Strategy
A 1% price increase generates 11% more profit. Most small businesses set prices by gut feeling. Here's the right way to do it.
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Create a free accountPrice is the business decision with the biggest impact and the least attention. Most small businesses set their price by looking at the competition or by adding up their costs and tacking on a margin. The result: they leave money on the table, compete in a race to the bottom, or simply lose money without realizing it.
This guide covers the most effective pricing strategies for small businesses and startups, with real examples of how to apply them and the mistakes to avoid.
A 1% increase in price generates, on average, an 11% increase in operating profit — more than any cost reduction or volume improvement. That is because price has a direct impact on margin without generating additional expenses.
And yet most founders spend more time optimizing their AWS costs than checking whether their prices are right. That is a prioritization mistake.
The simplest and most common: you calculate how much it costs you to produce your product or service, add a profit margin, and that is your price.
Example: cost of $40, 50% margin → price of $60
Advantage: simple, and it guarantees you never sell below cost.
Disadvantage: it completely ignores the value the customer perceives. If your product is worth $200 to the customer and you sell it for $60, you are giving away $140.
Use it: as a price floor, never as your main strategy.
You set your price by looking at what the competition charges: the same, a little less, or a little more. It is the default strategy for most small businesses.
The problem: you assume your competitors priced correctly. If they got it wrong (or are running at a loss to win market share), you will copy their mistake. It also ignores your competitive advantages.
Use it: as a market reference, not as the deciding factor. Knowing what the competition charges is useful; letting it drive your decisions is dangerous.
You set the price according to the value the customer gets, not your cost or the competition. It is the most powerful strategy and the one small businesses use least.
The key question is not "how much does it cost me to make this?" but "how much is this worth to the customer?" If your accounting software saves 10 hours a month for a CEO who bills $100/hour, you are generating $1,000 of value. A price of $49/month is very reasonable.
Use it: whenever you can quantify the value. Especially in professional services, software, consulting, and B2B products.
You adjust the price based on demand, timing, channel or customer profile. It is what hotels, airlines and Uber do. For small businesses, simpler variants are:
A single price for everyone. Simple to communicate, easy to understand. The risk: it leaves money on the table with customers who would be willing to pay more, and it can be expensive for small customers.
Two or three plans with different features and prices. The most common model in SaaS. The middle plan is usually the best seller (the anchoring effect). The key is to design each plan's limits so they naturally push customers toward an upgrade.
You pay for what you consume: per API call, per message sent, per GB stored. It lowers the barrier to entry (a low starting price) but makes revenue harder to predict. It works well for infrastructure and highly measurable services.
A free version that converts to paid. The most common mistake: making the free plan too good (nobody converts) or too bad (nobody uses it). Freemium works when you have very low marginal costs and a product with network effects.
Many founders think a low price makes selling easier. In reality, the opposite happens in many markets:
The low-price trap
If you cut your price by 20% to close more deals but your margin was 30%, you now need triple the volume to earn the same. A low price is not a strategy; it is a race to the bottom.
Sooner or later you will have to raise prices. Here is how to do it well:
Every pricing decision has a direct impact on your break-even point: how many units or customers you need to cover your fixed costs. A higher price lets you reach break-even with fewer customers, which reduces operating risk.
If you want to calculate your break-even point under different pricing scenarios, use our break-even calculator.
With Hayes Strategic you can see how every price change affects your margin, your MRR and your break-even point.
The right price is neither the lowest nor the highest: it is the one that reflects the value you deliver, that the market can pay, and that lets you build a sustainable business. Reviewing it regularly — at least once a year — is not optional. It is part of strategic management.
If it has been a while since you reviewed your prices, you are probably keeping them low out of inertia. The question you should be asking is not "will my customers accept an increase?" but "how much real value am I delivering, and am I charging accordingly?"