Pricing is not just a number you put on a product. It is a strategic lever that defines who you serve, how you compete, and whether your product survives.
Pricing is the fulcrum between what your product costs you to build and what customers are willing to pay. The trap many PMs fall into is treating pricing as a simple markup exercise or a checkbox task delegated to finance. The actual job is far more complex — it requires understanding your cost structure, customer value perception, competitive dynamics, and how all these interact in your market context.
If you cannot answer how your pricing reflects both your costs and your customers' willingness to pay, you are not ready to own your product’s financial success.
Cost-plus pricing is more than a markup
Cost-plus pricing gets a bad rap for being simplistic. The reality is that an advanced cost-plus pricing approach is a strategic tool — not just a formula.
The core idea is simple: Price = Cost + Markup. But the question is: how do you determine the markup? And what costs do you include?
In practice, you start by mapping your full cost structure — direct costs like materials or cloud compute, indirect costs like support and licensing, and overheads such as admin and sales.
Then you overlay market research on how much value your target customer segment perceives in your product. This is crucial. A naïve markup might price you out of the market or leave money on the table.
Consider an advanced AI-driven CRM system. Suppose the total cost per user per year is ₹10,000, including development amortization, licensing fees, support, and overhead.
Market research shows customers perceive value up to ₹20,000 per user per year because of productivity gains and sales uplift.
A simple 20% markup would price the product at ₹12,000 — but that leaves significant value uncaptured.
An advanced approach sets the price at ₹15,000, balancing competitive positioning and value capture.
The formula becomes:
Price = Cost + (Value Perceived - Cost) × Strategic Markup Factor
Here, the markup factor reflects your market power, competitive intensity, and risk appetite.
This approach requires you to deeply understand your costs and your customers' value perception — not just guess or apply a fixed percentage.
Value-based pricing centers the customer’s willingness to pay
While cost-plus pricing starts with your costs, value-based pricing starts with the customer.
Your price reflects the value your product delivers to the customer’s business or life, not your internal costs.
That means you must know:
- What problem your product solves
- How critical that problem is
- How much economic or emotional value the solution creates
- How much customers are willing to pay for that value
Take Netflix as an example. Their pricing isn’t based on the cost of streaming infrastructure or content acquisition alone. Instead, it reflects the value customers place on exclusive content, convenience, and user experience.
Netflix offers tiered plans: a standard plan at ₹650 per month and a premium plan at ₹1,150 per month with added value like 4K streaming and multiple simultaneous streams.
The formula here is:
Price = Standard Price + Added Value Premium
The premium reflects the customer’s incremental willingness to pay for exclusivity and enhanced experience.
Value-based pricing requires rigorous customer research — surveys, conjoint analysis, usage data — to quantify willingness to pay.
It also demands ongoing experimentation and iteration. Your assumptions about value will evolve as your market and competitors change.
Pricing strategies in different market structures
Pricing does not exist in a vacuum. The market structure you operate in shapes your pricing power and tactics.
Monopoly and oligopoly give pricing power — with strategic constraints
In a monopoly, you can set prices higher because customers have no alternatives.
For example, a proprietary enterprise software vendor with a unique product can charge a premium reflecting that monopoly.
In an oligopoly — like the Indian telecom market dominated by a few players — pricing is a game of strategic positioning.
If three major telecom providers offer similar plans at ₹400, a new entrant might price at ₹350 with additional benefits to attract customers.
But this triggers a competitive response, leading to price adjustments.
Here, pricing is modeled as:
Price = Competitive Base Price ± Strategic Adjustment Factor
The adjustment factor depends on your objectives — market share gain, margin protection, or customer retention.
Continuous market monitoring and rapid pricing agility are essential.
Balancing cost, value, and competition: The Indian context
India’s market dynamics add layers of complexity.
Cost sensitivity is high. Customers expect value but resist price increases unless clearly justified.
Value perception varies widely. Urban enterprise clients may pay a premium for SaaS products like Razorpay’s payment gateway, but small businesses in Tier 2 cities might prioritize affordability.
Competition is fierce and fast-moving. Companies like Swiggy and Meesho constantly adjust pricing and promotions to capture market share.
A pricing strategy that ignores these realities will fail.
The PM’s job is to blend cost understanding, value insights, and competitive intelligence into a coherent pricing approach.
Pricing models you must know
Here are common pricing models and when they fit:
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Freemium: Basic features free, premium paid. Useful for products with network effects or to acquire users quickly.
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Subscription: Recurring fees, often monthly or yearly. Ideal for SaaS and services with ongoing value.
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Tiered Pricing: Different plans for different segments, capturing variation in willingness to pay.
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Competitive Pricing: Pricing relative to competitors. Important when products are similar commodities.
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Penetration Pricing: Low initial price to gain market share, then gradual increases.
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Skimming Pricing: High initial price targeting early adopters, then lowering over time.
Your choice must align with your product strategy and market realities.
The Netflix $6 mistake and the power of tiering
Netflix’s 2011 attempt to split streaming and DVD services into separate products with a combined 60% price hike was a catastrophe.
Customers felt betrayed, leading to 800,000 cancellations in a quarter and a 77% drop in stock price.
The lesson: pricing changes must be carefully communicated and aligned with customer value perception.
Netflix recovered by introducing tiered streaming plans (Basic, Standard, Premium) that captured different willingness to pay segments and increased average revenue per user over time.
This example underscores that pricing is a blend of economics, psychology, and storytelling.
The PM’s role in pricing strategy
You are not just handing over a number to finance. Pricing is a core PM responsibility because:
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You understand the user’s problem and value drivers.
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Pricing shapes product usage, adoption, and customer segmentation.
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Pricing decisions affect your product’s market positioning and competitive dynamics.
Your job is to design pricing that maximizes value capture without alienating customers or ceding market share.
Test yourself: Pricing the AI CRM
You are the PM for an AI-driven CRM platform targeting mid-sized Indian enterprises. Your total cost per user per year is ₹10,000. Market research shows your target segment values the product up to ₹20,000 per user per year due to productivity gains. Competitors price similar products around ₹12,000.
The call: How do you set your price? What factors influence your markup? How do you justify your pricing to leadership and sales?
Your reasoning:
Field exercise: Map your product’s pricing levers (15 min)
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Choose a product you are familiar with — preferably one you manage or use frequently.
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List all the costs involved in delivering this product: direct, indirect, and overhead.
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Research or estimate the value your product delivers to its users. What problem does it solve, and how critical is it?
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Identify your competitors’ pricing and market positioning.
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Based on this, draft a pricing formula that balances cost, value, and competition.
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Reflect: What risks does your pricing strategy carry? How could you test or validate it?
Where to go next
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If you want to master user-centered pricing: User Research Methods
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If you want to align pricing with product vision: Product Vision and Strategy
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If you want to sharpen financial acumen: Metrics and KPIs
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If you want to prepare for PM interviews: PM Interviews
PL alumni now work at Flipkart, Razorpay, Swiggy, PhonePe, Amazon, Microsoft, and 30+ other companies.