When defining a go-to-market strategy for a new product, pricing is often the most intimidating part. Set the price too high and you will not sell. Set it too low and you will leave money on the table. Because of this, pricing is frequently postponed, until a client finally asks the inevitable question: “How much does it cost?” At that point, panic often replaces strategy.
Yet, pricing can be the single factor that determines whether a new product succeeds or fails. If it is so critical, why is it so often delayed?
1) Complexity. Pricing requires inputs from multiple domains, both market-facing (marketing, sales) and internal (product development, data science, legal, finance).
2) No one-size-fits-all approach. Every product/market combination is different, even within the same product line. There is no formula that works for everyone.
3) Where the “rubber hits the road”. Few business numbers carry as much weight as price. It implicitly includes all the key business assumptions: total addressable market, customer value, margins, expected market share.
Does agentic AI change the rules of the game?
Setting the right price has always been of paramount importance for new products. But the latest commercialization of agentic AI has left many product leaders questioning whether strategic pricing should change.
The fact is that products using AI can create and sustain customer value in unprecedented ways. Utility, emotional, and social engagement are no longer attributable to broad customer groups but to micro-segments. Products using agentic AI can better adapt to evolving customer needs and create not only personalized, but also dynamic, customer experiences.
Dynamic personalization means that customer value changes over time. Products continuously adapt to user behavior and sustain value delivery for longer. Compared to traditional data-driven personalization, the difference is in speed, in two ways:
- Knowledge packaging. AI agents do not just use sheer amounts of data. They also repackage existing knowledge instantaneously, so that information feels highly contextual and relevant.
- Adaptive learning. AI agents learn from every customer interaction and immediately reuse that knowledge, refining the value delivered to each individual customer.
It is then no surprise that pricing agentic products has quickly become, for good reasons, a central question for many product teams. But this brings a more fundamental question: should the principles of pricing actually change as a result?
Probably not.
Pricing remains linked to the actual value that organizations, within specific competitive environments, can deliver to customers when it matters.
Pricing is complex. The good news is that it does not have to be complicated, and there is no need to reinvent the wheel. What changes is not the foundation of pricing, but the context in which those principles must be applied. While products become more personalized, applying pricing correctly requires a deeper understanding of the underlying principles that govern pricing and buying decisions. For this reason, before choosing how to price, it is essential to understand the core principles that govern pricing decisions.
Pricing strategies for new products fall into three categories: Value-Based Pricing, Competitive Pricing, and Cost-Plus Pricing. These approaches are not isolated. They rather build on top of each other. These approaches stand on three fundamental pillars: Game Theory, Supply & Demand, and Prospect Theory. Strategy, Economics, and Psychology are the forces that support each pillar.
The 3 pillars of pricing
Three concepts constitute the foundation of pricing. Together they integrate all the key angles required to think about pricing: economics, strategic thinking and psychology. Understanding them beforehand is like washing our hands before cooking a meal. They are:
1. Supply and demand
2. Game theory
3. Prospect theory
1. Supply and Demand
Economist tell us that price is where the forces of demand and supply meet. It sounds abstract but the idea simple.
1) Price increases with demand. The more customers want your product, the more you can charge for it.
2) Price decreases with supply. The scarcer and more differentiated your product is compared to competitors, the more you can charge for it.
Balancing these two forces generates the optimal price, or the “price equilibrium”. The following graph illustrates how supply and demand orginate the optimal price.
Combining supply and demand gives us a starting point for determining price. The next question is: “what happens to sales when price changes?”
Intuitively, when price increases, fewer customers buy the product, and vice versa. So the key question is by how much demand changes when price moves. To answer this question, we need to know how sensitive demand is to price changes. This sensitivity is the elasticity of demand.
Elasticity measures how much unit sales change when price changes slightly.
- In low-elasticity markets, price increases have little effect on demand.
- In high-elasticity markets, small price changes cause large swings in sales volume.
Elasticity is not just a fixed property of the market. It can also be influenced by the product’s value proposition.
Strong brands, ecosystems, and switching costs reduce elasticity, meaning customers continue buying even when prices increase. For example, Apple’s ecosystem of hardware, software, and services makes switching to Android or Windows costly in terms of time and effort.
In many ways, price elasticity is a practical measure of customer loyalty.
2. Game Theory
Price changes influence not only demand, but also competitor behavior.
When only a few large players compete for market share in an industry, the actions of one company can trigger responses from others. Game theory studies this interdependence and helps predict when price changes will trigger retaliation, accommodation, or escalation.
For example, if one firm lowers its price to gain market share, competitors may retaliate with their own price cuts. If this back-and-forth continues, a price war can emerge. When prices drop, margins disappear, and in extreme cases one company may exit the market while the other survives with thin margins and little ability to raise prices again.
Because of this, predicting how competitors will react to pricing moves becomes critical. Competitor analysis and game theory help anticipate these reactions and identify pricing strategies that avoid destructive outcomes.
For startups focusing on narrow beachhead markets, the risk of triggering an immediate reaction from large incumbents may be lower. Large players often avoid aggressive price responses when volumes are small and the short-term financial impact is limited. Nevertheless, the possibility that incumbents—or new entrants—respond to pricing moves should always be considered.
In many ways, pricing resembles a game of chess: every move anticipates the opponent’s next move.
3. Prospect Theory
Beyond economics and strategic thinking, psychology plays a crucial role on how people react to prices. Research in behavioral economics shows that people do not evaluate prices rationally. Instead, their decisions are influenced by cognitive biases. Prospect theory, developed by Daniel Kahneman and Amos Tversky, explains how individuals perceive gains and losses differently.
This means that price framing and presentation matters as much as the price number itself.
A few cognitive biases are particularly relevant for pricing.
- Anchoring. The first price a consumer sees for a product, sets an expectation for all future purchasing decisions. Once a product or feature has been introduced at a certain price, changing that price becomes difficult. This is why launching products with heavy discounts can be risky, as it makes later price increases harder to justify. Similarly, presenting a premium option before a standard option can make the latter appear more affordable.
- Loss aversion. Consumers feel the pain of a price increase (losses) much more strongly than the pleasure of an equivalent discount (gain). Therefore, avoiding a surcharge is more motivating than gaining a bonus. For example, when a free trial ends, loosing it feels like a loss, which encourages users to purchase.
- The power of free. In his bestselling book Predictably Irrational, Dan Ariely shows how “Free” is not just the price of zero. It triggers an emotional response that makes free options far more attractive than deeply discounted ones. This is why free trials, freemium models, and free shipping are often more compelling than temporary discounts.
- Pain of paying. Spending money creates a psychological discomfort that reduces the enjoyment of a product. Bundling costs into a single payment reduces the frequency of that discomfort. Conversely, separating gains (such as multiple small discounts) often feels more rewarding than a single combined discount.
A natural question is whether exploiting these biases is ethical. As long as the approach remains transparent and aligned with the consumer’s interests, applying insights from prospect theory can improve decision-making for the customer. For example, nudging can simplify complex choices and help people make decisions that benefit them.
The 3 main pricing strategies
Once we understand the fundamentals of pricing, the next question is how to apply them in practice. In other words, how do we actually set the feared price?
In practice, most pricing strategies fall into three main ones:
Cost-plus pricing
Cost-plus pricing seems straightforward: calculate your total unit cost, add a markup, and set the price. However, to determine a “total unit cost” we must account for fixed costs, including rents, labor, and infrastructure. Because these don’t scale directly with production, we divide them by our expected sales volume. This creates a “chicken and egg” problem:
- To set a price, we need to know our unit cost.
- To know our unit cost, we must predict our sales volume.
- But, sales volume is ultimately driven by the price that we still need to set.
So, if we overestimate our volume, our markup per unit looks profitable on paper but small in reality. This is particularly lethal for new products with high upfront R&D costs and low initial sales.
To avoid overpricing early-stage products, many ventures base markup on variable costs only, rather than on total costs, so that sales volume are out of the equation.
In this way, by ensuring a healthy gross profit margin, pricing focuses on the “contribution” each sale makes toward covering the fixed overhead. While “healthy” varies by industry, ranging from 12% in Automotive to 80%+ in Software, a general benchmark of >40% is often the target for sustainable growth.
For startups heavily relying on customer acquisition (online marketing, agents, distributors, and so on) a robust pricing strategy ensures that the gross margin generated by the average customer during its average retention period is at least 3x the cost spent to acquire that customer.
Competitive pricing
Since cost-plus pricing focuses only on the company’s cost structure, it is essential to look at competitors and alternatives. After all, customers evaluate a product primarily in relation to the next best option available to them.
Ideally, when a product goes to market it has a distinct value proposition. Even products that imitate existing ones usually introduce improvements (better usability, specific features, or a sharper focus on a particular segment). However, no matter how unique a product is, customers will always compare it with alternatives and may trade some of that value for a lower price.
In practice, this means that the price markup relative to the closest alternative must remain acceptable for the target segment. Put simply, customers must perceive that the additional value they receive justifies any price difference.
If the required markup becomes negative, meaning the product price goes below cost to compete, it is usually a signal that going to market is not viable. The main exception is when there is a clear strategic objective, such as temporarily undercutting a competitor to gain market share or force consolidation.
A well-known example occurred in 2010 when Amazon aggressively reduced diaper prices, at times selling at a loss, to pressure Diapers.com, which it later acquired.
Undercutting competitors does not necessarily require selling below cost. A company may be able to offer lower prices simply because it operates with structurally lower costs. These advantages can come from product simplification or from innovative solutions. An example is Agfa Radiology Solutions, which launched the VALORY™ digital radiography room in Europe in 2021. The system provides high-quality imaging at a lower price and complexity level, making it suitable for smaller clinics and offering a practical alternative to expensive high-end radiology systems.
Value-based pricing
A cost-plus pricing starts from the company’s costs, while competitive pricing anchors the price to available alternatives. Value-based pricing starts from the customer ‘s point of view instead.
The idea is simple: if a product generates superior value for a specific customer segment, the price can exceed costs or competitor benchmarks to reflect the economic value created for the customer, whether through higher productivity, lower risk, time savings, or better outcomes.
In practice, the question becomes: “how much better off is the customer by using this product?” The greater the value generated, the greater the pricing power.
A well-known example of value-based pricing comes from ASML. Its extreme ultraviolet lithography machines enable chip manufacturers to produce more advanced semiconductors that would otherwise be impossible to manufacture at scale. Because the value created for customers is enormous, ASML can afford to price these systems at hundreds of millions of euros per unit, far above their production cost and largely independent of competitor benchmarks.
An important caveat with value-based pricing is that value alone does not directly translate to willingness to pay. In other words, if a product generates a certain amount of monetary value for the average customer in a given market segment, the customer’s willingness to pay will be only a fraction of that value. This is because the customer will perceive only part of that value. Emotional, cultural or even political factors will lower customer willingness to pay.
Pricing as a rational decision
Pricing is both intimidating and critical, but it does not require reinventing the wheel. Solid pricing strategies should combine 3 general perspectives: costs, competitors and value created for customers.
While price is a crucial number, it is not immutable. Although lowering prices is far easier than increasing them, prices can usually be adjusted over time, within certain limits. For this reason, it is better to start from a thoughtful pricing logic rather than from a number chosen in a hurry.