Pricing is the one lever that directly affects both revenue and margin simultaneously — yet most sellers set prices by gut feel or by copying competitors. Price too high and conversions drop. Price too low and every sale erodes your business. Here are the six strategies that cover every product and market scenario, with real examples.
Strategy 1: Cost-plus pricing
The simplest strategy — add a fixed markup to total cost. Guarantees you always cover costs but ignores what the market is willing to pay.
Total Cost = Product Cost + Overhead per Unit
Cost-Plus Price = Total Cost ÷ (1 − Target Margin%)
Example: Cost $15, Overhead $3, Target Margin 40%
Total Cost = $18
Price = $18 ÷ (1 − 0.40) = $18 ÷ 0.60 = $30.00
Gross Profit = $30 − $18 = $12 (40% margin ✓)Note the formula uses margin (% of revenue), not markup (% of cost). Using the wrong formula is the most common pricing maths mistake — a 40% markup would give you $18 × 1.40 = $25.20, which is only a 28.6% margin, not 40%.
Strategy 2: Target margin pricing
Identical in result to cost-plus when you specify the desired gross margin. The calculator shows both to make the margin explicit. Always use this formula when working backwards from a margin target:
Price = Total Cost ÷ (1 − Desired Margin%)
At 50% margin: Price = $18 ÷ 0.50 = $36.00
At 60% margin: Price = $18 ÷ 0.40 = $45.00Strategy 3: Competitive pricing
Anchors your price relative to the market. The calculator sets this at 5% below the competitor price you enter — a common positioning that signals value without being the cheapest option. If your product is genuinely differentiated, price at parity or above.
Competitive Price = Competitor Price × 0.95
Example: competitors sell at $29.99
Your competitive price = $29.99 × 0.95 = $28.49Strategy 4: Psychological pricing
Prices ending in .99 or .95 are perceived as significantly cheaper than rounded numbers, even when the actual difference is $0.01. Research consistently shows that $19.99 outsells $20.00 even when buyers know exactly what is happening.
Psychological Price = Math.ceil(Cost-Plus Price) − 0.01
Example: cost-plus price is $28.50
Psychological price = $29 − 0.01 = $28.99Psychological pricing works best for consumer products priced under $200. Above that, round numbers ($1,000 vs $999) often signal quality and premium positioning.
Strategy 5: Keystone pricing
A traditional retail rule of thumb: price at exactly 2× total cost. This gives a 50% gross margin — enough to cover retail operating costs while leaving room for markdowns during sales.
Keystone Price = (Product Cost + Overhead) × 2
Example: Cost $15 + Overhead $3 = $18 total cost
Keystone Price = $18 × 2 = $36.00 (50% gross margin)
Useful check: if your keystone price is below your
competitor price, your cost structure is competitive.
If it is far above, investigate your COGS.Keystone pricing originated in brick-and-mortar retail, where 50% gross margin was the minimum needed to sustain physical store economics. For ecommerce with lower overhead, keystone is often the floor, not the target.
Strategy 6: Value-based pricing
Price based on the value the customer receives, not what it cost to produce. If your product saves a business $500/month in labour, charging $99/month is easily justified regardless of your COGS. This is the pricing model behind most successful SaaS products.
Value-based pricing requires understanding your customer's alternatives — what would they pay otherwise? A design tool that replaces a $5,000/month agency contract could justify a $299/month price even if it costs $10 to serve each customer.
Demand elasticity — how price-sensitive are your customers?
Price elasticity of demand measures how much quantity demanded changes with a 1% price change. Enter it in the calculator to understand your sensitivity:
| Elasticity | Meaning | Example products |
|---|---|---|
| −0.5 (inelastic) | 10% price rise → 5% volume drop | Insulin, utilities, luxury goods |
| −1.0 (unit elastic) | 10% price rise → 10% volume drop | Many consumer staples |
| −2.0 (elastic) | 10% price rise → 20% volume drop | Commodity products, price-comparison markets |
How the recommended price is calculated
If competitor price exists:
Recommended = (Cost-Plus × 0.5) + (Competitive × 0.5)
If no competitor data:
Recommended = Cost-Plus Price
This blends profitability (cost-plus ensures margin)
with market positioning (competitive anchors to market).Frequently asked questions
Should I always price at the recommended price? Use it as a starting point, not a final answer. Factor in your brand positioning, product quality signals, and whether you are in a price-sensitive commodity market or a differentiated niche.
What is the minimum viable price? The price floor below which you lose money on each sale — calculated as total cost ÷ (1 − minimum acceptable margin %). The calculator shows this as a separate card so you always know your floor.
When should I use keystone vs target margin pricing? Use keystone as a sanity check and target margin for precision. Keystone (50% margin) is appropriate for physical retail. Digital products and SaaS typically target 60–80% gross margins.
Find your optimal price free →Related tools: Profit Margin Calculator · Break-Even Calculator · Discount Calculator · Shopify Profit Calculator