Pricing Your Product: Why Many Founders Undercharge and How to Fix It

You've built something. You've poured your time, energy, and resources into solving a problem for your customers. Now comes one of the most important decisions for your business: how much to charge for it. This isn't just about covering your costs; it's about communicating your value, funding your growth, and ultimately, building a sustainable business.

Many founders, especially when they're just starting, fall into the trap of pricing too low. They worry about scaring customers away, or they focus so much on their own costs that they forget the much larger value their solution brings. This initial pricing decision can set the trajectory for your entire business, affecting everything from your profit margins to your ability to hire and expand.

When you undercharge, you're not just short-changing yourself; you're often signaling that your product isn't as valuable as it truly is. Your price should accurately reflect the impact you have on your customers' lives and businesses.

The Core Idea: Pricing for Value, Not Just Cost

At its heart, pricing your product for the first time should be about value-based pricing. This means you set your price based on the perceived value your product delivers to your customer, rather than simply adding a markup to what it cost you to produce. Your costs are important – they set the floor for your pricing – but they shouldn't dictate the ceiling.

Think about it from your customer's perspective: they aren't buying your product because it cost you X to make. They're buying it because it solves a problem, saves them time, makes them money, or reduces their stress. The amount of money they are willing to pay is directly tied to how much they value that solution.

Another concept in pricing is anchoring. This is how you present your prices to influence how customers perceive them. By strategically showing different price points or comparing your price to alternatives, you can make your chosen price seem more reasonable, or even a bargain, in comparison. We'll explore how to do this practically.

So, why do so many founders undercharge? Often, it's a mix of fear of rejection, underestimating their own creation's impact, or a tendency to focus inward on their own expenses rather than outward on the customer's gain. You're building something significant; your price should reflect that.

A Step-by-Step Approach to Setting Your First Price

Let's break down how to approach pricing your product or service for the first time.

Step 1: Deeply Understand Your Customer's Problem and Your Solution's Value

Before you put a number on anything, you need to articulate exactly what problem you solve and the specific value your solution brings. Don't just list features; focus on benefits. Consider the pain you eliminate, such as wasted time, lost money, missed opportunities, or constant frustration. Also, consider the gain you provide, like increased revenue, greater efficiency, peace of mind, or access to new markets.

Once you've identified these, try to quantify them. To do this, talk to your ideal customers. Ask them how much time they currently spend on the problem you solve each week or month, what the financial impact of the problem is on their business, what the cost of not solving this problem is for them, and how much it would be worth to them to have this problem completely disappear.

Hypothetical Example: Say you run a laundry business. Your service saves a busy professional 3 hours per week of washing, drying, and folding. If that professional values their time at N5,000 per hour, your service is potentially saving them N15,000 per week in their own time. This is a significant piece of the value you deliver.

Step 2: Map Your Value to Money

Now that you understand the quantifiable value you provide, translate that into a potential price range. Your goal is to capture a fraction of the value you create for the customer.

To do this, calculate the Return on Investment (ROI) for your customer. If your product helps a business save N100,000 per month, charging N10,000 for it means they get a 900% ROI. That's a compelling proposition. Also, consider industry standards for value capture; many successful businesses aim to capture between 10% and 20% of the total economic value they deliver to their customers. If you save your customer N100,000, you might aim to charge N10,000-N20,000.

How to tell if it's working: Your customers should easily see how the money they spend on your product is significantly less than the money, time, or pain it saves or generates for them.

Step 3: Research the Alternatives (Not Just Competitors)

Your product doesn't exist in a vacuum. Customers always have alternatives, even if it's just doing nothing or using a manual process.

To research alternatives, list all existing options. These include competitors who offer a similar solution and what they charge. Consider the DIY option: can customers build or do it themselves, and what's the cost in time, materials, and effort? Also, consider the consequences of doing nothing, which is often the most expensive option in the long run. Calculate the "true cost" of these alternatives, including not just monetary costs, but also opportunity costs, frustration, and potential risks.

Hypothetical Example: If you offer a logistics system that helps businesses track shipments and reduce errors. The alternative might be manual tracking with spreadsheets, which leads to 5% of shipments being delayed or lost, costing the business N50,000 per month in refunds and lost customer trust. The true cost of not using your system is at least N50,000 plus intangible damage. Your price should be a fraction of this.

Step 4: Understand Your Own Costs (The Floor, Not The Ceiling)

While value-based pricing focuses on the customer, you still need to know your own costs to ensure your business is sustainable. This will establish the absolute minimum you can charge.

To understand your costs, calculate your Cost of Goods Sold (COGS), which is the direct cost of producing your product or delivering your service (materials, direct labor, packaging). Also, calculate your Operating Costs, which are the expenses of running your business that aren't directly tied to each unit sold (rent, salaries, marketing, software subscriptions, electricity, internet).

How to tell if it's working: Ensure your proposed price allows for a healthy profit margin after covering both COGS and a reasonable portion of your operating costs. If your value-based price is below your total costs, you need to re-evaluate either your costs or the value you're delivering.

Step 5: Design Your Pricing Structure and Anchor Points

This is where you decide how you'll charge and how you'll present those prices.

Common pricing models include a one-time fee for products with a single purchase, a subscription for monthly or annual recurring payments (e.g., software, content), per-unit or per-transaction pricing based on usage (e.g., per shipment, per user, per message), and tiered pricing, which offers different levels (Basic, Standard, Premium) with varying features and prices.

When using anchoring, remember it's about helping customers understand value in context. One strategy is to present your highest price first when showing tiers. This sets a high anchor in the customer's mind, making the mid-tier option (which might be your target) seem more reasonable. Another is the decoy effect: introduce a slightly inferior option that makes your target option look like a much better deal, for instance, an option that costs almost as much as your target but offers significantly fewer features. You can also anchor against alternatives by reminding customers of the cost of their current alternatives from Step 3. For example, "Our service costs N20,000/month, which is less than half of the N50,000 you're losing to shipment errors each month."

My Own Experience with Value and Risk: When we built the enterprise-grade platform for EMPI Costumes, which handles costume hire and equipment rental, we engineered a robust caution fee deposit hold lifecycle. This feature manages the entire process of collecting, holding, and releasing deposits, significantly reducing the risk of damage or loss for the client. A founder building such a system would consider this risk mitigation as part of the total value delivered. The peace of mind and financial security it offers justifies a price that reflects this protection, far beyond the operational cost of merely processing a transaction. It's a clear example of how mitigating a specific business risk translates directly into measurable value for the customer.

Step 6: Set Your Initial Price and Test

Don't aim for perfection on day one. Your first price is a hypothesis.

To set and test your price, pick a starting price based on your value calculations, cost floor, and chosen anchors, then select a price for your initial offering. Gather feedback aggressively through direct conversations, asking customers, "How does this price feel to you? Is it too high, too low, or just right?" For online products, A/B test different price points with segments of your audience and monitor conversion to see if people are buying at this price. Look for the "40% Very Disappointed" test, popularized by Sean Ellis, which suggests that if at least 40% of your current users would be "very disappointed" if your product disappeared, you've likely found a strong product-market fit and can command a higher price. If fewer than 40% would be very disappointed, your pricing might be less critical than improving your core offering.

How to tell if it's working: You'll see sales at your price, and customer feedback will generally validate that the value outweighs the cost. If you're getting no sales, the price might be too high or your value proposition isn't clear. If everyone is buying without question, you might be too low.

Common Pricing Mistakes and How to Avoid Them

Even with a structured approach, it's easy to stumble. Here are the most common pricing mistakes I've seen founders make and how to steer clear of them.

Mistake 1: Relying Solely on Cost-Plus Pricing

What it is: Simply adding a fixed percentage markup to your costs. Why it's a mistake: This ignores the immense value you might be creating for your customer, leaving significant revenue on the table. It also doesn't account for market demand or competitor pricing. How to avoid it: Use your costs as a floor – the absolute minimum you need to charge to survive. Your ceiling should be determined by the value you deliver to your customer.

Mistake 2: Pricing Too Low (The "Scared to Charge" Trap)

What it is: Setting a price that is artificially low out of fear of rejection or a lack of confidence in your product. Why it's a mistake: Low prices can signal low quality, making it harder to attract premium customers. It also starves your business of the resources needed for growth, marketing, and improving the product. It's incredibly hard to raise prices significantly later. How to avoid it: Understand and articulate your value (Steps 1 & 2). Trust your product. If you've truly built something valuable, customers will pay for it. Test a slightly higher price than you initially feel comfortable with. Remember, it's easier to drop a price than to raise one.

Mistake 3: Not Clearly Communicating Your Value

What it is: Assuming customers will inherently understand the benefits of your product, or focusing solely on listing features. Why it's a mistake: Customers don't buy features; they buy solutions to their problems. If they don't see the direct value your price provides, they won't buy. How to avoid it: For every feature, translate it into a benefit. Quantify that benefit wherever possible. Instead of "Our system has real-time tracking," say "Our real-time tracking reduces shipment delays by 15%, saving you N50,000 in monthly compensation costs."

Mistake 4: Ignoring Customer Segmentation

What it is: Offering a single price for all customers, regardless of their needs, size, or how much value they derive. Why it's a mistake: Different customers have different budgets and different needs. A small business might derive less value (or have a smaller budget) than a large enterprise. A single price means you either overcharge some or undercharge others. How to avoid it: Consider tiered pricing or different product offerings for different customer segments. A "Basic" tier for early-stage users, and a "Premium" tier for those who need more features and are willing to pay for greater value.

Mistake 5: Setting It and Forgetting It

What it is: Believing that once you set a price, it's fixed forever. Why it's a mistake: Markets change, your product evolves, and your costs fluctuate. What was right six months ago might not be right today. How to avoid it: Treat pricing as a dynamic process. Review your pricing at least once a year, or whenever you launch significant new features, enter new markets, or see major shifts in your costs or competition. Always be listening to customer feedback on price.

Your First Pricing Checklist

Before you launch or refine your initial price, use this checklist:

• Clearly defined the core problem my product solves.
• Quantified the value (time, money, risk, emotion) my product delivers to customers.
• Identified all customer alternatives and their true costs.
• Calculated my product's direct and operating costs.
• Chosen a pricing model (e.g., subscription, per-unit, tiered).
• Developed at least one anchoring strategy for my price presentation.
• Prepared to communicate my product's value, not just its features.
• Set a trial price and planned how to gather feedback on it.

What I'd Do This Week

1. Map your customer's biggest pain point to a quantifiable value. Sit down with a few existing or ideal customers. Ask them about the specific costs (in Naira, time, stress) of the problem your product solves. Don't just guess; get concrete numbers from them.
2. Sketch out three potential pricing tiers. Even if you only launch with one, thinking about a "Basic," "Standard," and "Premium" offering forces you to define distinct value propositions for different customer segments. What unique value does each tier offer? How would you anchor them against each other?
3. Draft a simple "Value Proposition Statement" for your target price point. It should clearly state: "For [Ideal Customer], who [has this problem], my product [solves it by doing X], which results in [quantifiable benefit Y], for [Price]." This forces clarity and value articulation.

Pricing is less about finding the "perfect" number and more about understanding the value you create. Start with confidence, listen intently to your customers, and be ready to adapt as you learn. Your price is a reflection of your belief in what you're building.

— Samuel