By-product pricing is setting prices for the secondary outputs of a production process, such as sawdust from timber, whey from cheese-making or ash from power plants. It is a product-mix pricingstrategy: income from the by-product lowers the effective cost of the main product, so a firm can price that product more competitively. The by-product’s price only needs to cover the cost of handling and selling it.
List every output of the process, including what is now thrown away or paid to remove.
02
Find who values it
Look in other industries: one sector's waste is often another's raw material.
03
Set the floor
Price at least at the cost of storing, processing and shipping it; disposal costs avoided are a gain on top.
04
Feed it back
Use the by-product margin to price the main product more aggressively.
Where you see it today
User data in AI products
For AI products, conversations can be a by-product with value of their own. Google’s Gemini Apps privacy notice says conversation data is used to provide, improve and develop its products and machine-learning technologies, with settings that limit some of that use. Free or cheap tiers make more sense when usage itself improves the next model.
Who should be paid for data
Economists have argued that treating user data as capital collected for free neglects the people who create it, and proposed treating it partly as labour (Arrieta-Ibarra et al., 2018). The debate is about who captures the value of a by-product.
Data-centre heat
In 2022 Microsoft and the energy company Fortum announced that waste heat from planned Microsoft data centres near Helsinki would be converted into district heating for homes and businesses. As AI drives data-centre growth, heat is becoming a by-product with a market.
Coal ash in building materials
The US Environmental Protection Agency describes the two largest encapsulated uses of coal combustion residuals as fly ash in concrete and desulfurisation gypsum in wallboard. A disposal cost becomes an input sold to another industry.
What is pricedA free tier that feeds a paid one, often generating usage data
ExampleFree AI chatbot tiers
How to use it
Map every output of your process, including data, heat and scrap, and what each costs you today.
Ask which industries could use each output, and talk to two or three potential buyers.
Price by-products at least above handling cost, and count avoided disposal costs as part of the gain.
If usage data improves your product, decide openly whether and how users share in that value.
Check regulation first: data, waste and food by-products each come with their own rules.
The Business Engineer lens
In AI, the interaction is often worth more than the subscription, because usage produces the traces that improve the next model. The Business Engineer explains why that by-product sits at the centre of post-training economics.
The complete explainer, cleaned up and reformatted for mobile.
By-product pricing involves setting prices for secondary products generated during manufacturing processes. It aims to recover production costs and generate additional revenue through the sale of by-products. Use cases include manufacturing, agriculture, and energy production. However, challenges include managing market demand fluctuations and addressing environmental impact concerns.
Key Concepts of By-Product Pricing
Secondary Outputs: By-products are secondary outputs that are not the primary focus of production but still have economic value.
Waste Reduction: By-product pricing aligns with sustainability goals by reducing waste and maximizing resource utilization.
Revenue Generation: It allows businesses to generate additional revenue streams from outputs that would otherwise be treated as waste.
By-Product Pricing Strategies
Cost Allocation: Allocate production costs to both the primary and by-products to determine their respective cost structures accurately.
Market Assessment: Identify potential markets for the by-products and assess their demand and pricing dynamics.
Bundling: Consider bundling primary products with related by-products to create value-added offerings for customers.
Real-World Examples of By-Product Pricing
Meat Processing: In the meat processing industry, by-products like bones, hides, and organs are turned into revenue-generating products such as pet food, leather goods, and pharmaceuticals.
Sugar Production: In the sugar industry, molasses, a by-product of sugar refining, is often sold to other industries for use in products like animal feed, alcohol, and yeast production.
Petroleum Refining: Petroleum refineries produce various by-products such as asphalt, lubricants, and chemicals from crude oil processing, creating multiple revenue streams.
Benefits of By-Product Pricing
Increased Revenue: By-product pricing enables businesses to capture value from secondary outputs, increasing overall revenue.
Cost Offset: Revenue from by-products can offset production costs, making primary products more cost-competitive.
Sustainability: By maximizing resource utilization and minimizing waste, by-product pricing aligns with sustainability and environmental goals.
Risk Mitigation: Diversifying revenue streams through by-products can mitigate risks associated with fluctuating primary product prices.
Challenges and Considerations
Market Fluctuations: The value of by-products may be subject to market fluctuations, requiring businesses to adapt their pricing strategies accordingly.
Regulatory Compliance: Some by-products may be subject to specific regulations, affecting their production and pricing.
Resource Allocation: Deciding how to allocate resources (e.g., labor and equipment) to by-product utilization can be complex.
By-Product Pricing Additional Examples
Lumber Mill: A lumber mill produces sawdust as a by-product during the process of cutting and shaping wood into lumber. The sawdust can be priced and sold to other industries for use in particleboard, mulch, or animal bedding.
Sugar Refinery: In sugar refining, molasses is generated as a by-product from the extraction of sugar from sugarcane or sugar beets. The molasses can be priced and sold to be used in the production of alcohol, animal feed, or as an ingredient in certain foods.
Petroleum Refinery: Refineries producing gasoline also generate by-products such as petroleum coke or asphalt. These by-products can be priced and sold for use in various industrial applications, including energy production and road construction.
Dairy Farm: In dairy farming, manure is a by-product of milk production. Farmers can utilize manure as fertilizer or even consider pricing it for sale to other agricultural operations.
Brewery: Breweries produce spent grains as a by-product during the beer brewing process. These spent grains can be priced and sold to farmers for use as animal feed.
Power Plants: In energy production, power plants often generate heat as a by-product. This heat can be captured and sold to nearby facilities or used for district heating systems.
Fish Processing Plant: Fish processing plants generate fish waste as a by-product when processing seafood. The waste can be priced and sold for conversion into fishmeal, fish oil, or other products.
Textile Manufacturing: Textile manufacturers often produce textile waste and trimmings as by-products during the production process. These by-products can be priced and sold for use in insulation, stuffing, or recycling.
Automotive Industry: The automotive industry generates various metal scraps and leftover materials as by-products during the manufacturing of vehicles. These materials can be priced and sold to metal recycling companies.
Fruit Juice Processing: Fruit juice processing plants produce fruit peels and pulp as by-products. These can be priced and sold for use in animal feed, composting, or extraction of essential oils.
Coffee Roastery: Coffee roasters produce coffee chaff, which is the outer husk of the coffee bean. This by-product can be priced and sold for use as mulch, compost, or in specialty products.
Poultry Farm: Poultry farms generate chicken feathers as a by-product during processing. Feathers can be priced and sold for use in various applications, including animal feed and fertilizer.
By-Product Pricing: Key Highlights
Definition: By-product pricing involves determining prices for secondary products that are generated during primary manufacturing processes, aiming to recover costs and generate additional revenue.
Characteristics:
Secondary Product: Pricing a by-product that results from the production of a primary item.
Cost Recovery: Setting prices to offset production costs.
Market Demand: Considering demand and value of the by-product in the market.
Use Cases:
Manufacturing: Pricing by-products resulting from manufacturing processes.
Agriculture: Pricing agricultural by-products for sale or utilization.
Energy Production: Pricing by-products from energy generation.
Examples:
Lumber Mill: Pricing sawdust generated during lumber milling.
Sugar Refinery: Pricing molasses produced during sugar refining.
Benefits:
Profit Generation: Creating extra revenue through by-product sales.
Sustainability: Encouraging sustainability by utilizing by-products.
Cost Reduction: Lowering production expenses through by-product sales.
Challenges:
Market Demand Fluctuations: Adapting to changes in demand for the by-product.
Pricing Strategy: Determining the optimal pricing approach for the by-product.
Environmental Impact: Addressing environmental concerns linked to by-product disposal or use.
Tyson Foods
StrategyBy-Product Pricing: Sold animal by-products (e.g., bones, fats) to industries for use in pet food, fertilizers, and biodiesel.
OutcomeIncreased revenue from by-products, enhancing overall profitability and resource utilization.
Dole Food Company
StrategyBy-Product Pricing: Sold pineapple skins and cores to produce animal feed and bioenergy.
OutcomeGenerated additional revenue streams, reducing waste and improving sustainability.
Starbucks
StrategyBy-Product Pricing: Sold used coffee grounds to gardeners and farmers for composting.
OutcomeIncreased revenue from waste products, promoting sustainability and community engagement.
Budweiser
StrategyBy-Product Pricing: Sold spent grain from the brewing process to livestock feed producers.
OutcomeReduced waste and generated additional revenue, supporting sustainability initiatives.
Procter & Gamble
StrategyBy-Product Pricing: Utilized leftover materials from soap production to create glycerin for industrial use.
OutcomeEnhanced resource efficiency and created additional revenue streams from by-products.
Hormel Foods
StrategyBy-Product Pricing: Sold pork and beef by-products to the pet food industry.
OutcomeIncreased revenue from by-products, enhancing profitability and reducing waste.
Archer Daniels Midland (ADM)
StrategyBy-Product Pricing: Sold soybean hulls as livestock feed and wheat bran for animal feed and industrial use.
OutcomeGenerated additional revenue from by-products, improving overall profitability.
Coca-Cola
StrategyBy-Product Pricing: Sold citrus pulp from juice production to the livestock feed industry.
OutcomeReduced waste and created new revenue streams, enhancing sustainability efforts.
Ford Motor Company
StrategyBy-Product Pricing: Sold scrap metal and other manufacturing by-products to recycling companies.
OutcomeIncreased revenue from waste materials, promoting sustainability and reducing environmental impact.
General Mills
StrategyBy-Product Pricing: Sold oat hulls from cereal production as a biomass fuel source.
OutcomeReduced waste and generated additional revenue, supporting sustainability initiatives.
PepsiCo
StrategyBy-Product Pricing: Sold potato peels from snack production to create animal feed and bioenergy.
OutcomeGenerated additional revenue streams, reducing waste and improving sustainability.
Unilever
StrategyBy-Product Pricing: Utilized by-products from food processing to create ingredients for other products.
OutcomeEnhanced resource efficiency and created new revenue streams from by-products.
Nestlรฉ
StrategyBy-Product Pricing: Sold cocoa shells from chocolate production as garden mulch.
OutcomeReduced waste and generated additional revenue, promoting sustainability and resource utilization.
Chevron
StrategyBy-Product Pricing: Sold sulfur produced during refining to the chemical industry.
OutcomeIncreased revenue from by-products, improving overall profitability and resource utilization.
Dow Chemical
StrategyBy-Product Pricing: Sold chlorine by-products from chemical processes to other industries.
OutcomeGenerated additional revenue streams, enhancing resource efficiency and sustainability.
Mars, Incorporated
StrategyBy-Product Pricing: Sold by-products from pet food production for use in animal feed.
OutcomeIncreased revenue from by-products, supporting sustainability and reducing waste.
3M
StrategyBy-Product Pricing: Sold manufacturing by-products as raw materials for other industries.
OutcomeEnhanced resource efficiency and created additional revenue streams from by-products.
Kraft Heinz
StrategyBy-Product Pricing: Sold cheese whey from dairy production to create protein supplements and animal feed.
OutcomeReduced waste and generated additional revenue, supporting sustainability initiatives.
AB InBev
StrategyBy-Product Pricing: Sold yeast and spent grains from brewing to the animal feed industry.
OutcomeIncreased revenue from by-products, promoting sustainability and reducing waste.
L’Orรฉal
StrategyBy-Product Pricing: Utilized by-products from manufacturing processes to create new cosmetic ingredients.
OutcomeEnhanced resource efficiency and created new revenue streams from by-products.
Expanded Pricing Strategies Explorer
Cost-Plus Pricing
DescriptionMarkup added to production cost for profit
Key InsightsEnsures costs are covered and provides a predictable profitmargin.
Value-Based Pricing
DescriptionPrices set based on perceived customer value
Key InsightsAligns prices with what customers are willing to pay for the product or service.
Competitive Pricing
DescriptionPricing in line with competitors or undercutting
Key InsightsHelps maintain competitiveness and market share.
Dynamic Pricing
DescriptionPrices adjusted based on real-time demand
Key InsightsMaximizes revenue by responding to changing market conditions.
Penetration Pricing
DescriptionLow initial prices to gain market share
Key InsightsAttracts price-sensitive customers and establishes brand presence.
Price Skimming
DescriptionHigh initial prices gradually lowered
Key InsightsCapitalizes on early adopters’ willingness to pay a premium.
Bundle Pricing
DescriptionMultiple products or services as a package
Key InsightsIncreases the perceived value and encourages upselling.
Psychological Pricing
DescriptionPricing strategies based on psychology
Key InsightsLeverages pricing cues like $9.99 instead of $10 for perceived savings.
Freemium Pricing
DescriptionFree basic version with premium paid features
Key InsightsAttracts a wide user base and converts some to paying customers.
Subscription Pricing
DescriptionRecurring fee for ongoing access or service
Key InsightsCreates predictable revenue and fosters customer loyalty.
Skimming and Scanning
DescriptionContinually adjusting prices based on market dynamics
Key InsightsAdapts to changing market conditions and optimizes pricing.
Promotional Pricing
DescriptionTemporarily lowering prices for promotions
Key InsightsEncourages short-term purchases and boosts sales volume.
Geographic Pricing
DescriptionAdjusting prices based on geographic location
Key InsightsAccounts for variations in cost of living and local demand.
Anchor Pricing
DescriptionHigh initial price as a reference point
Key InsightsInfluences perception of value and makes other options seem more affordable.
Odd-Even Pricing
DescriptionPrices just below round numbers (e.g., $19.99)
Key InsightsCreates a perception of lower cost and encourages purchases.
Loss Leader Pricing
DescriptionOffering a product below cost to attract customers
Key InsightsDrives traffic and encourages additional purchases.
Prestige Pricing
DescriptionHigh prices to convey exclusivity and quality
Key InsightsAppeals to premium or luxury markets and enhances brand image.
Value-Based Bundling
DescriptionCombining complementary products for value
Key InsightsEncourages customers to buy more while receiving a perceived discount.
Decoy Pricing
DescriptionLess attractive third option to influence choice
Key InsightsGuides customers toward a preferred option.
Pay What You Want (PWYW)
DescriptionCustomers choose the price they want to pay
Key InsightsPromotes customer goodwill and can lead to higher payments.
Dynamic Bundle Pricing
DescriptionPrices for bundled products based on customer choices
Key InsightsTailors bundles to customer preferences.
Segmented Pricing
DescriptionDifferent prices for the same product by segments
Key InsightsConsiders diverse customer groups and willingness to pay.
Target Pricing
DescriptionPrices set based on a specific target margin
Key InsightsEnsures profitability based on specific financial goals.
Loss Aversion Pricing
DescriptionEmphasizes potential losses averted by purchase
Key InsightsEncourages decision-making by highlighting potential losses.
Membership Pricing
DescriptionExclusive pricing for members of loyalty programs
Key InsightsFosters customer loyalty and membership growth.
Seasonal Pricing
DescriptionPrice adjustments based on seasonal demand
Key InsightsMatches pricing to fluctuations in consumer behavior.
FOMO Pricing (Fear of Missing Out)
DescriptionLimited-time discounts or deals
Key InsightsCreates urgency and encourages purchases.
Predatory Pricing
DescriptionLow prices to deter competitors or drive them out
Key InsightsStrategic pricing to gain market dominance.
Price Discrimination
DescriptionDifferent prices to different customer segments
Key InsightsCapitalizes on varying willingness to pay.
Price Lining
DescriptionDifferent versions of a product at different prices
Key InsightsCatering to various customer preferences.
Quantity Discount
DescriptionDiscounts for bulk or volume purchases
Key InsightsEncourages larger orders and repeat business.
Early Bird Pricing
DescriptionLower prices for early adopters or advance buyers
Key InsightsRewards early commitment and generates initial sales.
Late Payment Penalties
DescriptionAdditional fees for late payments
Key InsightsEncourages timely payments and revenue collection.
Bait-and-Switch Pricing
DescriptionAttracting with a low-priced item, then upselling
Key InsightsUses attractive deals to lure customers to higher-priced options.
Group Buying Discounts
DescriptionDiscounts for purchases made by a group or community
Key InsightsEncourages collective buying and customer loyalty.
Lease or Rent-to-Own Pricing
DescriptionLease with an option to purchase later
Key InsightsProvides flexibility and ownership choice for customers.
Bid Pricing
DescriptionCustomers bid on products or services
Key InsightsPrices determined by customer demand and willingness to pay.
Quantity Surcharge
DescriptionCharging a fee for purchasing below a certain quantity
Key InsightsEncourages larger orders and higher sales.
Referral Pricing
DescriptionDiscounts or incentives for customer referrals
Key InsightsLeverages word-of-mouth marketing and customer networks.
Tiered Pricing
DescriptionMultiple price levels based on features or benefits
Key InsightsAppeals to customers with varying needs and budgets.
Charity Pricing
DescriptionDonating a portion of sales to a charitable cause
Key InsightsAligns with corporate social responsibility and attracts conscious consumers.
Behavioral Pricing
DescriptionPrice adjustments based on customer behavior
Key InsightsCustomizes pricing based on customer interactions and preferences.
Mystery Pricing
DescriptionPrices hidden until the product is added to the cart
Key InsightsEncourages customer engagement and commitment.
Variable Cost Pricing
DescriptionPrices adjusted based on variable production costs
Key InsightsReflects cost changes and maintains profitability.
Demand-Based Pricing
DescriptionPrices set based on demand patterns and peak periods
Key InsightsMaximizes revenue during high-demand periods.
Cost Leadership Pricing
DescriptionCompeting by offering the lowest prices in the market
Key InsightsFocuses on cost efficiencies and price competitiveness.
Asset Utilization Pricing
DescriptionPricing based on the utilization of assets
Key InsightsOptimizes revenue for assets like rental cars or hotel rooms.
Markup Pricing
DescriptionFixed percentage or dollar amount added as profit
Key InsightsEnsures consistent profit margins on products.
Value Pricing
DescriptionPremium pricing for products with unique value
Key InsightsAttracts customers willing to pay more for exceptional features.
Sustainable Pricing
DescriptionPricing emphasizes environmental or ethical considerations
Key InsightsAppeals to conscious consumers and supports sustainability goals.
Gennaro Cuofano is a CRO and tech executive who has worked in AI since late 2015, starting with bringing NLP, natural-language generation, voice and chatbot products to the marketing industry. His background is in law and finance: he holds a Master's degree in Law and an International MBA with an emphasis on corporate finance (LUISS Business School and the University of San Diego, 2012), and worked as a financial analyst at a real-estate investment firm in San Diego and as an assistant controller. His work focuses on business model strategy, business engineering and, more broadly, structural analysis: how companies make money, read from their own filings. He created FourWeekMBA and leads research there and at The Business Engineer, his newsletter on AI and business strategy, with over 95,000 subscribers and more than 1,000 published analyses. His writing has also appeared on Entrepreneur (for example, How to Digitize a Family Business in Europe) and HackerNoon. Find him on LinkedIn and Substack. See how we source.
