What is the correct strategy on which pricing is based?

Many entrepreneurs start with the famous statement, "I’ll enter the market with the best quality and the lowest price," but this strategy often collides with reality. That’s why I’d like to discuss this topic a little.

Peter Drucker, the father of management, considered that the third sign of a company's decline and death is pricing based on cost. Here, we are talking about successful companies that make a difference in the market.

This is a simple approach used by many businesses, which involves calculating the cost and then adding a profit margin on top of it.

This method is not wrong in traditional businesses, but it becomes problematic for entrepreneurial ventures aiming to make an impact in the market and offer a unique product. The reality often proves otherwise; entrepreneurs quickly face competition and find themselves needing to redesign the product or service to align with the market, which increases costs.

At this point, many businesses cut back on features and quality in a bid to maintain profitability. While making a profit is a given, the more important question is: Is the customer responsible for making the profit for you? Should they bear the burden of competition on your behalf? So, what is the right approach?

The correct approach is that the customer is not responsible for generating your profit, nor should they be expected to accept a subpar product simply because you're trying to reduce costs to make a profit. The root cause of this problem is, in fact, the incorrect pricing strategy.

The right strategy is to price based on the market’s willingness to pay for the product—value for money. We all know that the production cost of an iPhone is much lower than its selling price, but we still pay that amount.

Therefore, you need to study your product, analyze competitors and alternatives, and set your price based on the market’s readiness to pay for it.

What amount would the customer be willing to pay for your product or service?

It’s not about cost + profit margin, which can quickly erode due to competition, costs, and expenses. Just a reminder, I’m speaking here about entrepreneurial projects, not traditional ones.