How to price a product or service

What goes into the cost of one unit?

Underpricing usually comes from leaving costs out. For a product, add up everything that rises with each sale:

• Materials or the manufacturer's unit price
• Packaging, labels and inserts
• Inbound shipping, duties and any testing spread across the batch
• Payment processing and marketplace fees per order
• Outbound shipping you do not charge the customer
• An allowance for returns, breakage and unsold stock

For a service, the main cost is time. Count all of it, including travel, preparation, messages and admin, not just the hours in front of the client, and add supplies and any per-booking fees. If you would not do the work for that hourly figure, the price is too low.

How do I calculate my break-even point?

The SBA's formula is: break-even point in units = fixed costs ÷ (price per unit − variable cost per unit). Fixed costs stay the same whatever you sell, such as rent, software, insurance and loan payments. Variable costs rise with each sale. The part of each sale left after variable costs is the contribution margin, which pays the fixed costs and then becomes profit.

Seeing the units side by side makes the trade-off concrete: a higher price needs fewer sales, but only if enough people still buy. The SBA also suggests splitting semi-variable costs, such as a phone plan with a usage charge, into their fixed and variable parts for a more accurate result.

How do I check my price against the market?

Your costs set the floor; customers set the ceiling. The SBA's market research questions include what potential customers pay for the alternatives, so look at:

• What direct competitors charge for a similar product or service, and what is included
• What customers pay for the thing they use instead, even if it is a different kind of solution
• Whether your buyers care more about price, quality, speed or convenience
• What you would need to charge to sell through a retailer or wholesaler later, since they need their own margin

If your break-even price is above what the market pays, look for a cheaper way to make or deliver it, a customer group that values it more, or a different product. Do this before you order inventory, using quotes from your manufacturer shortlist.

How should I price a service?

Three common approaches, which you can mix:

• Hourly, when the work varies a lot. Set the hourly rate from the income you need divided by the hours you can realistically bill, not the hours you work.
• Per job or package, when the work is predictable, such as a standard home cleaning or a lesson. Customers like knowing the price upfront, and you gain when you get faster.
• Recurring, for ongoing work such as weekly visits or memberships. Steady income makes your break-even easier to reach.

Write down what each price includes, and what costs extra. A clear scope prevents arguments about what the price covered.

What are the rules for advertising discounts?

Comparing a sale price with your own former price is allowed when the former price is genuine. The FTC's Guides Against Deceptive Pricing say a former price is a legitimate basis for a price comparison if it is the actual, bona fide price at which the item was offered to the public on a regular basis for a reasonably substantial period of time.

Setting an inflated "regular" price just so you can advertise a large reduction is what the Guides call a fictitious former price, and the advertised bargain is then false. Keep records of the prices you actually offered and when, so you can back up any "was" price you show.