How to Price Your Products for Profit

Pricing is one of the most important decisions in a small business, and one of the most often guessed. Many owners copy a competitor's price, or add a round number to their costs and hope for the best. That approach can leave you working hard for little profit.

A better method starts with your real costs. Once you know what it costs to make or deliver a product, you can set a price that covers those costs, pays for your overheads and leaves a profit you can rely on.

This article shows a simple, repeatable way to price. It uses round numbers, so you can follow each step and check the result yourself.

Start with the full cost of each product

The first step is to know what each product costs. Start with direct costs: materials, packaging, and any labour that goes straight into making or delivering the item. These are often called variable costs, because they rise with each unit you sell.

Then add a share of your overheads. Overheads are costs that do not change with each sale, such as rent, utilities, insurance, software and admin. If you ignore them, your prices may cover the product but not the business.

To share overheads across products, divide your monthly overheads by the number of units you expect to sell in that month. This gives you an overhead cost per unit. It is an estimate, so review it whenever your sales change.

Understand markup and margin

Two terms cause confusion, so it helps to define them.

Markup is the amount you add to cost, shown as a percentage of cost.

• Markup (%) = (Price - Cost) / Cost x 100

Margin is the share of the selling price that is profit.

• Margin (%) = (Price - Cost) / Price x 100

A product that costs $30 and sells for $60 earns $30 of profit. Its markup is $30 / $30 = 1, or 100%. Its margin is $30 / $60 = 0.5, or 50%. The same sale looks very different depending on which measure you use. Margin is usually the better guide for profit planning, because it tells you what share of each sale you keep.

For more on margin, read How to Calculate Your Business Profit Margin.

Price by target margin

To price for a target margin, use this formula:

• Price = Cost / (1 - Target margin)

Write the margin as a decimal in this formula. A 50% target becomes 0.50.

Worked example: a 50% target margin

Suppose your product costs $30 to make, and you want a 50% margin.

Step 1: Subtract the margin from 1. 1 - 0.50 = 0.50

Step 2: Divide the cost by that figure. $30 / 0.50 = $60

Check: at $60, profit is $60 - $30 = $30. Margin is $30 / $60 = 50%. The check matches the target.

Price by full cost and overheads

Now combine everything into a full-cost price. Suppose a small business makes a product with these costs:

• Materials and packaging: $15 per unit
• Direct labour: $10 per unit
• Overheads: $3,000 per month, shared across 300 units sold each month

Step 1: Work out the overhead per unit. $3,000 / 300 = $10 per unit

Step 2: Add up the full cost per unit. $15 + $10 + $10 = $35

Step 3: Set a target margin of 20%, and calculate the price. 1 - 0.20 = 0.80 $35 / 0.80 = $43.75

Check: profit is $43.75 - $35 = $8.75. Margin is $8.75 / $43.75 = 0.20, or 20%.

In practice, you might round to $44 depending on your market. Rounding up slightly is usually safe, but check that the margin still meets your goal. At $44, profit is $9 and the margin is about 20.5%.

What happens when sales fall?

Overheads do not shrink when sales drop. Suppose only 200 units sell in a month. The overhead per unit rises to $3,000 / 200 = $15. The full cost becomes $15 + $10 + $15 = $40. To keep a 20% margin, the price must rise to $40 / 0.80 = $50.

Check: profit is $50 - $40 = $10, and $10 / $50 = 20%. This is why a price that works at high volume may need review when volume falls.

Pricing a service

The same method works for services. Suppose a job takes 5 hours of staff time at $20 an hour, so the direct labour is $100. Overheads allocated to each job are $25. The full cost is $100 + $25 = $125.

To earn a 30% margin, calculate the price:

1 - 0.30 = 0.70 $125 / 0.70 = $178.57

Check: profit is $178.57 - $125 = $53.57, and $53.57 / $178.57 = 0.30, or 30%. Your service price may need rounding in practice, but the calculation shows how cost and margin link together.

Check the market

A correct cost calculation does not guarantee that customers will pay the price. Look at what similar products sell for, both locally and online. If your price is far above the market, consider whether you can reduce costs, improve the product, or find a niche that values what you offer. If it is far below, you may be leaving profit on the table.

Test price changes carefully. Change one product at a time, and watch sales for a few weeks before you decide.

Do not forget discounts and fees

If you sell through platforms, offer discounts, or pay card processing fees, these costs reduce your margin. Take the $60 product from earlier. A 10% discount drops the price to $60 x 0.90 = $54. Profit falls to $54 - $30 = $24, and the margin falls to $24 / $54 = 44.4%.

Build discounts and fees into your pricing plan from the start, so you do not discover the problem later. Our article on managing cash flow when prices change covers how to keep your plans steady when costs move.

Review prices regularly

Costs change. Materials can rise, wages can change, and overheads can grow. Review your prices at least once a year, and whenever a cost changes significantly. Small, regular price reviews are often easier to manage than one large change made after a long gap.

You can test prices with your own numbers using the markup pricing tool.

Pricing checklist

1. List every direct cost for one unit.
2. Add a fair share of monthly overheads to each unit.
3. Decide the target margin you need to stay healthy.
4. Calculate the price using price = cost / (1 - margin).
5. Compare the price with the market.
6. Check that discounts and fees still leave the margin you need.
7. Set a date to review your prices again.

Frequently asked questions

What is the difference between markup and margin?

Markup is the percentage added to cost, while margin is the percentage of the selling price that is profit. A 100% markup gives a 50% margin on the same product. Margin is usually better for planning profit.

Should I include overheads in product prices?

Yes, if you want your prices to cover the full cost of running the business. Overheads can be shared across products as a cost per unit. Review that share each time your sales volume changes.

What if customers say my price is too high?

Look first at whether the value of your product is clear to buyers. Compare your costs and your offer with the market before you cut prices. A lower price may bring more sales but less profit per sale, so test changes carefully.

Should I ask an accountant about pricing?

If you sell in several markets or have complex costs, a qualified accountant or business adviser can help you check your figures. They can also advise on the tax treatment of your sales.