Many small business owners set prices by gut feeling or by copying competitors. This leads to either charging too little and losing money or charging too much and losing customers. Here’s how to price your products with confidence.
Know your true costs
Start by figuring out exactly what your product costs to make or deliver. Include everything:
- Materials and ingredients. Count every component that goes into your product.
- Labor costs. Track the time it takes to make each product. Multiply by the hourly wage (including your own time).
- Overhead costs. This includes rent, utilities, equipment, software, insurance, and other expenses that keep your business running. Divide these monthly costs by the number of products you sell to find the overhead cost per product.
Add these three numbers to find your break-even point. This is the minimum price needed to cover costs.
Add your profit margin
Your business needs to make money to grow. Decide on a profit margin based on your industry and goals.
For retail products, margins typically range from 30% to 50%. Service businesses often aim for 20% to 50% or more. Research what’s normal in your industry.
To calculate your price: Divide your break-even cost by (1 minus your desired profit margin as a decimal).
Example: If your product costs $10 to make and you want a 40% profit margin, your price would be $10 ÷ (1 – 0.4) = $16.67.
Check what the market will bear
Your price must also make sense to customers. Research what similar products sell for. Consider:
– How your quality compares to competitors.
– What makes your product different or better.
– Who your customers are and what they can afford.
If your calculated price seems too high for the market, look for ways to cut costs or improve your product to justify the higher price.
Test different price points
Don’t be afraid to test different prices. Try a higher price with some customers and a lower price with others. See which leads to more profit overall.
For service businesses, create different service packages at different price points. This lets customers choose based on their budget while you learn what sells best.
Review and adjust regularly
Check your pricing at least every six months. As costs change and your business grows, your prices should change too.
Keep track of:
- Changes in material costs
- Increases in overhead
- Competitor price changes
- Customer feedback about value
Pricing strategies to consider
Cost-plus pricing: Add a standard markup to your costs. Simple but may miss market opportunities.
Value-based pricing: Price based on what customers think it’s worth, not just your costs. Often leads to higher profits.
Tiered pricing: Offer good-better-best options at different price points. Lets customers choose their price level.
Common pricing mistakes to avoid
Undervaluing your time is a common mistake – many small business owners forget to pay themselves properly. Competing only on price creates a race to the bottom that leads to shrinking profits. Many owners also fail to raise prices as their costs increase over time. Not calculating costs accurately by missing expenses often results in surprise losses that could have been avoided with better pricing.
Final thoughts
Good pricing isn’t about guessing or hoping. It’s about knowing your numbers and understanding your market. When you price with confidence, your business becomes more stable and profitable.
Take time this week to review one product’s pricing using these steps. You might find you’ve been leaving money on the table.