Pricing is the one decision that affects every sale you'll ever make, yet many small businesses set prices once, by guesswork, and rarely revisit them. This guide gives you a repeatable method: find your floor, check the market, then choose a price that matches your positioning. You'll need a few numbers you probably already have.
Step 1: Know your true cost per unit
Your price has to cover what it costs to make and deliver one more unit. This is your variable cost, and it's usually more than the obvious materials. For a physical product, include:
- Materials or wholesale cost
- Packaging and labels
- Inbound freight (what you pay to get stock to you)
- Outbound shipping you don't charge the customer for
- Payment processing fees, typically a percentage plus a small fixed fee per transaction
- Marketplace or platform fees, if you sell through one
- Direct labor, if you or an employee spend measurable time on each unit
For a service, variable cost is mainly the time spent on the job plus any materials, subcontractors or software used for that client.
Missing costs are the most common reason a business that "sells a lot" still struggles. Before you set a price, list every cost that rises when you sell one more unit and add them up.
Step 2: Account for fixed costs
Fixed costs are what you pay whether you sell one unit or a thousand: rent, insurance, software subscriptions, salaries, your website, accounting fees. They don't belong in the cost per unit, but your prices must cover them collectively.
Here's the question to ask: at a given price, how many units do I need to sell to pay my fixed costs? The answer is your break-even volume, and the break-even calculator works it out in seconds. If the number is unrealistic for your market, either the price is too low or the cost structure is too heavy.
Step 3: Set a floor with cost-plus pricing
Cost-plus pricing adds a markup to your variable cost. It's not the whole answer, but it gives you a floor you shouldn't go below.
Notice that this uses a margin, not a markup. If your product costs $24 to make and deliver and you want a 60% gross margin, the price is $24 ÷ 0.40 = $60. A "60% markup" would give only $38.40, a margin of 37.5%. The difference matters, and our markup vs. margin guide explains why. You can test both in the markup and margin calculator.
What target margin should you use? It depends heavily on your industry and channel. Products sold through retailers need room for the retailer's margin on top of yours. Businesses with high fixed costs need higher gross margins to cover them. Rather than borrowing a number from the internet, work backward: estimate realistic monthly volume, then find the margin at which that volume covers your fixed costs and leaves the profit you want.
Step 4: Research what customers compare you to
Customers don't see your costs. They see alternatives. Make a short list of what a buyer would realistically consider instead of you: direct competitors, substitutes, and doing nothing or doing it themselves. For each, note:
- The price, including shipping and any add-ons a buyer would actually need
- What's included, such as warranty, support, speed and customization
- How they position themselves: budget, mainstream or premium
This gives you a range. If your cost-plus floor sits well above what customers pay for comparable alternatives, you need a reason to be more expensive (quality, speed, service, specialization) or a cheaper way to deliver.
Step 5: Choose your position and price to value
Within the range between your floor and the market ceiling, the right price depends on the value you deliver and who you want to serve. A few principles help:
- Price to the value of the outcome, not your effort. A bookkeeping service that saves a client hours of work every month and avoids penalties is worth more than the hours it takes you.
- Don't compete on price unless you have a structural cost advantage. Small businesses rarely win price wars against larger competitors who buy in bulk.
- Make premium options available. A higher tier with faster delivery or extra features lets customers who value more pay more, and makes the standard option look reasonable.
- Use round or charm prices consistently with your brand. $49 reads as a deal; $50 reads as straightforward. Pick one style and stick to it.
Step 6: Test the effect of discounts and increases before you make them
Price changes affect profit more than most owners expect, because they come straight out of profit per unit. On a product with a 40% gross margin, a 10% discount means you need roughly a third more sales to earn the same gross profit. A 10% increase means you could lose about a fifth of your sales and still earn the same.
Before running a sale or raising prices, plug your numbers into the discount and price increase calculator. It shows exactly how much volume you need to gain, or can afford to lose.
Step 7: Review prices on a schedule
Costs creep up through supplier increases, shipping changes and new software, while prices often stay frozen. Put a pricing review on your calendar at least once a year, and recheck sooner if a major cost changes. At each review:
- Recalculate variable cost per unit with current invoices.
- Check your gross margin against your target.
- Look at what competitors charge now.
- Decide whether to adjust, and tell existing customers in advance if you raise prices.
A worked example
A small candle business sells through its own website. Each candle costs $6.50 in wax, fragrance, wick and jar, $1.20 in packaging, $0.90 in payment fees and $3.40 in shipping it absorbs, for a variable cost of $12.00. Fixed costs are $2,500 a month.
At a 60% target gross margin, the floor price is $12 ÷ 0.40 = $30. Each candle contributes $18, so break-even is about 139 candles a month. Comparable hand-poured candles sell for $28–$42. The owner positions the line as mid-premium at $34, which contributes $22 per candle and brings break-even down to 114 a month. A $44 gift set with two candles costs $22.50 to fulfill, giving customers a premium option.
Common pricing mistakes
- Leaving out shipping, fees or packaging from cost
- Confusing markup with margin
- Pricing purely by copying a competitor whose costs you don't know
- Never paying yourself, which hides how thin the margin really is
- Discounting reflexively when sales are slow instead of fixing marketing or the offer
Pricing isn't a one-time formula. It's a decision you refine. Start with a solid cost floor, check it against the market, price for the value you deliver, and use the numbers to test each change before you make it.