How to Price Your Products So You Make a Profit

Many small businesses set prices by copying a competitor or by guessing. Then the month ends and there is very little money left. Good pricing starts with your real costs and the profit you need, then checks the result against the market. This guide shows a simple method you can use for any product.

Step 1: Add up every cost per item

Your cost is more than the price you pay for ingredients or stock. Include everything it takes to get one item to a customer.

• Materials, ingredients or the price you pay for stock
• Packaging, labels and bags
• Delivery or transport
• Payment fees and any commission
• A share of rent, power, data and wages, if you can estimate it
• Waste, damage and returns

Step 2: Decide the profit you need

Pick a target margin, which is the share of the selling price you keep as profit. Margin and markup are different, and mixing them up is a very common mistake. A 30% markup is not a 30% margin. Our Profit Margin Calculator shows both side by side.

Step 3: Work out the price

Use this formula: Price = Total cost ÷ (1 − target margin).

Example: a bag of snacks costs 1,800 to make, and 200 to package, so the total cost is 2,000. You want a 30% margin. Price = 2,000 ÷ 0.70 = 2,857. You round up to 2,900. Your profit is 900 per bag, which is about 31% of the price.

Step 4: Compare with the market

Now look at what similar businesses charge, and at what your customers are happy to pay. If the market price is higher than yours, you may be underpricing. If the market price is lower, do not just cut your margin. First look for ways to lower your costs, or find a reason customers should pay more, such as better quality, faster delivery or nicer packaging.

Step 5: Test and adjust

Pricing is not permanent. Watch your sales for a few weeks. If everyone buys without questions, your price may be too low. If almost nobody buys, check whether the problem is price or something else, like how the product is shown.

Mistakes to avoid

• Forgetting your own time. If you pay yourself nothing, your real profit is smaller than it looks.
• Giving discounts without checking. A 10% discount can remove a much bigger share of your profit than you expect.
• Never updating prices when your costs go up.
• Copying a competitor's price without knowing their costs. They may have different costs, or may be losing money.

Frequently asked questions

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