There's a famous story about Elon Musk and rocket costs. When SpaceX was starting out, he got a quote for buying a refurbished ICBM from Russia. The number was absurd. So instead of negotiating, he did something different: he looked up the raw material costs for every component of a rocket — aluminium, titanium, copper, carbon fibre — and added them up.
The total came to about 2% of the asking price. The rest was markup, habit, and the assumption that rockets just cost what rockets cost.
That's first principles thinking. Strip away every assumption. Get back to what is actually, physically, undeniably true. Then reason forward from there.
Now here's what I want to ask you: when did you last apply that kind of thinking to your pricing?
The pricing equivalent of "rockets just cost that much"
Most pricing decisions I've seen — across industries, across company sizes — aren't really decisions at all. They're habits dressed up as strategy.
"We benchmarked competitors."
"We added a standard margin to cost."
"We've always priced this way."
This is what Musk calls analogical thinking. You look at how others have solved the problem and copy the answer. It's fast, it's safe, and it's almost certainly leaving money on the table — or worse, pricing you out of markets you deserve to be in.
"The problem with analogical pricing isn't that it's wrong. It's that it borrows someone else's mistakes — and you have no idea what those mistakes are."
First principles pricing asks a harder question: why would a customer pay for this at all? Not what the market charges. Not what your spreadsheet says. Why, from first principles, does this product create value — and how much of that value is it reasonable to capture?
Three axioms that don't change
When you strip pricing down to its foundations, three things hold true regardless of industry, product, or market:
Customers pay for outcomes, not your inputs. Cost sets your floor. Value sets your ceiling. Everything between is a strategic choice.
Every customer has a mental price range for every product. It's not fixed. Reference points, value framing, and context all shift it — legally and legitimately.
In markets where quality is hard to observe — professional services, enterprise software, high-stakes decisions — a low price doesn't attract buyers. It makes them nervous.
These aren't pricing tactics. They're the physics of pricing. Violate them, and no amount of sales skill or marketing budget will fully compensate.
The three diagnoses behind "it's too expensive"
Here's where first principles thinking gets practically useful. When a customer says your price is too high, that sentence could mean three completely different things:
1. Their WTP is genuinely below your price. This is a real pricing problem. Rare, but it happens.
2. They don't fully perceive the value. This is a communication problem. Far more common.
3. They're testing you. This is a negotiation tactic. Also very common.
The default response — discounting — only solves case one. In cases two and three, it actively damages you. You've just told the customer that your price had no logic behind it, and that pressure works.
McKinsey doesn't discount. Part of the reason is exactly this: a lower price would cause clients to question why they're so cheap — and once that question is in the room, it's very hard to remove.
On pricing as a quality signalA quick diagnostic
If you want to know whether your pricing is built on first principles or habit, answer these honestly:
If you answered "no" or "not sure" to three or more of these, your pricing is most likely analogical — borrowed from the market, inherited from history, or arrived at by gut feel. That's not necessarily a crisis. But it is an opportunity.
One reframe to take away
Tesla didn't succeed because it priced cheaply. It succeeded because it redefined what value meant in the car category — and then priced accordingly. The price followed the value logic, not the other way around.
not arithmetic.
The market's price is just the average of everyone else's assumptions. It has no authority over what your product is worth.
Go back to first principles. Figure out what value you actually create, for whom, and under what conditions. Then build your price from there — not from what everyone else charges.
— Jan Y. Yang writes about pricing strategy, willingness-to-pay measurement, and pricing institutionalization at pricinggoat.com