Pricing strategy and value creation in competitive markets

Introduction

“You don’t build pricing strategy from spreadsheets. You build it from value.”

In most product organizations, pricing is either treated as a finance lever or reduced to simplistic cost-plus formulas. But great product leaders know: pricing is strategy. It’s how you signal value, shape perception, segment your market, and capture margin.

Economics 101 teaches us price elasticity, demand curves, and equilibrium. But in the real world, markets are not perfect, consumers are not rational, and products are not equal. The job of a product leader is not just to price the product, it’s to create and defend the right to price.

Conventional View vs Strategic Product Thinking

The conventional view (Economics 101):

• Price Elasticity of Demand (PED): Measures how demand changes relative to price.

• In perfect competition, small price changes lead to large swings in demand.

• Supply and demand curves dominate decision logic.

• Standard tactic: Cost-plus pricing (e.g., Cost + 20%).

What's missing in this view:

1. Value-Based Pricing > Cost-Based Pricing

“Cost is a floor. Value is the ceiling. Price is the bridge.”

Cost-based pricing (e.g., cost + 20%) is convenient but deeply flawed:

• Easy to calculate, hard to justify to the customer.

• It’s internally focused, ignoring customer willingness to pay.

• It encourages underpricing valuable products and overpricing irrelevant ones.

• It commoditizes your offering, inviting comparison.

Instead, modern product teams focus on value-based pricing:

• Anchor pricing to perceived customer outcomes, not internal effort.

• Understand where in the customer's journey the product creates, saves, or enhances value.

• Price segmentation by persona, job-to-be-done, or urgency.

• Price cuts without understanding value can destroy profitability.

2. Price Elasticity of Demand (PED): What it is and isn’t

Definition: Price elasticity measures how sensitive demand is to changes in price. Formally:

$$\text{PED} = \frac{\%\ \text{Change in Quantity}}{\%\ \text{Change in Price}}$$

But here's the key:

• High elasticity ≠ green light to cut price.

• Elasticity does not consider margins or profitability.

Thought experiment:

If PED = 3, and margin = 20%, should you cut price by 10%, so demand increases by 30%? Sound good?

Most would say yes, because:

• 10% price cut → 30% demand increase (PED = 3)

• More units sold = more revenue?

But here’s the trap:

• Your margin drops from 20% to 10%

• To make the same total profit, you now need to sell 100% more, not just 30%

3. Market Structure shapes Pricing Power

Different markets = different pricing realities:

4. The Margin Trap: Why price wars fail

Thought experiment:

• Two players (e.g., A and B) each make $100 profit in a stable market.

• A cuts price to gain market share → now A makes $120, B drops to $60.

• B retaliates with its own price cut → both end up making $80.

• Net result: the total market profit drops, and both players lose margin compared to the starting point.

Insight:

• Competitors rarely compete on price at the same time.

• Price wars erode total market profitability, not just individual performance.

Long-term consequences:

• Brand devaluation

• Lower R&D investment

• Loss of pricing power

5. Small Price Premium → Massive Profit Impact

“A 1% price premium can result in a 12% increase in net margin.”

Let’s say your average product margin is 8.5%. If you increase price by just 1%:

• Margin jumps to 9.5%

• That's a 12% increase in profit (9.5 ÷ 8.5 = 1.12)

At 5% price premium, profit can rise by 50–60%, assuming costs stay flat.

6. What great products do differently

Final thought

“Pricing is not a math problem. It’s a strategy problem.”

By mastering value-based pricing and understanding the dynamics of your market, you unlock margin, protect brand strength, and avoid the death spiral of commodity competition.

If everyone has the same hammer, it’s not about the hammer, it’s about what you build with it. Product innovation now lies in wrapping commoditized intelligence in differentiated value.