Setting a selling price involves balancing the cost of a product, what the market is willing to pay, and what the competition offers. A poorly calibrated price erodes the margin or drives customers away. Understanding pricing methods allows for a profitable strategy from the outset, rather than blindly adjusting afterward.
The perceived value to cost ratio: the starting point for any pricing
Before discussing formulas or margin rates, there is a mechanism that conditions every purchasing decision. The customer mentally compares what they believe they will receive (the perceived value) to the displayed price. The more this ratio leans in their favor, the more likely they are to buy without hesitation.
Take a handmade soap sold at a local market. Its ingredients are inexpensive. Yet, its price is higher than that of an industrial soap. Why does the customer pay more? Because they attribute significant value to craftsmanship, local sourcing, and the absence of additives. The perceived value justifies a price that the cost price alone would not explain.
This ratio has a direct consequence on price setting. You can act on two levers: lower the price to improve the ratio, or increase the perceived value through service, packaging, or warranty. The second option protects the margin. To delve deeper into this topic, check out pricing methods and their concrete implications.
Cost-based strategy: setting a reliable floor price
The most common method involves calculating the cost price and then adding a percentage for margin. This is the foundation of any business that sells a product or service.
Cost price: what to actually include
Have you ever noticed that a craftsman sometimes underestimates their hourly rate? This is often because certain indirect costs are overlooked. The cost price is not limited to raw materials. It includes:
- Direct costs: raw materials, subcontracting, consumables related to the production of the product
- Indirect costs: rent, insurance, administrative expenses, equipment depreciation
- Actual working time, including prospecting, management, and after-sales service
An underestimated cost price creates a fictitious margin. You think you are making money, but the business is slowly exhausting itself.
Applying the margin: margin rate or multiplier coefficient
Once the cost price is established, you decide on a margin rate. For retail, this rate varies by sector. For a service, it depends on positioning and expertise.
The calculation remains simple: selling price excluding tax = cost price x (1 + margin rate). Then add the applicable VAT to obtain the price including tax. The floor price corresponds to the complete cost price: below this, each sale generates a loss.
Setting a price relative to the competition without sacrificing margin
Aligning with the market is reassuring. But copying a competitor’s price without knowing their cost structure is risky. Their cost price may be lower than yours due to larger volumes, lower rent, or different suppliers.
Competitive analysis helps define an acceptable price range for the customer, not dictate your exact price. Position yourself within this range, then justify the difference with a concrete advantage: delivery time, personalized support, extended warranty.
A price aligned with the competition is only relevant if your margin remains positive. Selling cheaper than a competitor who is also losing money has no strategic interest.
Value-based pricing: when the product dictates the price
Why do some software programs cost ten times more than others with similar features? Because their price reflects the benefit the customer derives, not the development cost.
Value-based pricing reverses the usual logic. Instead of starting from the cost and adding a margin, you start from what the customer is willing to pay for the result obtained. This approach works particularly well for high-expertise services and distinctly differentiated products.
Identifying the willingness to pay
The willingness to pay is measured through surveys, price tests (A/B testing on an e-commerce site, for example), or analysis of past sales. The goal is to identify the threshold beyond which most customers forgo the purchase.
This threshold constitutes the ceiling price. The appropriate price lies between the floor price (cost price) and the ceiling price (willingness to pay). The higher the perceived value, the wider this gap, and the more comfortable the potential margin.
Dynamic pricing and personalized pricing: what changes in practice
Digital tools allow for real-time price adjustments based on demand, stock, or seasonality. This is dynamic pricing, common in air transport or hospitality.
Another practice, personalized pricing, uses the customer’s personal data to display a different price based on their profile. This second approach is increasingly regulated. In the United States, the FTC published a proposed enforcement policy specifically targeting personalized pricing in August 2026, and several U.S. states have adopted transparency laws on the subject.
The distinction between dynamic pricing and individualized pricing is becoming a major regulatory issue. The former adjusts a price for everyone based on an objective criterion (time, stock). The latter targets a specific individual. If you sell online, this distinction deserves particular attention before automating your pricing grids.
- Dynamic pricing: global adjustment based on supply and demand, generally lawful
- Personalized pricing: individual rate based on customer data, increasingly regulated
- Algorithmic transparency: emerging obligation to communicate the criteria for price variation
Price setting is not a one-time calculation made at the launch of a product. It is a continuous balancing act between costs, perceived value, competitive positioning, and regulatory framework. A technically fair price can be commercially poor, and vice versa. The only reliable indicator remains the actual margin, the one that appears on the income statement after all expenses.
