How Pricing Actually Works — From First Principles (Part 1 of 3)

_{[Read time: 5.5 minutes]}

We all want to charge more for our expertise.

But most of us aren’t even confident in the price we’re charging today.

That’s not a tactics problem. It’s not even a strategy problem.

It’s a thinking problem.

When you started the business, you were juggling everything — so you skipped the thinking and copied the pricing.

• Matching what others charge

• Defaulting to time or effort

• Guessing what feels fair

That’s called reasoning by analogy — borrowing someone else’s answer to solve your own equation.

But when you have different clients, different problems, different stakes — the copied answer doesn’t fit.

No wonder every pricing decision feels shaky, arbitrary, or hard to defend.

My goal here isn’t to hand you a price. It’s to rewire how you think about pricing — and rebuild the logic behind it.

What drives it. What anchors it. What protects it.

Because pricing is the ultimate needle mover. And if we want to use it well, we can’t build on a fragile foundation.

We have to break it down and rebuild it from the ground up.

This is Part 1 of a 3-part series on pricing — from first principles.

First, Let’s Talk About First Principles Thinking

First principles thinking means stripping away assumptions and getting to the core fundamental truths. Not tradition. But logic.

You ask:

• What do I know to be true?

• And (only once I found truth) what can I build from there?

Your pricing deserves the same treatment.

A Quick Example of First Principles: Paul Graham

When Paul Graham started Y Combinator — the startup accelerator behind Airbnb, Dropbox, and Stripe — he didn’t ask: “What do other startup accelerators offer?”

He asked: “What do early-stage founders actually need to succeed?”

They didn’t need polished pitch decks or generic workshops.

They needed fast feedback, smart guidance, and a real shot at survival.

So he built YC from scratch: short, intense, equity-based — not fee-based. That’s first principles thinking in action.

Now let’s do the same with pricing.

The 3 Building Blocks of Pricing from First Principles

To rebuild pricing from truth, we have to answer 3 core questions:

• What are your buyers actually buying?

• Why does it matter to your buyers?

• What’s the fair price, based on that reality?

Each step builds on the one before it. Skip one, and the whole structure wobbles.

Let’s walk through them.

Step 1: What are your buyers actually buying?

If you’re pricing from first principles, you have to ask:

What is this exchange fundamentally about?

• Clients don’t buy hours

• They don’t buy credentials

• They don’t even buy process

First Principle: Customers buy desired outcomes — results, shortcuts, or relief from complexity, risk, or delay.

It sounds simple. You already know it’s true. But most people skip this step and jump to numbers and value.

Stop.

Deeply internalize that you sell outcomes — then get crystal clear on what those outcomes actually are for your buyer.

Because if you believe you're selling time or tasks, you'll keep pricing like a task rabbit — instead of the expert you actually are.

Step 2: Why does it matter to your buyers?

Once you know what’s being bought, the next question is:

What makes that outcome worth paying for?

In other words, what factors shape perceived value:

• The urgency of the problem

• The cost of leaving it unsolved

• The upside of solving it

• The number of viable alternatives

• How fast, clear, or stress-free your solution feels

Now, here’s what most people get wrong:

They try to add value by doing more.

First, you literally can’t add value (it’s a dependent variable).

Second, you don’t get to decide what’s valuable (your buyer does).

You can only influence the conditions that shape how value is perceived.

Third, value changes when you repackage, communicate, highlight, uncover or remove (something).

Next Principle: Value lives in the buyer’s world — not the expert’s.

That’s why the same offer can be worth $2,000 to one client and $20,000 to another.

This also explains why doing more doesn’t always justify charging more.

Because value isn’t about effort — it’s about relevance.

Step 3: What’s the fair price — based on that reality?

If value lives in the buyer’s world, then price must reflect what’s at stake for them, not what’s at stake for (or costs) you.

Next Principle: Price should be grounded in the perceived value — as defined by the buyer’s context — not anchored to the expert’s inputs.

This isn’t easy to do, and where most people backslide to:

• “How long will it take me?”

• “What are others charging?”

• “What would feel fair?”

Remember this isn’t about execution. It’s about pricing expertise.

That means your price should reflect:

• The tangible and intangible value created (their upside)

• The risk removed (their exposure)

• The alternatives avoided (their constraints)

You align your number with what changes in their world — not how hard you worked in yours.

Examples:

• A $2,000 diagnostic that saves 65 hours of decision paralysis? Efficient.

• A $15,000 roadmap that prevents a $300K mistake? Smart investment.

• A $25,000 retainer that avoids a 7-figure messy scale-up? Protective.

This isn’t about inflating prices. It’s about grounding them in truth — value that’s real, relevant, and context-aware.

Let’s condense this all down to one question:

“If no one had priced this service before, and I had to build the logic from scratch, what would make the most sense — for me and for them?”

To rebuild pricing from first principles, don’t start with tactics.

That’s the shift.

You don’t need a perfect number.

You need a sound reason.

— — — — —

This was Part 1 of 3. Here’s what’s coming next:

• Part 2: How to Raise Your Price from First Principles

• Part 3: How to Protect Your Price and Make It Stick

— — — — —

See you next week for Part 2.

Peter

P.S. Not sure if your price is doing the job it’s supposed to?

If your price feels too low, too shaky, or too hard to explain, I’ll help you fix it.

The Price Audit is a 1-week expert review of your offer and pricing strategy. You’ll walk away knowing what’s working, what’s broken, and where your pricing is misaligned, inconsistent, or limiting growth.

Reply to this email with ‘price audit’ to get started.