it was better, so it cost more, and some kids would always pay more to have the better one.
Here’s the direct answer to how to price a product: start from the customer’s alternative, not your costs. Price the gap between what they’re doing now and what your product makes possible, present it in tiers so the customer prices themselves, and raise until you feel the flinch. Cost sets your floor — the number below which you’re running a charity. Everything above the floor is a story about value, and you are the one holding the pen.
Cost-plus is the amateur tell
The default method — add up costs, tack on a margin, done — feels responsible and is quietly ruinous. Customers do not know your costs. They do not care about your costs. No one has ever stood at a shelf thinking about your supplier terms. The only cost math happening at the moment of purchase is theirs: what this problem is currently costing them, and what solving it is worth.
Cost-plus also does something sneakier: it prices your product like a commodity, which announces that it is one. Price is a signal before it’s a number — it tells the customer what category you’re in, what quality to expect, and who else is buying. Set it like an accountant and the market reads it like a label.
Price the gap, not the product
There’s an old parable about a repairman who fixes a dead machine with one tap of a hammer and hands over a large bill. Outrage: “It was one tap!” The itemized version comes back: tapping — almost nothing; knowing where to tap — everything else. That’s value pricing in one story. You’re not charging for the tap, the hour, or the materials. You’re charging for the distance between the customer’s world with the problem and without it.
So do the arithmetic from their side of the table. What does the problem cost them — in money, time, risk, embarrassment? What’s the next-best alternative, including doing nothing? The room between the alternative and your outcome is the priceable gap. Products that widen the gap can raise prices without changing costs at all — which is why care and brand are pricing strategies, not just service ones.
Three tiers, always
Single prices force a yes/no decision. Tiers change the question from “should I buy this?” to “which one am I?” — and that’s a much better question for you, because almost everyone answers it from the middle.
The mechanics are old and honest. The top tier anchors: next to it, the middle looks reasonable instead of expensive. The bottom tier catches the price-sensitive and makes the middle look complete instead of stripped. And the top tier isn’t decoration — a real slice of any market buys the best one, on principle, every time, and serving them costs you one more row in the table. Fail to offer a premium and the premium buyers spend their premium somewhere else.
The fruit-snack economy taught me this before I could spell it, and it taught you too — everyone instinctively gets tiering the moment they’re the seller. Cost-plus has to be taught. Instinct had it right.
Raise until the flinch
Almost everyone reading this is underpriced, for a predictable reason: the seller feels the price harder than the buyer does. You rehearse the number, imagine the objections, and pad in a discount before anyone asked. Meanwhile the buyer hears the number once, in passing, between forty other decisions.
The working heuristic: the right price stings slightly to say out loud. If you can quote it without a flicker, there’s room above it. Test in steps, and watch what actually happens — because the math of a raise is brutal in your favor: price increases carry no new costs, so nearly every added dollar lands on margin. Lose a slice of the most price-sensitive customers in the process and you’ll often find revenue flat, workload lighter, and the remaining customers better behaved. The customers you lose at the honest price were the ones the dishonest price was subsidizing.
Cheap costs you twice
Underpricing feels humble. It bills you twice. Once in the margin you burned — money that was sitting on the table with your name on it. And again in the category you joined: cheap prices attract the customers who chose you for the price, who churn for a coupon, complain the most, and refer people exactly like themselves.
The second bill is the killer, because margin is what funds everything customers later love you for — the service, the quality, the unscalable care. Premium pricing isn’t vanity; it’s the budget for being worth it. A price that can’t pay for excellent delivery is a promise you’ve pre-broken.
Five questions before you set the number
The working checklist, in the order that matters:
1. What is the customer’s current alternative, fully costed? Including the do-nothing option — time lost, risk carried, annoyance endured. That total is your anchor, not your spreadsheet.
2. What is the outcome worth in their world? Money made or saved, hours returned, status gained, worry removed. Price against the gap you close, and be able to say the gap out loud in one sentence.
3. Who is the premium buyer, and what does their version look like? Somebody in your market wants the best one and doesn’t look at prices. Build their tier first — it anchors everything below it and finances plenty above it.
4. What does this number signal? Say the price to a stranger and watch what category their face files you into. If the flinch is yours and not theirs, you’re low.
5. Can this price fund the experience I’m promising? Work the margin backward into service, quality, and care. If the answer is no, the price isn’t humble — it’s a default notice, issued in advance, to your own customers.
When to discount (almost never)
Discounting the core product trains your market to wait, tells full-price buyers they were fools, and swaps brand for arithmetic. If you need levers, use ones that don’t reprice the thing itself: bundle, add a smaller entry product, extend terms, over-deliver a bonus. Change the offer, not the number. The number is the story, and stories don’t survive being marked down every February.
When you’re starting with nothing, this discipline matters most — the temptation is to buy your first customers with cheapness, and the problem is that it works. Then you’re the cheap one, and that label costs more to remove than it ever earned.
Cost is your floor. The alternative is their anchor. The gap is your price.
Charge like it matters. Then deliver like it’s underpriced — that order, never the reverse.
Tyk Sullivan
Serial entrepreneur in Tampa, Florida. Founder of Plutus Capital and NUMEN. More about Tyk →