Pricing Strategy: 14 Types, How to Choose One, and How to Set Your Price

Cost-plus pricing

Cost-plus pricing adds a fixed percentage to your full cost per unit. It is the simplest strategy to compute, and it has one trap: two formulas that look alike.

Start with full cost. For one unit, add up:

• materials or the direct cost of delivery;
• labor, including contractors;
• a share of overhead (rent, insurance, accounting);
• software and tools;
• your own pay, at the rate you would pay someone to do your job.

Leaving out your own pay is the most common gap. A price that covers everything except you is a price below the floor.

Then apply one of two formulas:

Markup is a percentage of cost. Margin is a percentage of price. In our example, a 30% markup on a $10 cost gives a $13 price that leaves $3, a 23% margin on the price. In our example, if your plan calls for a 30% margin and you apply a 30% markup, you earn 23%. That gap repeats on every unit you sell.

Cost-plus fits low-value items with costs buyers can see: contract manufacturing, wholesale, and government work billed on cost. It fails when marginal cost is near zero, which is the case for software and other digital products. A markup on almost nothing gives almost nothing and ignores what the product saves the buyer. It also moves the wrong way: when your costs fall, your price falls with them, even if buyers would pay the same.

Competitive pricing

Competitive pricing sets your price against the prices of direct rivals for the same unit of sale. It has three postures:

Collect prices before you pick a posture. Use a five-column table and fill one row per direct competitor:

The last two columns carry most of the information. A rival charging less per month may bill setup separately or leave out support. Compare only prices quoted for the same unit, and adjust for what is included. If you do not have the competitor list yet, start with how to find your competitors or run a competitor analysis. The free check your idea for free tool lists your competitors with their share of visibility.

Cooperative pricing means watching rivals’ prices. It never means agreeing on them. Under Section 1 of the Sherman Act, horizontal price-fixing agreements between competitors are illegal per se². A shared rate card in a local trade group falls on the wrong side of that line.

Before you go dismissive, check three things. Can buyers name what you do that rivals do not? Would they notice if you raised your price by a step? Do you have enough demand at your price to stay busy? If any answer is no, start with a cooperative price and raise it when the evidence arrives.

Value-based pricing

Value-based pricing sets the price from what your offer is worth to the buyer compared with the next-best option. There are two paths, one for one-off goods and services and one for subscriptions.

For goods and services, start from a comparable product:

1. Name the closest alternative a buyer would choose if you did not exist.
2. Write down its price.
3. List every way your offer differs from it.
4. Put a dollar value on each difference: add it where you are better, subtract it where you are worse.
5. Add the values to the alternative’s price. The sum is your ceiling.
6. Set your price below the ceiling, so the buyer keeps part of the gain.

In our example (assumption), the alternative costs $200. In our example, yours saves the buyer two hours they value at $40 an hour (plus $80) but offers no weekend support (minus $30). In our example, the ceiling comes to about $250, and a price of $220 to $230 gives the buyer a reason to switch.

The dollar value of a difference starts from a pain the buyer already has. Read reviews of the alternatives to find which differences buyers mention unprompted (customer pain points from reviews).

For subscriptions, pick a value metric: the unit you charge by, so the bill grows as the customer gets more value. Bookings handled are one example; contacts stored and invoices sent are others. List several candidate metrics, then ask customers which one tracks the benefit they feel. A metric that grows with the customer’s own revenue keeps price and value in step.

Different buyers see different value, so build a persona grid. A hypothetical grid looks like this:

The grid tells you which profile your price should be built for. For the research behind it, see target audience analysis.

Penetration pricing

Penetration pricing sets the price below the competitor band to win customers fast, then raises it. Captive-product pricing (razor-and-blades) is a different strategy: the base item stays cheap for good, and the profit comes from refills or consumables bought later. If you never plan to raise the base price, you are running captive-product pricing, and your unit check has to include the consumables.

Set the raise trigger before launch: the price goes up when you reach your customer-base goal, for example a number of accounts or a share of the local market. Write that number down on day one, or the low price stays by default.

The risk sits at the raise. Customers who came for the price leave first when it rises. Loyalty has to come from something the low price paid for: habit, switching costs, a service they now rely on.

A low price brings volume only if your buyers are price-sensitive and you can serve the extra load at a cost below your planned final price. A low price will not rescue an offer that buyers do not want.

Price skimming

Price skimming launches at the top of the corridor, sells to buyers who want the product first, then steps down to reach the next group. Apple launched the original 8GB iPhone at $599 on June 29, 2007; about ten weeks later, on September 5, 2007, it cut the price to $399³.

Lower the price when one of two things happens:

• you reach the profit target you set for the launch price;
• demand at the current price drops, or a rival launches a close substitute.

Skimming bets on how long early demand lasts. If eager buyers run out in weeks and you planned for months, the early margin ends up in unsold stock or idle capacity. The cut costs you too: buyers who paid the launch price see the drop and remember it at your next launch.

Dynamic pricing

Dynamic pricing changes the price with demand, time, and remaining capacity. It fits fixed, perishable capacity: rental nights, appointment slots, seats. It also fits quote-based services, where every job gets its own price. It fits subscriptions poorly, because customers expect the same bill each month.

There is one US limit to check. A majority of states have price-gouging statutes that curb price increases on certain critical goods and services, including gasoline, during declared emergencies⁴. If your algorithm raises prices when demand spikes, check whether your state’s law covers your category and set a cap for emergency declarations.

Differential pricing

Differential pricing charges segments different prices for the same offer, and can also vary it by place and time. Pricing by segment means rates for students and nonprofits, or for small businesses. By place means regional prices that follow local purchasing power. Currency belongs here too: ProfitWell data show revenue per customer about 30% higher when the price uses the buyer’s local currency symbol⁵. By time means off-peak rates and early-bird prices.

Two conditions make it work: segments differ in what they will pay, and a buyer in a cheaper segment cannot resell to a buyer in a dearer one. There is a federal limit for goods. The FTC states that a seller charging competing buyers different prices for the same commodity may violate the Robinson–Patman Act, which applies to goods of like grade and quality⁶. If you sell products to retailers who compete with each other, price differences need a cost or market basis you can document.

Premium pricing

Premium pricing keeps your price permanently above the market as part of your position. Skimming is a temporary launch price that falls. A premium brand that cuts its price signals that the gap was never real, so premium needs a visible reason that lasts: materials, service levels, a guarantee. If buyers cannot name the reason, they compare on price and you lose.

Economy pricing

Economy pricing stays at the low end of the market and earns its margin through low costs: fewer features, plain packaging, little marketing spend. Dollar Shave Club built a mail-order razor business on low prices, and Unilever bought it in 2016 for a reported $1 billion in cash; the terms were not officially disclosed⁷. Economy works only if your cost base is lower than your rivals’. Matching a low price on a normal cost base is penetration pricing with no end date.

Psychological pricing

Psychological pricing uses how buyers read numbers. Charm endings have the most research behind them: Anderson and Simester ran three field experiments and found that a $9 ending raised demand in each⁸. Anchoring shows a higher reference price first, such as a top tier or a list price, so the next price reads as moderate. A decoy tier is an option priced to make the tier next to it look like the better deal.

One trade-off is an assumption we have not verified: in business software, a 9 ending may read as a discount product and pull in buyers who leave sooner. Test it on your own conversion and retention numbers before you adopt it.

Freemium

Freemium gives a limited product free for an unlimited time and charges for upgrades. A free trial gives the full product for a limited time. Freemium is an acquisition model, and it pays only under three preconditions:

• the cost of serving one more free user is close to zero;
• a clear upgrade trigger exists, such as a usage limit or a feature that teams need;
• the free audience is large enough that a small paying share covers the cost of everyone else.

Bundle pricing

Bundle pricing sells several items for one price below the sum of their separate prices. The pro is a higher order value, and buyers accept items they would not pick alone. The downside: buyers lose sight of each item’s price, which makes comparing and later unbundling harder. Do not pad a bundle with low-value items to inflate the “you save” figure. Buyers spot it, and the whole bundle reads as filler.

High-low pricing and loss leaders

High-low pricing sets a regular price and runs frequent promotions below it. A loss leader is an item sold below cost to bring in buyers who also purchase other items.

The “was $X, now $Y” line has a federal rule. Under the FTC Guides Against Deceptive Pricing, a former-price comparison holds only if the product was openly and actively offered at that price, in good faith, for a reasonably substantial period⁹. A price set high for a week so it can be “cut” fails that test.

Subscription and usage-based pricing

Subscriptions charge per period. Usage-based pricing charges per unit consumed. Most software and service companies pick one of five models:

A share of the customer’s revenue, as in the worked example below, is a usage model with the customer’s own sales as the unit.

The unit check

Our thresholds: an LTV/CAC of 3 or more holds, 1 to 3 is thin, and under 1 loses money on every customer. This is our own money criterion, used in our concept method. It is a working rule, not a market statistic.

The reading rule: a ratio far above 3, or a payback under a month, is a flag on the inputs. The first input to test is CAC. For background on these terms, see unit economics explained.

The worked example: co-hosting in Scottsdale

The idea in our example: a Scottsdale, Arizona co-hosting service that runs listings and guest messaging, plus pricing, for second-home owners; absentee hosts pay 15–20% of bookings^ex. Pricing is both what this service sells and its own pricing question.

Our system checked it on October 14, 2026. In the example by our method, the verdict was “Possible, with caveats”^ex with a score of 57^ex, built from 17 search queries^ex and 23 sources^ex. The check found no demand data: the demand source is “none” (example by our method^ex).

Competitors. The check found 9 direct competitors (example by our method^ex). Their shares of visibility, example by our method:

Complaints. In the example by our method, the check grouped buyer complaints by theme: Price 3^ex, Quality 3^ex, Other 2^ex, Service and support 1^ex.

Unit check. The inputs, example by our method: a price of $830^ex per purchase, 1 purchase per month^ex, a margin of 0.3^ex, a lifetime of 10 months^ex and a CAC of $30^ex. The arithmetic, example by our method:

• Monthly contribution in our example: $830 × 1 × 0.3 = $249.
• LTV: $249 × 10 = $2,490^ex.
• LTV/CAC: $2,490 ÷ $30 = 83^ex.
• Payback: $30 ÷ $249, about 0.1 month^ex.

To run the same numbers with your own inputs, use the unit economics calculator or the unit economics and financial model template.

Risks. The check listed four, example by our method:

• Tuckedin already covers most of the offer, so buyers may pick the incumbent and the idea never wins a first booking^ex.
• Only 3 price complaints were found, and one of them is an anecdote rather than a market gap, so they may not support a price-led offer^ex.
• A business license is required to operate, which adds setup time and cost before the first booking^ex.
• Market size is unknown because no search-volume data exists, so the revenue ceiling cannot be estimated from demand^ex.

More on reading these: business risks before launch.

The pricing reading of the example

The competitor band is the 15–20% share of bookings that absentee hosts pay (example by our method^ex). With 9 direct competitors^ex and a leader at 21% visibility^ex (example by our method), the market fits the “many sellers, similar offers” row. Cooperative competitive pricing inside the band fits. In our example, a penetration price below 15% would give margin away in a market where the leader already covers most of the offer.

Price is a weak wedge here. The check found 3 price complaints (example by our method^ex), and its own risk says that is too thin for a price-led offer. The difference has to come from service, priced at the band, not below it. Value-based logic can still move the founder up the band: if the service raises an owner’s booking revenue, a share of bookings captures part of that gain without a price change. The pricing model already does value-based work.

The ratio of 83 (example by our method^ex) sits far above our threshold of 3. By the reading rule, that sends the founder to test the $30 CAC (example by our method^ex) first: run a paid campaign or a referral push and record the real cost of one signed owner.

The ceiling cannot come from market size, because the check found no demand data (example by our method^ex). An owner-side estimate is the next step, and the market size calculator works from your own inputs.

The license risk becomes step 6. The City of Scottsdale requires an annual city license for each property rented for under 30 days, and a valid Arizona transaction privilege tax (TPT) license for each rental property¹⁰. Those sit with the owner, so onboarding a new owner includes license paperwork the co-host may help with. Arizona generally requires a real estate license to manage real property owned by someone else. The Arizona Department of Real Estate has confirmed that, under A.R.S. 32-2121(A)(15), you need no license to arrange or accept short-term rental reservations on another’s behalf, or to solicit them¹¹. Check which side of that line your service scope falls on before you set the price.