Pricing is one of the most important decisions a business makes, and one of the most commonly botched — priced too low and you work hard for no profit; too high and nobody buys. Good pricing isn't a guess or a gut feeling; it's built from your real costs, the market, and the value you provide.
This guide covers how to price a product on solid ground, including the margin-versus-markup confusion that quietly loses businesses money.
What you need
- ✓A full picture of your costs — not just the obvious ones.
- ✓A sense of what competitors charge and what customers value.
- ✓A target profit margin.
Step-by-step
- 1
Work out your true cost per unit
Add up everything it costs to make and sell one unit: materials, labour, and a share of overheads (rent, tools, software, packaging, payment fees, shipping). Underpricing usually starts with forgetting these hidden costs — your price has to cover all of them before any profit.
- 2
Understand margin vs markup
These are not the same, and confusing them loses money. Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A 50% markup is only a 33% margin. Decide your target margin, then price to hit it.
- 3
Price to cover cost plus your target margin
To hit a target margin, divide your cost by (1 − margin). For a £10 cost and a 40% margin: £10 ÷ 0.60 = £16.67. This guarantees each sale delivers the profit you actually need, rather than a markup that sounds bigger than it is.
- 4
Check the market and the value
Your cost-plus price is the floor, not the answer. Look at what competitors charge and what your product is worth to customers. If you deliver more value, you can often charge more; if you're in a crowded market, you'll be constrained. Position deliberately.
- 5
Consider your pricing strategy
Decide how you want to position: premium (higher price, higher perceived value), competitive (in line with the market), or penetration (low to win share, then raise). Also think about price psychology and whether to offer tiers or bundles.
- 6
Test, review and adjust
Pricing isn't set once. Watch your actual margins, sales volume and feedback, and adjust. Small price increases often add more profit than they cost in lost sales — many businesses under-price out of fear and leave money on the table.
Examples
- A maker pricing at 'cost + 50%' thought they had a 50% margin; it was actually 33%, and they were barely profitable after overheads they'd forgotten to include.
- Recalculating from a target 40% margin (cost ÷ 0.60) instead of a 40% markup lifted each sale's real profit noticeably.
Tips
- →Include every cost — overheads, fees, packaging, shipping — not just materials.
- →Know the difference: markup is on cost, margin is on price.
- →To hit a target margin, divide cost by (1 − margin).
- →Cost-plus is your floor; the market and value set the ceiling.
- →Don't fear small price rises — they often add more profit than they cost.
Common mistakes
- Forgetting hidden costs. Include overheads, fees, packaging and shipping so the price truly covers cost.
- Confusing markup and margin. They differ — a 50% markup is a 33% margin; price to your target margin.
- Pricing only on cost. Use cost as the floor, then factor in the market and the value you provide.
- Under-pricing out of fear. Test small increases; many businesses leave real profit on the table.
Conclusion
Pricing well means building from your true costs, targeting a real margin (not a markup you've mistaken for one), and then reading the market and the value you offer. Cover every cost, price to your margin, position deliberately, and review regularly — good pricing is the difference between busy and profitable.