Pricing is arguably the most powerful lever you have to influence revenue and market perception, but it’s also incredibly sensitive. It is a potent blend of psychology, strategy, economics, and storytelling.
Pricing is not just a number on a product page or subscription tier. It is the mechanism by which your product delivers value to users and captures value for the business. The actual job of pricing is to set a monetary value that reflects the user's perceived value, maximizes profit, and positions the product strategically in the market.
If you price too low, you leave money on the table and risk being perceived as cheap or low quality. Price too high, and you risk alienating users or losing market share. Pricing is a strategic choice that shapes your product’s trajectory and user experience.
Pricing is about perceived value, not just cost
Most product managers get stuck thinking pricing is cost plus margin. That is a trap. The actual formula is:
Price = User’s perceived value
Users pay for solving a problem — the more critical that problem, the higher the price they are willing to pay. The cost to build the product is only one input, not the driver.
For example, a simple note-taking app and a sophisticated project management tool might have similar development costs. But the project management tool solves a more complex and costly problem for businesses; its perceived value is higher, so it commands a higher price.
Your pricing strategy must align with your product strategy. Ask yourself: is your product a premium solution or a budget-friendly option? Are you targeting enterprises or individual consumers? Your price must reflect that positioning.
Common pricing strategies and when to use them
There are multiple pricing strategies, each with different trade-offs and use cases. Understanding these is essential to make informed decisions.
Freemium pricing
Offer a free basic version with limited features, and charge for premium features.
- This lowers the barrier to entry and builds a user base.
- Monetization comes from a subset who need advanced features.
- Common in SaaS and consumer apps.
Example: A basic project management tool is free, but collaboration and reporting features require a subscription.
Subscription pricing
Charge recurring fees, monthly or yearly.
- Works well for SaaS and services.
- Provides predictable revenue.
- Enables continuous engagement.
Example: A cloud storage service charging ₹200/month for 100GB.
Tiered pricing
Offer multiple plans with increasing features and price points.
- Segments users by willingness to pay.
- Provides clear upgrade paths.
- Allows you to capture more value from different user segments.
Example: A streaming service offers Basic, Standard, and Premium plans with varying video quality and device limits.
Value-based pricing
Set prices based on the value the product delivers to customers.
- Requires deep understanding of customer problems and outcomes.
- Prices are justified by the time saved, revenue generated, or costs avoided.
Example: A CRM that saves a sales team 10 hours per week might price based on the productivity gains, not just development cost.
Competitive pricing
Set prices relative to competitors.
- Useful in markets with similar products.
- Can be used to gain market share (penetration) or position as premium (skimming).
Example: Pricing slightly below a competitor’s SaaS offering to attract price-sensitive customers.
Penetration and skimming pricing
- Penetration: Start with low prices to gain market share quickly.
- Skimming: Start with high prices targeting early adopters willing to pay more.
Both are temporal strategies depending on your go-to-market goals.
Advanced pricing strategy: blending cost, value, and market dynamics
Pricing is more than picking a number. It is a strategic decision that balances cost, perceived value, and competitive context.
Advanced cost-plus pricing
Cost-plus pricing adds a markup to the cost of producing the product. But advanced cost-plus pricing considers:
- Detailed cost structure: development, licensing, support, overhead.
- Market research on value perception.
- Strategic markup factor based on positioning.
Example: For a high-tech AI-driven CRM, if cost per unit is ₹10,000 but customers perceive value up to ₹20,000, price could be set at ₹15,000 to capture value while staying competitive.
Formula:
Price = Cost + (Value Perceived - Cost) × Strategic Markup Factor
Advanced value-based pricing
Value-based pricing requires:
- Deep analysis of customer needs and willingness to pay.
- Mapping product features to tangible customer benefits.
- Using data on usage patterns and competitor pricing.
Example: Netflix prices a premium plan ₹500 higher than the standard because customers value exclusive content and better streaming quality.
Formula:
Price = Standard Price + Added Value Premium
Competitive pricing in different market structures
Market structure influences pricing power:
- Monopoly: High pricing power, can charge premium prices.
- Oligopoly: Pricing must consider competitor actions closely.
Example: In Indian telecom (oligopoly), pricing plans at ₹350 when competitors charge ₹400 can attract price-sensitive users.
Pricing formula in competitive markets:
Price = Competitive Base Price ± Strategic Adjustment Factor
This factor reflects your goals — market share growth, profit maximization, or customer retention.
Pricing mistakes that kill products
Pricing is sensitive — mistakes can cripple your product.
The Netflix $6 mistake
In 2011, Netflix announced a split of streaming and DVD rental services, doubling prices for customers who wanted both. The backlash was brutal:
- Lost 800,000 subscribers in one quarter.
- Stock dropped 77%.
- Brand damage forced a quick reversal.
The mistake: poor communication of value and abrupt price change without customer empathy.
Overpricing or underpricing without research
Pricing without validating user willingness to pay or competitor pricing leads to lost revenue or lost customers.
Ignoring pricing as part of the product experience
Pricing shapes how users engage with your product. Freemium tiers, feature gating, and usage-based pricing influence adoption and retention. Pricing is not just a business decision — it is a product decision.
The PM’s role in pricing strategy
Pricing is a core product management responsibility because:
- You understand the user problems and value delivered.
- Pricing influences product usage and feature adoption.
- Pricing segments the market and positions the product.
You collaborate with finance and sales, but you define the strategy.
Pricing considerations in the Indian market
India’s market dynamics add specific challenges:
- Price sensitivity: Indian customers are often price conscious. Your AI-powered SaaS cannot charge a 3x premium without clear ROI.
- Data quality and feature expectations: For enterprise products, customers expect solutions tailored to Indian data and workflows, which influences perceived value.
- Competitive landscape: Many Indian startups compete in crowded segments; pricing must reflect local competitors and substitute products.
Test yourself: Pricing a SaaS product in India
You are the PM at a SaaS startup in Bangalore targeting small and medium businesses in India. Your product is a project management tool with basic features free and premium features like reporting and integrations behind a paywall. Competitors charge between ₹500 to ₹1,500 per user per month. Your development cost per user is ₹200 monthly, and the marketing budget is tight.
The call: What pricing strategy would you choose and why? How would you position your product in the market?
Your reasoning:
A real-world case study: Netflix’s pricing evolution
Netflix faced a near-death pricing mistake in 2011 with the Qwikster debacle. The attempt to unbundle DVD and streaming services and raise prices by about 60% alienated customers, causing massive churn and stock price collapse.
Netflix recovered by introducing tiered pricing for streaming — Basic, Standard, and Premium — based on features like number of simultaneous streams and video quality. This allowed Netflix to:
- Capture different willingness-to-pay segments.
- Provide clear upgrade paths.
- Increase average revenue per user subtly over time.
Today, Netflix’s tiered pricing supports a subscriber base of over 230 million and $31+ billion in annual revenue.
The lesson: pricing mistakes are costly, but a well-designed pricing strategy can fuel sustainable growth.
Pricing strategy is a dynamic process
Your pricing strategy is not set in stone. It evolves with:
- Market changes and competitor moves.
- Customer feedback and adoption patterns.
- Product maturity and feature set expansion.
- Cost structure changes, especially cloud and AI inference costs.
Regularly revisit your pricing using data and user insights.
Supporting media: Video on Pricing Strategies
Where to go next
- If you want to master product financials: Core Financial Strategies in Product Management
- If you want to build pricing into your product strategy: Product Vision and Strategy
- If you want to understand market segmentation: Market Segmentation and Targeting
- If you want to improve user research: User Research Methods
- If you want to prepare for PM interviews: PM Interviews