Price too high and you scare away customers and clients. Price too low and you worry about turning a profit.

Price too high and you feel anxious about delivering the goods. Price too low and you’ll never know what you were capable of earning.

No matter if you’re a freelancer, an entrepreneur, or a small business, finding the right pricing for the goods you have to offer is always a headache. You flip between two extremes, never finding that happy medium. And like a contestant on The Price is Right, you don’t get any fancy prizes if you guess wrong.

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But product pricing doesn’t have to be a headache. If anything, it should be an exciting opportunity for you to carve out your niche and expand your business. Sound counter-intuitive? Let’s explore.

Pricing is Relative: How to Know Your Market

If you’ve ever seen an absurdly-priced cocktail menu, you’ve seen the principle of ‘relative pricing’ in action. Bars will charge an exorbitant amount of money for their most expensive cocktail — not because they plan on selling it, but so that they can sell you the expensive (albeit slightly more affordable) alternative.

When The Economist ran a campaign in which they offered two pricing options that were the same, one professor decided to poll his students about which they would buy. (There was a third, less expensive, option). After the poll, he found that the vast majority of his students took the expensive option that gave them the most value.

The lesson: pricing is largely psychological. It’s also relative. A great deal on a studio apartment in Manhattan might be an absurdly high price for even a mansion in Montana.

Just as real estate agents need to know their area, you need to know your niche.

If you’re going to set the right prices, then you’re going to need to know your market — plain and simple. Otherwise, you have no context for understanding the customer’s options.

Competitor research is like homework, so here are a few helpful tips to get you started:

Once you know your market, you’ll have the proper context to decide whether you charge a lot or a little.

But that’s just a start.

Identifying the Right Niche for Your Product

Since context is so important, then believing that your product is part of a cheap, affordable niche is going to set you up for cheap, affordable prices.

But what if you didn’t view your cheap competitors as your true competition?

Ramit Sethi of I Will Teach You To Be Rich explains that his “high-end” courses don’t even compete with free courses. He’s able to do this by focusing on specific niches that are hard to find anywhere else.

If you compete with huge companies manufacturing their products overseas, then there’s a good chance that you’re not going to do well unless you can get your prices way, way down.

If you compete with higher-end companies and offer an affordable alternative, that’s a horse of a different color.

It’s all about your market positioning. Before you set an appropriate price for yourself, you have to find an underserved niche that needs precisely what you’re offering.

This is why upscale clothing boutiques can exist side-by-side with cheap online options. It’s why you go to a store with a reputation for quality and eschew all of the cheaper versions you can find in the supermarket.

It all starts with finding your specific type of customer. If you want to charge more, you have to find the people willing to pay your price. If not, you’ll always compete with the lowest denominators — and that’s not an accurate way to settle on product pricing.

If You Bring Value, Everything is Negotiable

So you’ve looked at your market and found an appropriate type of customer that you’re looking for. You should have a price range that your product will fall into.

What if you believe your product deserves more?

Then there are ways to charge more for your product within the bounds of reason. Everything in business is negotiable, after all, especially if you can effectively communicate the value your product brings to the table.

Let’s say you sell t-shirts. Anyone can go online and find a cheap t-shirt for just a few bucks. But you can charge much more if something about your t-shirts is exclusive to your process or brand.

But in order to put that price in the proper context, you’ll need to know the psychology of the average customer:

Finally, remember that pricing is not final. You can change your price over time as you get a feel for what the market demands and how you’ve positioned your company.

In business, only the real life market makes for completely accurate feedback. Keep tweaking and learning until you find a price that drives more profit.

For more info on product pricing, check out our JUMP guide.

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