In 1982, a bottle of Grey Goose vodka did not exist. In 1997, Sidney Frank launched it at $30 a bottle — roughly double the price of Absolut, which was the premium standard. The product was a well-made French vodka, but blind taste tests could not reliably distinguish it from competitors priced at half the amount.

Grey Goose sold $60 million in its first year. By 2004, Bacardi acquired the brand for $2.2 billion. The vodka was good. The price was the strategy.

Pricing communicates. It tells the customer who the product is for, how it should be perceived, and what category it occupies. A price set by cost-plus calculation sends no signal at all. A price set by strategic intent shapes the entire business around it.

Cost-plus pricing — calculate the cost of production, add a desired margin, set the price — is the default method for most businesses. It has one advantage: simplicity. It has one flaw: it ignores the customer entirely.

The customer does not care what it costs you to produce. They care what it is worth to them. These are different numbers, and the gap between them is where profit lives or dies.

A management consultant who charges $200 per hour because that is a reasonable markup on their time is leaving money on the table if the insight they provide in that hour saves the client $50,000. The client values the outcome at $50,000. The consultant values their time at $200. The gap — $49,800 of uncaptured value — represents a pricing failure, not a pricing strategy.

Cost-plus pricing also creates a dangerous incentive: it rewards inefficiency. If the price is calculated as cost plus 30%, then higher costs produce higher absolute margins. The business has no structural incentive to reduce costs — and in fact, reducing costs reduces revenue. The logic is backwards, and the businesses that follow it are perpetually commoditized.

The alternative is value-based pricing — setting the price based on the value the product or service delivers to the customer, not the cost of producing it. This requires understanding what the customer values, how they measure that value, and what alternatives they have.

A software tool that reduces a company's customer churn by 2 percentage points is worth more to a company with $50 million in recurring revenue than to a company with $500,000. The product is identical. The value is different. Value-based pricing captures that difference — charging larger companies more, not because the product costs more to serve them, but because it delivers more value to them.

Enterprise software has understood this for decades. Salesforce charges per user. AWS charges per usage. Neither price is derived from cost. Both are derived from the value the customer extracts — and the price scales with that value.

Price is the most powerful positioning tool a business has — more powerful than advertising, more immediate than branding, more visible than design. A product priced at $49 occupies a different psychological category than the same product priced at $499. The customer draws inferences about quality, exclusivity, and seriousness from the price alone.

This works in both directions. A consulting firm that charges $500 per hour attracts different clients — and commands different respect — than a firm charging $150 per hour. The work may be comparable. The price signals that the $500 firm operates at a different level, serves different clients, and delivers outcomes that justify the premium.

Lowering prices is the most tempting and most destructive competitive response. It signals desperation. It attracts price-sensitive customers who will leave for the next lowest price. It compresses margins, reduces the resources available for product improvement, and creates a downward spiral that is extremely difficult to reverse.

Raising prices — deliberately, strategically, with improved positioning to match — is the underused lever. Most businesses can raise prices 10% to 20% with minimal customer loss if the price increase is accompanied by a clear explanation of value. The customers who leave at a 15% price increase are almost always the least profitable customers — the ones the business is better off without.

The right price is not a calculation. It is a discovery. And discovery requires testing.

A/B testing — presenting different prices to different segments and measuring conversion, retention, and lifetime value — is the most reliable method. It removes opinion from the equation and replaces it with data.

For businesses where A/B testing is impractical, the willingness-to-pay interview is the next best tool. Ask customers directly: "At what price would this product be too expensive to consider? At what price would it be so cheap you would question its quality?" The range between those two numbers defines the pricing window. The optimal price sits in the upper third of that window — high enough to signal quality, low enough to avoid rejection.

The most common pricing mistake is not charging too much. It is charging too little — underpricing the product based on cost, leaving value on the table, and training the market to expect a lower price than the product deserves.

Price is not what you charge. It is what you communicate. Set it accordingly.