How to Price a New Product or Service

How to Price a New Product or Service

Short answer: price sits between four boundaries. Your cost floor, the competitor anchor, the customer’s value ceiling, and their willingness band. Find all four before you pick a number, then set your price at the top of what you can justify with evidence rather than the bottom of what you can get away with. 

The most common and most expensive pricing mistake in a new business is starting too low, because your first price becomes the reference point for every customer, every referral, and every increase you’ll ever have to argue for.

The four boundaries

1. The cost floor, below which you lose money

           Cost floor = cost of delivery ÷ (1 minus your target contribution margin)

If a sale costs £42 to deliver and you need a 55% contribution margin, the floor is £42 ÷ 0.45, which is £93.33.

Include your own labour at replacement cost. A floor calculated on unpaid founder time isn’t a floor, it’s a trapdoor.

This is a floor, not a price. Cost-plus pricing is the weakest method available, because it prices your inefficiency rather than the customer’s outcome. Use it to know where “no” begins, and nothing more.

2. The competitor anchor, or what buyers have been trained to expect

From your competitor research, plot the actual price spread. You need three numbers: the low end, the cluster in the middle, and the high end.

The important part is working out what the high-priced providers include that the low-priced ones don’t. That list is your menu of justifications. If every £180 provider includes a written report and the £90 ones don’t, then the report is worth roughly £90 in that market, and you now know exactly what to build.

3. The value ceiling, or what the outcome is worth to the buyer

Quantify what happens when the problem is solved.

Money gained or saved. Recovering six hours a month of a £22-an-hour role is £132 a month of value.

Risk removed. What does the failure cost, and how likely is it? A £4,000 penalty with a 20% annual likelihood is £800 of expected value.

Time returned, priced at what that person’s time is genuinely worth to them.

Emotional value, meaning relief, status and confidence. Real, often large, and hard to quantify. Consumers pay for it constantly.

Your ceiling sits roughly where the customer’s return stops feeling obvious. As a rule of thumb, B2B buyers want a visible three to five times return. Below two times, the purchase feels marginal and gets deferred indefinitely.

4. The willingness band, or what this segment actually pays

Ceiling and willingness are not the same thing. A service can be worth £2,000 to a sole trader who has never spent more than £300 on anything in their life. Budget norms, category expectations and internal approval thresholds cap what people will pay regardless of the value on offer.

Find the band in interviews by asking what they spend on this now, and what the largest single amount they’ve ever spent on something similar was. Past behaviour again, never hypothetical willingness.

Your price lives between the floor and the lower of the ceiling and the willingness band. If the floor sits above both, the business model is wrong, not the price.

Worked example: mobile sports massage

The floor is £97. The willingness band tops out around £70. The model does not work as designed.

That isn’t a pricing failure, it’s a structural finding, and it arrived before any money was spent. Four fixes are visible immediately.

Reduce travel cost per session by clustering appointments geographically or working from one venue two days a week. This alone can drop the floor to around £70.

Change the unit sold. A block of six sessions at £58 each, paid upfront, raises cash, cuts no-shows and reduces acquisition cost per session.

Move the segment. Sports clubs and corporate on-site days pay by the day rather than the session, and the floor collapses once travel is amortised across eight clients.

Raise the ceiling with an assessment. The £85 providers include a written report.

Adding one moves you into the top band instead of competing inside the £60 cluster.

The pricing exercise redesigned the business. That is what it’s for.

Six structures, and what each does to your economics

Price isn’t only a number. The shape of the price often matters more than the figure.

The three-tier structure deserves particular attention, because it works in almost every category. Build it deliberately.

Tier one anchors low. Deliberately limited. It exists to make tier two look complete, and to catch price-sensitive buyers who would otherwise leave without buying anything.

Tier two is the target. This is where you want 60 to 70% of buyers to land. Priced at your real target, containing everything a normal customer needs.

Tier three anchors high, priced at two to three times tier two. Its main job is making tier two look reasonable. A minority always buy it, and that’s pure upside.

Without a high tier, your top price is the anchor, and everything you offer looks expensive by comparison. Adding one typically shifts the mix upward without changing anything about the core offer.

Setting the opening price

Start higher than feels comfortable. Specifically: pick the number your evidence justifies, then check that it sits in the upper half of the competitor cluster. Several reasons this matters more than founders expect.

Low prices attract the worst customers, who are the most demanding, the most pricesensitive and the quickest to leave. Price signals quality in every category where quality can’t be assessed in advance, which is most of them. Discounting from a real price is easy, while raising from a low one costs you the relationship. And you’ll need margin to fund acquisition, absorb mistakes and reinvest.

Never open with a discount as your headline. If you want to reward early customers, make it a bounded extra rather than a lower price: extra scope, a longer guarantee, an added service, priority scheduling, or explicitly time-limited founding-customer terms. That protects the reference price while still rewarding people for taking a risk on you.

The signal that you’ve priced too low

If you’re winning more than 70 to 80% of quotes, your price is below what the market will bear. A healthy win rate in most categories sits between 30 and 50%. Losing deals on price isn’t failure, it’s evidence you’re operating at the top of your band. Losing no deals on price means you’ve left money on the table on every single sale.

Testing price properly

You don’t need a formal experiment to test price.

Quote higher on the next five enquiries and change nothing else. Compare win rate and total contribution, not win rate alone. Four wins at £600 beats six at £380.

Test the tier structure rather than the headline number if you have enough volume to compare.

Watch the pause. In live quoting, the moment of visible hesitation tells you where the band ends more reliably than any survey will.

Ask the prospects you lost. Was it price, or something else? A surprising proportion say something else, and if they do, price was never your problem.

Raising prices later

Every new business under-prices at the start. Plan the correction instead of dreading it.

When to do it: when you’re winning over 70% of quotes, when you’re capacityconstrained, when input costs have risen, or annually as a matter of policy.

How to do it, in order of ease.

Start with new customers only. Raise the rate for anyone arriving after a set date. Zero risk, immediate margin, and it establishes the new reference price quietly.

Add before you increase. Introduce a genuine improvement, whether that’s a report, a guarantee or faster turnaround, and price the new version higher. You aren’t raising a price, you’re releasing a better product.

Then existing customers, with notice and a reason. Thirty to sixty days’ notice, a specific reason, and an option that softens it, such as locking the old rate for twelve months by moving to annual payment. 

Expect some churn and model it: a 15% increase can absorb roughly 13% of customers leaving before you’re worse off, and the ones who leave are usually your least profitable.

What actually happens is far less dramatic than founders fear. Most report that the customers they were most worried about losing didn’t comment at all.

Five pricing errors that persist for years

Pricing your cost instead of their outcome. Your effort is not the value.

One price and one option. No tiers means no anchoring and no upgrade path.

Competing at the bottom. The cheapest position is the only one that can always be taken from you.

Charging for time when you sell outcomes. Getting faster should increase your income, not reduce it.

Never revisiting. A price set in year one and held through three years of cost inflation is a silent, compounding pay cut.

Frequently asked questions

What if my costs mean I have to charge more than competitors?

Then either your model needs changing or your position does, and it’s worth working out which before you discount. Higher costs usually come from a structural choice such as travel, small batch sizes or delivering everything personally, and those can often be redesigned. Where the cost is inherent to a genuinely better offer, the answer is to make that difference visible and verifiable so the higher price reads as a reason rather than a penalty.

Should I publish my prices on my website?

Publish them if your offer is standardised, if buyers commonly compare before enquiring, or if you want to filter out people who can’t afford you. Keep them off the page when scope varies enormously and a number without context would mislead. A useful middle path is publishing a starting price or a typical range, which qualifies enquiries without committing you to a figure before you understand the job.

How do I handle a customer who asks for a discount?

Trade rather than concede. Reduce the scope, extend the timeline, ask for payment upfront, or offer a smaller package at a lower price, so the discount buys you something in return. Simply lowering the number teaches that customer, and anyone they refer, that your price is negotiable. Where you genuinely want to win the work, a time-limited concession with a stated reason does less damage than an open-ended one.

What price should I charge for my very first customer?

Your real price, with a bounded extra if you want to reward them for taking the risk. Charging almost nothing feels safer and creates two problems: you learn nothing about willingness to pay, and you cannot raise the price later without a difficult conversation. If you need the first customer badly, offer more scope or a stronger guarantee at full price rather than a lower number.

How often should I review my prices?

Once a year as a minimum, and immediately whenever a key input cost moves materially or your win rate climbs above 70%. An annual review works best as a scheduled policy rather than a reaction, because it removes the emotional weight from the decision. Businesses that never revisit prices are the ones taking a compounding pay cut without noticing it.

Is it better to charge hourly or a fixed price?

Fixed pricing is better in almost every case where you can define the deliverable, because it rewards you for getting faster and makes the decision easier for the buyer. Hourly makes sense when scope is genuinely unpredictable, when the client controls the direction of the work, or early on while you’re still learning how long things take. A common path is starting hourly to gather data, then moving to fixed prices once you know your real delivery times.

What if a competitor undercuts me heavily?

Check first whether they’re actually cheaper or simply quoting less scope, because the two look identical from the outside and usually aren’t. Where the price is genuinely lower, don’t match it. Compete on the dimensions the review evidence says buyers are unhappy about, such as responsiveness, honest quoting and communication. Businesses winning on price alone tend to be unsustainable, and matching them shortens your life rather than theirs.

How do I price something nobody else sells?

Anchor on what the customer does today instead of on competitors, since the true alternative is always the current approach. Price against the cost of that alternative, whether that’s staff time, a workaround, a substitute product or the cost of doing nothing. 

Then test with a small number of buyers at two different prices to find where hesitation begins. Without a competitor anchor, the willingness band becomes your most important boundary and the one worth testing hardest.