5.3 Price: Turning Value Into Revenue

Why Price Matters

Pricing is not just a number—it’s where value turns into revenue. In fact, Warren Buffett once said, “The single most important decision in evaluating a business is pricing power.”1 That’s because price has a direct and immediate impact on profitability. According to marketing expert Roger Best, even small changes in price can shift profits by as much as 50%. That’s more than changes in cost, volume, or efficiency.

Why does a small price change impact profit so much?

When you raise price by 1%, that entire increase (minus any loss in volume) flows directly to profit because your costs stay the same. For many products, especially those with high fixed costs, even a tiny bump in price boosts profit fast. For example, if a company has a 10% profit margin, a 1% price increase (with stable sales volume) could lift profits by 10% or more. That’s why marketers—and CEOs—pay so much attention to pricing decisions!

Your price doesn’t just reflect what something costs. It reflects what customers believe it’s worth.

The Value Equation: Why Price Isn’t Just a Number

Every time a customer considers a purchase, they make a simple value judgment:

Perceived Value > Price → They buy.

Price > Perceived Value → They walk away.

That value judgment depends on three factors:

  1. Internal reference prices

    “What have I paid before?”

  2. External reference prices

    “What are others paying?”

  3. Price-quality inferences

    “Does a higher price mean better quality?”

In other words, pricing only works when it’s aligned with the benefits customers believe they’re getting. That’s where value positioning comes in.

Figure 5.1: Choosing a Value Positioning Strategy

This grid shows how companies position their offerings based on price and customer benefits:

  • Higher price for more benefits

    • Premium products with premium positioning

    • Apple or Peloton

  • Same price for more benefits

    • Outcompete without raising prices

  • Lower price for more benefits

    • Hard to pull off, but powerful when done well

    • Costco

  • Lower price for same benefits

    • Classic budget strategy

    • Store brands

  • Much lower price for fewer benefits

    • Bare-bones appeal for ultra price-sensitive segments

  • “Me Too” positioning

    • Same benefits at the same price . . . and nothing to set you apart. Tread carefully here.

Customers compare more than just prices—they compare value. And our goal is to tip that equation in our favor. So how do companies set prices in the real world?

Four Classic Pricing Approaches

There’s more than one way to set a price—and each strategy reflects what a company understands (or doesn’t) about its customers, competitors, and costs. Figure 5.X shows a framework to help visualize the trade-offs:

Figure 5.2: Four Pricing Approaches

  • Cost-Plus Pricing

    Start with costs and add a profit margin. Simple, but risky—it ignores what customers are willing to pay.

  • Competitive Pricing

    Price based on competitors. Safe, but it can lead to price wars or commoditization.

  • Value-Based Pricing

    Set prices based on what customers perceive as valuable—not just what it costs to make.

  • Golden Goose Pricing

    Charge the highest price the market will bear—but beware. It can invite a flood of competitors. You must carefully monitor customer feedback and competitor responses.

The best pricing strategy isn’t just about covering costs—it’s about understanding what your customers value and how you stack up to the competition.

Cautionary Tale: Palm Pilot and the Price of Getting Greedy

In the late 1990s, Palm’s handheld devices (Palm Pilots) dominated the personal digital assistant (PDA) market. Palm set premium prices, believing loyal tech enthusiasts would pay almost any amount for their must-have gadgets. And for a while, they did.

But by 2002, competitors like Handspring and Microsoft Pocket PCs entered the market with lower-priced, feature-rich alternatives. Palm had charged the highest price the market would bear, without considering the risks. Their Golden Goose Pricing, drawing in competitors eager to offer a better deal, cost Palm Pilot dearly.

Within only a few years, Palm’s market share collapsed. The company struggled to compete on price and innovation, eventually fading into tech history.

Pro Tip

Charging what the market will bear can work temporarily, but competitors will eventually respond. If you’re not ready to innovate or adjust, Golden Goose Pricing can kill the goose that lays golden eggs.

References

Quantum Zeitgeist. (2024, June 20). What happened to the Palm Pilot? The amazing futuristic PDA precursor to the smartphone. https://quantumzeitgeist.com/what-happened-to-the-palm-pilot/

Ed. (2001, May 24). Handheld prices unlikely to drop further. PalmInfocenter. https://www.palminfocenter.com/news/1960/handheld-prices-unlikely-to-drop-further/

Five Common Pricing Strategies

Marketers have plenty of pricing tools—but five strategies show up again and again across industries. Let’s start with the two that shape the launch phase of a product:

Figure 5.3: The Diffusion Process

Price Skimming

Start high, then lower prices over time to capture different customer segments.

Example: Samsung’s flagship phones—early adopters pay more, latecomers get a deal

Price Penetration

Start low to grab market share quickly and deter competitors.

Example: Hyundai’s early US market push—lots of value at a surprisingly low price

Psychological Pricing

Use price cues that feel cheaper.

Example: $4.99 feels more affordable than $5, even though the difference is minimal

Bundle Pricing

Combine products or services at a discounted rate to boost overall value.

Example: Microsoft 365 bundles Word, Excel, PowerPoint, and Teams into one package

Freemium/Tiered Pricing

Offer a basic version for free, then upsell premium features or services.

Example: Spotify lets users stream music for free—but charges for ad-free, downloadable listening.

Promotional Pricing: The Coca-Cola Effect

During the Great Depression, Coca-Cola began offering a six-bottle carton with a coupon. It was one of the first promotional pricing strategies. It didn’t just encourage people to buy more, it introduced the idea of bringing Coke home—shifting consumption from public places to family settings. That pricing tactic shaped how people viewed the brand for decades.

Strategy in Action: Sell More... Drink More… Coca-Cola

Several years ago, a retired Coca-Cola bottling plant manager shared a pricing insight with a group of marketers that stopped them in their tracks.

“The thing is,” he said, “selling Coca-Cola isn’t like selling toilet paper.”

At first, the marketers weren’t sure what he meant. Of course Coke isn’t toilet paper—but what was the deeper lesson? The manager explained that Coca-Cola is a magical product. The more people have at home, the more they drink. If a family stocks up because of a price promotion—a two-for-one deal, a coupon, or a temporary price cut—they don’t just hoard the product. They consume more. Coke becomes a drink for breakfast, the morning commute, lunch, a work pick-me-up, dinner, or even late-night relaxation.

Toilet paper? No matter how much you buy, you’re not going to use more just because it’s on hand. This is called the “on-hand acceleration effect.” Once Coca-Cola enters the home in quantity, consumption rates go up. More promotions, more stock, more drinking occasions.

That’s why Coca-Cola executives use motivational pricing. Short-term promotions increase sales today. But more importantly, they drive higher long-term consumption rates. For Coca-Cola, promotional pricing wins both today and tomorrow.

But if you try the same strategy with toilet paper (or similar products), you give away profit today and tomorrow:

  • Customers stockpile during the sale.

  • They don’t buy again until supplies run out.

  • Future sales—at full price—decline.

That’s why pricing strategy must consider not just how much people will buy during a promotion, but whether promotions will change their consumption habits over time.

Pro Tip

Pricing promotions can be an investment in future consumption—but only if the product’s usage expands when more is on hand.

Pricing and Your Competitive Angle

Your competitive angle (from Chapter 4) should support your price—and vice versa. If you’ve created clear differentiation and value, you can avoid price wars, charge premium prices, and build loyal customers who see your brand as worth it.

Strategy in Action: Healthy Choice Café Steamers—Winning at a Premium Price with a Competitive Angle

When ConAgra Foods (now ConAgra Brands) launched the Healthy Choice Café Steamers line in the early 2000s, they faced a serious market challenge:

  • The frozen meal category was dominated by price-sensitive shoppers.

  • Competitors like Lean Cuisine and Smart Ones were locked in a race to the bottom on price.

  • Customers expected frozen meals to cost under $3.00 or they wouldn’t even consider buying.

The Big Question: w could Healthy Choice convince shoppers to pay more?

Solution

  • Technology as Differentiation

    Introduced a unique steam-cooking tray system that kept ingredients separate during cooking. This resulted in better taste and texture—and allowed the brand to justify a higher price.

  • Health Benefits

    Promoted clear functional and emotional benefits

    • Lower calorie counts

    • No artificial preservatives

    • Freshness and “real meal” quality

  • Premium Packaging

    Designed upscale, modern packaging that visually separated Café Steamers from generic frozen meals.

Premium Pay-off

By aligning value-based pricing with both functional benefits and emotional drivers (taste, health, and a sense of quality dining), Café Steamers successfully launched at a premium price point ($3.75 to $4.50)—and grew to double-digit market share in the premium frozen meal segment.

Pro Tip

Customers don’t just pay for calories or convenience. They pay for better experiences, healthier lifestyles, and emotional satisfaction—if you communicate that value clearly.

Table 5.4
Café Steamers Value Ladder
Level Example from Café Steamers
Touch & See Attributes Innovative steam-cooking tray, premium packaging, fresh ingredients.
Functional Benefits (Rider) Better taste and texture, healthier nutrition, portion control.
Emotional Benefits (Elephant) Feel empowered to eat healthy without sacrificing taste or convenience.
Personal Values Health & well-being, self-care, making smart choices.

Healthy Choice Café Steamers used this value ladder to connect a simple product innovation (a steam tray) to deeper emotional drivers and personal values. This justified premium pricing in a cost-sensitive market and fueled long-term growth.

Pro Tip

Price isn’t just what customers pay, it’s what they’re willing to exchange for something they value. Your job? Match that value—and turn it into real revenue.

References

Conagra Brands. (2016, July 11). New organic ingredient meals from Healthy Choice make eating organic even easier. https://www.conagrabrands.com/news-room/news-new-organic-ingredient-meals-from-healthy-choice-make-eating-organic-even-easier-2184340

Refrigerated & Frozen Foods. (2016, July 11). ConAgra's expanded Café Steamers line features innovative steaming basket. https://www.refrigeratedfrozenfood.com/articles/90974-conagras-expanded-caf

Refrigerated & Frozen Foods. (2016, July 29). ConAgra Foods expands Healthy Choice Simply Café Steamers line. Retrieved from https://www.refrigeratedfrozenfood.com/articles/91235-conagra-foods-expands-healthy-choice-simply-caf

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