Nina Ali, Founder, First Matter
May 15, 2026
Pricing is one of the most important and most neglected decisions a business makes. It can be painful and confusing, and a lot of founders spend only 8 to 10 hours on it before moving on, even though it can have the single biggest impact on profitability of any choice the business makes. New ventures tend to underprice the product, often out of anxiety about putting their own work in front of the market. The reflex is to be conservative, but conservative pricing is hard to walk back later. It is always easier to lower a price than to raise one.
Even small differences in price translate to large differences in how much volume the business has to push. At low margins, a price gap of only a few percent can be the difference between needing to sell tens of millions or hundreds of millions of dollars in product to land the same profit. Margins this thin are normal in hardware and certain services businesses, which is exactly where founders most often shave a few percent off the price to avoid a hard conversation.
Three factors determine pricing, and cost is not one of them. The three are value, competition, and strategy. Value is the anchor, both quantitative and qualitative. It is the impact the solution creates for the customer, measured in dollars saved, time saved, risk avoided, or any other concrete outcome the customer cares about. Competition shapes the ceiling, through direct competitors and through alternatives like a homegrown build. The full set of alternatives also includes adjacent solution classes and the option of doing nothing at all, so the relevant comparison is broader than the obvious competitors. Strategy is the lever for using price to hit specific objectives. Price can be set deliberately above or below the value driven number to chase scale, network effects, brand perception, or a key account, as long as the company knows what it is buying with the move. Cost only enters at the end, as a check on whether the price actually works.
Total value is the anchor underneath all of this, and it equals reference value plus differentiation value. Reference value is the price of the customer's best alternative, whether that is a direct competitor, a different class of solution, a homegrown build, or doing nothing. Differentiation value is the gap between the offering and that reference, positive or negative. Price sits below total value, because the customer needs an incentive to buy, and the gap between price and cost is the profit margin.
A Harvard Business Review study by Michael Marn and Robert Rosiello of 2,463 companies in 1992 quantified just how much pricing matters. A 1% improvement in price translated to about an 11.1% improvement in operating profit. The same 1% improvement in variable cost moved profit by 7.8%, volume by 3.3%, and fixed cost by 2.3%. Of the five levers a business can pull to grow profit, raising the price, increasing perceived value, increasing total value, reducing cost, or growing volume, the price lever is by far the strongest per unit of effort.
Pricing becomes strategic when a company sets price to pursue a specific objective, like winning market share or building a premium brand, rather than to maximize profit on each sale. Two patterns are common. The first is to lower price and profit temporarily to hit a concrete objective. Amazon held margins near break even for years to capture scale. Uber and Lyft burned cash to take market share. Gig economy companies priced low to reach critical mass for a network effect. Wind turbine manufacturers cut prices to win strategic projects.
The second pattern uses psychology on an ongoing basis to drive high margin sales. Razor companies practically give away the razor to sell the blade. Gas turbines often sell near break even because the 20 year service contract attached to them runs at 80% margin. Grocery stores put cheap milk and eggs at the back of the store. Luxury brands set prices high to create a high quality perception, since shoppers often use price as a proxy for quality. Decoy pricing places an unattractive option next to the real offer so that the comparison flatters the offer the company actually wants to sell.
Takeaway Price is set by value, competition, and strategy. Cost is the check, not the driver. Spending more time on pricing analysis is probably the highest return work a young company can do.
Different markets settle into different pricing realities, and most fall somewhere on a spectrum between value driven and competition driven. One end has the highest profit potential and is driven by value. The other end has the lowest profit and is driven by competition.
Six categories sit along that spectrum, from highest profit potential to lowest:
- Luxury pricing is where the price is often higher than the actual utility value of what is sold. Think high fashion, luxury cars, and perfume.
- Monopolies are where one company controls most or all of the market because of high barriers to entry, network effects, or industry consolidation. Eyewear in the US is a monopoly through consolidation. Platforms with strong network effects often become monopolies. Pharmaceuticals get there through patents.
- Oligopolies cover most large established industries, with a few big companies splitting the market. Airlines, airplane manufacturers, and telecommunications all fit.
- Tier based competition has many competitors, but each only really competes with the others in its quality tier. Cars are the classic example, with luxury cars compared against other luxury cars and budget cars against other budget cars. Electronics, solar panels, and food often work the same way.
- Commodities are where pricing is set almost entirely by supply and demand because nobody can really differentiate. Raw materials and basic parts are the obvious examples.
- Loss leader pricing is where the product is sold below cost for a strategic reason. The gig economy, freemium, and razor blades all live here.
Two forces move a business along the spectrum. Competition pushes pricing down. Barriers to entry and industry consolidation push it back up.
Emerging markets show the dynamic clearly. A new market goes through three stages. In the first, one or a few companies have an early lead and can hold a high price. In the second, competitors flood in and the market collapses into extreme competition, usually right into loss leader territory. In the third, companies go out of business or get acquired, the final players emerge, and pricing tends to stabilize somewhere between oligopoly and tier based competition. How far apart those stages sit depends on how high the barrier to entry is and how many competitors show up.
Some more examples: The smartphone market is an oligopoly. Furniture is tier based. Artificial intelligence is currently a loss leader market, and likely to settle into oligopoly later. AI is being subsidized, much like ride sharing in its early years.
Takeaway Where a company sits on the spectrum is not a permanent identity. Markets move, especially emerging ones. Pricing strategy has to anticipate the next stage, not just depend on the current one.
Once a business knows roughly where it sits on the spectrum, the next question is how to structure the price so that it captures value across customer segments that experience the offering differently. Three mechanisms do most of the work. Bundling, price metrics, and price fences.
Bundling, sometimes called price offer configuration, segments the market by packaging different combinations of features, services, or products at different price points. Small customers get a stripped down version. Larger customers get the bundle with the features that justify the higher price. SaaS companies live in this world. QuickBooks runs a Simple Start tier for small businesses and a more expensive bundle for larger ones with bigger budgets. The discipline is to keep the number of bundles low. Three to five is the right range. Too much choice is overwhelming, and people would rather buy nothing than pick the wrong option.
Price metrics are the units a price is applied to. Five show up most often: per unit, per use, per time spent, per person or user, per amount of benefit received. The trap is defaulting to whatever metric the rest of the industry uses, because that metric was probably adopted out of tradition. Pricing can itself be a source of differentiation. Ryanair built the budget airline category around its pricing model. Smaller e-signing companies have grown by offering per use pricing to teams who can't justify a DocuSign subscription. Profit sharing and performance based pricing are theoretically ideal because they align directly with value delivered, but in practice they are hard to measure, harder to enforce, and tend to get contentious.
Thomas Nagle's filter from The Strategy and Tactics of Pricing is a useful screen for any metric the team is considering. The filter runs through five criteria. A good metric tracks with value differences across segments. It tracks with differences in cost to serve. It is easy to measure and enforce. It supports favorable positioning against competitors. And it aligns with how buyers actually experience value in use.
Price fences charge different customers different prices for the same offering when they meet a fixed criterion. Four categories cover most cases. Buyer identification is the simplest form, like student and senior discounts at movie theaters. Purchase location adapts pricing to the cost of living in a region, so the same grocery chain is priced higher in Los Angeles than in Tucson, and software companies adjust price by country. Time of purchase is the airline trick, where last minute fares are higher because business travelers book late and have larger budgets. The fourth category is purchase quantity, which shows up as volume discounts, order discounts, and step discounts, all of which reward bigger customers. Fences are the simplest segmenting tool but they require care. They work when the different customer groups will not realize they are paying different prices, or when the practice is well established and accepted. The cleanest way to apply a fence is as a discount off a standard price, so the highest paying group sees the standard and the other groups see a clear concession.
For larger bespoke projects, pricing usually lands in a proposal rather than a list price, and proposals come in three forms. A budgetary offer is quick, takes less effort to prepare, and carries a plus minus 20% margin of error. A non-binding offer puts more work into the numbers, lands around plus minus 5%, and signals seriousness without legal commitment. A binding offer is fully developed, legally binding, and carries a validity period for the price.
Takeaway A pricing structure should track how customers actually use the offering. Default metrics, oversized bundles, and unguarded fences all leave revenue on the table.
Determining a price is a cycle, not a one time exercise. The full loop has six steps. Gather intelligence. Consider strategy. Develop a pricing hypothesis. Refresh the value communication. Test pricing in the market. Adjust the approach.
Gathering intelligence covers seven inputs. Reference value, meaning the customer's best alternative. Differentiation value, both positive and negative, against that reference. Cost to serve, used to check whether the resulting price actually works. Perceived value, which is the customer's willingness to pay and a function of how well they understand the value being delivered. Customer sensitivity drivers, which are the non value reasons price sensitivity moves. Customer approval levels, sometimes called ability to close, which determine how much sign off a sale needs. And segmentation, which is how all six of those vary across customer types.
Sensitivity drivers deserve their own attention because they often explain pushback that has nothing to do with value. Nine drivers come up most. The size of the expenditure matters, because people scrutinize big numbers more than small ones. Shared costs matter, because a customer whose insurance is paying the bill cares less about the price than one paying out of pocket. Switching costs add to the real cost of adoption beyond what the vendor charges. Perceived risk has the same effect. Importance of the end benefit drives how hard people fight to buy at all. Price quality perceptions matter in markets where a high price signals quality. Perceived fairness is psychological, and a price that deviates significantly from what someone paid for a similar product before will feel wrong even if it is justified. Price framing changes sensitivity by contrast, so a $2,000 add on feels different next to a $200,000 base purchase than it does on its own. Competitiveness matters when the customer is a business that uses the input to compete in its own market.
Strategy comes next. Most early companies are looking at the first strategic pattern, temporarily lowering price to hit a concrete objective. The caution is that low prices are sticky. Raising them later is hard, sometimes impossible. So even when a strategic discount is the right call, the proposal should show the full price the discount is being applied against, communicate why the discount exists, and frame it as temporary. And the company should always ask for something in return, like a logo on the website, a testimonial, or a case study. The return can be meaningless to the customer and valuable to the seller, which is the ideal trade.
A pricing hypothesis is a concrete proposal across four dimensions. Which customer segments are targeted, what the price point is for each, what the pricing structure looks like across bundling, metrics, and fences, and what the pricing terms are. With the hypothesis in place, the messaging gets refreshed so that perceived value rises as close to actual value as possible. A quantitative value tool like an ROI calculator helps the customer see the value in their own terms. Then the price gets tested in the market with real customers.
The testing rule of thumb is simple. If nobody pushes back, the price is too low. Push the price up slowly until a little resistance shows up. If everyone pushes back hard, figure out why. Sometimes the value is not clear. Sometimes a sensitivity driver is doing the work. Sometimes the price genuinely is too high. The cycle then resets, with another round of intelligence, another hypothesis, and another test, in the kind of sprint cadence a company can actually sustain.
The most common pitfall is anxiety pricing. Founders who would price confidently for an employer will quietly cut their own prices because the work feels personal. The recommended antidote is an outside advisor who can talk a founder off the ledge when the instinct to discount kicks in.
Takeaway Pricing is a cycle, and the price the market is willing to pay is rarely the first number a founder feels comfortable saying. Test, watch for pushback, and adjust.
Can a market move from one part of the pricing spectrum to another, especially as climate pressure changes the availability of certain resources?
Markets do move. The single most useful response is to position from day one as the highest quality version of the product on offer. Most markets, even ones that look like commodities, end up with quality tiers, and there is always a segment willing to pay more for the better version. Winning a deal on quality is more durable than winning on price, because the customer who pays for quality is the right customer over the long run. The trap is to confuse a commodity stage with a winner take all stage. Winner take all dynamics like the ones that justified Uber and Lyft's pricing only work in markets with strong network effects. Most climate tech businesses are not in that situation. If a climate company finds itself in an emerging market with extreme competition, the game is survival. Runway is what separates the companies that make it to stabilization from the ones that don't.
Once a loss leader market stabilizes, how much does the price typically rise?
The size of the correction tracks how much hype and funding were behind the subsidy. Uber and Lyft prices roughly doubled or tripled after the dust settled. AI is on a more extreme footing. Pricing is currently around 10% of cost, so the eventual correction is likely to be at least 10x. Markets without that much capital behind them tend to see smaller swings.
Are there historical analogs to AI, where massive subsidy met aggressive cost decline?
Solar panels are the cleanest analog. Early modules cost roughly $3 to $10 per watt in the first decade of the market, which is about 20 times current pricing. Then a wave of new entrants, especially in China, plus around $8 billion in Chinese government funding, drove prices below cost, by about 20% in the worst stretch. Once the industry stabilized, prices recovered a little, but underlying costs kept falling, so the long term curve has stayed down. Lithium ion batteries followed a very similar path. Inflation is pushing prices back up across both categories now, but the structural cost decline has held.
Does the same pricing approach apply to consultancy services, and how is value priced and delivered in consulting?
Consulting is a tier based market with three broad tiers. The bottom tier is experience based, advisor or advisor doer, and roughly 90% of consultants live here. The middle tier sells a proprietary framework or worldview, with proven results available only to paying clients, and tends to charge at least double the bottom tier. The top tier has written the book, given the TED talk, and become a name, and earns significantly more than the two tiers below. In every case, the most valuable move is to drive toward quality rather than compete on price.
Total Value — The sum of reference value and differentiation value, used to anchor pricing decisions against the customer's best alternative. source
Reference Value — The price of the customer's best alternative, adjusted for differences in units. source
Differentiation Value — The positive and negative value to the customer of any differences between an offering and the reference product. source
Perceived Value — The value a customer actually understands the offering to provide, which the sales and marketing function works to align with total value. source
Pricing Spectrum — A framework that arrays markets from luxury pricing through monopoly, oligopoly, tier based competition, commodity, and loss leader, based on whether pricing is driven more by value or competition.
Bundling — A pricing structure that packages different sets of features, services, or products at different price points to capture value across customer segments. source
Price Metric — The unit a price is applied to, such as per unit, per use, per time, per user, or per amount of benefit received. source
Price Fence — A criterion that allows different customers to be charged different prices for the same offering, typically applied as a discount off a standard price. source
Loss Leader — A product priced below cost to drive strategic outcomes like market share capture or follow on high margin sales. source
Decoy Pricing — A pricing tactic where an unattractive option is offered alongside the real choices to make the preferred option look more appealing by comparison. source
Budgetary Offer — A quick, lower effort proposal price with roughly plus minus 20% accuracy, intended for planning purposes rather than commitment.
Non Binding Offer — A more developed proposal price with roughly plus minus 5% accuracy but no legal obligation to honor it.
Binding Offer — A fully developed, legally binding proposal price with a stated validity period.
Willingness To Pay — A customer's perceived value of an offering, which functions as the practical ceiling on what they will pay. source
First Matter — Nina Ali's climate tech commercialization advisory practice, where the pricing framework used in this workshop was developed.
Pricing Worksheet — Companion worksheet for the workshop, with the reference value and differentiation value exercise as the first section.
The Strategy and Tactics of Pricing by Thomas Nagle — The source of the price metric filter and much of the segmentation framework used in the session.
Managing Price, Gaining Profit by Marn and Rosiello — The 1992 Harvard Business Review study of 2,463 companies that produced the often quoted 11.1% profit lift from a 1% price improvement.