How to Price Your Product or Service

Pricing is the decision that most quietly determines whether a business works. Underprice and you can be busy, well reviewed, and still going backwards. Overprice without understanding your market and nothing sells. Most new business owners guess, and the guess is almost always too low.

This guide covers the three methods, how to work out the floor below which the work stops paying, and how to raise prices on existing customers.

Start with the floor, not the price

Before deciding what to charge, work out what you cannot charge less than. This is arithmetic rather than judgement.

For a product, your floor is the cost per unit, plus payment processing fees, plus a margin that covers your fixed costs at your expected volume. For a service, it is your target annual income plus business costs, divided by the hours you can realistically bill.

The billable hours trap

The most common pricing mistake in service businesses is dividing a target income by 2,080 hours, the standard full-time year. Almost nobody bills 2,080 hours. Time goes into sales, admin, invoicing, marketing and everything else that is not client work.

If you bill 50% of your hours, your effective rate has to be double what the naive calculation gives you. Our hourly rate calculator handles this directly by asking what share of your hours are actually billable.

The three pricing methods

Cost-plus pricing

Work out what it costs you and add a margin. Simple, defensible, and the weakest of the three, because it prices on your costs rather than on what the thing is worth to the buyer. It sets a floor rather than a price.

Competitive pricing

Look at what comparable businesses charge and position relative to them. Useful for understanding the range a market will bear. The risk is that it assumes your competitors priced well, which they may not have.

Value-based pricing

Price against the outcome the customer gets rather than the effort you put in. If your work saves a client $50,000, the price relates to that number rather than to the hours it took you.

This is the hardest to execute and produces the strongest margins. It requires understanding your customer's economics well enough to describe the value in their terms.

Margin, and why it matters more than price

Margin is what is left after the cost of delivering the thing. Two businesses charging the same price can have completely different outcomes depending on margin.

The number that matters for planning is contribution margin: price minus variable cost, expressed as a percentage. That figure tells you how many sales you need to cover fixed costs, which is your breakeven. The glossary covers these terms plainly if any are unfamiliar.

Do not forget processing fees

Card processing typically takes a percentage of every transaction. On thin margins this is not a rounding error, and it should sit inside your pricing rather than being absorbed afterward.

Why underpricing is the more common failure

New business owners underprice for predictable reasons. They price against what they would personally pay rather than what the market pays. They discount to win early customers and then cannot raise prices without a difficult conversation. They forget that the price has to cover non-billable time.

The trap is that underpricing looks like it is working. Customers say yes quickly, volume builds, and the business feels busy. The problem only becomes visible when the volume is high enough to be exhausting and the margin is still too thin to hire.

How to raise prices on existing customers

Give notice rather than surprising anyone. Apply the new price to new customers immediately and existing customers at a stated future date. Explain the change once, without over-explaining or apologising at length.

Expect some attrition and price accordingly. If a 20% increase loses you 10% of customers, revenue rises. Working that arithmetic before the conversation makes it a business decision rather than a nervous one.

Testing a price

Prices are more changeable than they feel. New customers can be quoted a higher number while existing ones stay where they are, which gives you real evidence about what the market accepts.

The signal to watch is not whether people say yes. It is whether they say yes immediately. If nobody ever hesitates, the price is likely below what the market would bear.

Pricing a service versus pricing a product

The arithmetic differs enough to be worth separating.

Services

The constraint is your available billable time, which is always less than your working time. The question is what annual income you need, what business costs sit on top, and how many hours you can genuinely bill.

Hourly billing has a structural problem: it ties your income to your time and it penalises you for becoming faster. Getting better at the work reduces what you earn from it, which is a strange incentive to build a business on.

Project pricing removes that link. You price the outcome rather than the hours, and efficiency gains accrue to you rather than to the client.

Products

The constraint is unit economics. Cost per unit, plus processing fees, plus a contribution toward fixed costs, and the volume required to cover those fixed costs is your breakeven.

The trap in products is treating variable and fixed costs as one number. They behave differently, and only the split tells you what happens as volume changes.

Discounting, and what it actually does

A discount is not a small concession. It comes straight out of margin, which means it hits profit much harder than it hits revenue.

Take a product at $150 with a $45 variable cost. Contribution margin is $105. A 10% discount takes $15 off the price and leaves margin at $90, a 14% cut in margin for a 10% cut in price. To hold the same total contribution you need roughly 17% more volume.

That is the arithmetic worth running before offering a discount, because "just 10%" sounds smaller than it is.

Anchoring and tiers

Presenting a single price gives the buyer one decision: yes or no. Presenting options changes the question to which one, which is a different and usually more productive conversation.

Three tiers is the common structure. The highest tier does work even when rarely chosen, because it establishes what the range looks like and makes the middle option read as reasonable.

This only functions when the tiers are genuinely different rather than artificially degraded versions of the same thing.

What to do when a customer says the price is too high

The instinct is to reduce it. The more useful first move is to find out what the objection actually is, because "too high" is doing several different jobs.

It can mean the value is not clear, in which case the answer is explanation rather than discount. It can mean the budget genuinely does not exist, in which case a smaller scope at a proportionate price may work. Or it can mean the person is not your customer, which is information rather than a problem.

Reducing the price answers only one of those three, and it is not the most common one.

Reviewing prices on a schedule

Prices set once and left alone quietly erode as costs rise. Reviewing them on a fixed schedule, annually at minimum, converts an uncomfortable ad hoc decision into a routine one.

A scheduled review also gives you a natural way to raise prices with existing customers, because an annual adjustment is easier to communicate than a sudden change.

Getting a second opinion

Pricing is difficult to judge from inside your own business, because you know exactly how much effort the work takes and your customer does not.

SCORE mentors and Small Business Development Center advisors will both work through pricing with you at no cost, and both see enough businesses to know what a market typically bears. Our free help page lists them.