Pricing is one of the most important decisions you’ll make, and one of the most rushed. Many new owners pick a number slightly below their competitors and hope for the best. The result is often a busy business that barely makes money, with no room to hire, advertise or survive a slow month.
Good pricing combines three things: your costs, the market, and the value customers receive. This guide shows how to use all three, with simple formulas and worked examples.
Start with your costs: the price floor
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Your price must cover what it costs to deliver each sale plus a share of your fixed costs, and then leave a profit. Separate your costs into two groups.
Variable costs rise with every sale: materials, ingredients, product cost, packaging, shipping, payment processing fees, sales commissions, and labor paid per job.
Fixed costs stay roughly the same each month regardless of sales: rent, insurance, software, phone, vehicle payments, salaries and the minimum you need to pay yourself.
Your price must be above your variable cost per sale, or every sale loses money. And the gap between price and variable cost, called the contribution margin, must be big enough, across all your sales, to cover your fixed costs.
The break-even calculator shows exactly how many sales you need at any price. Try a few prices and you’ll quickly see how a small price change affects the number of customers you need.
Method 1: Cost-plus pricing
The simplest method: add up the cost of one unit and add a markup.
Price = cost per unit × (1 + markup %)
If a candle costs you $6 in materials, packaging and fees, and you apply a 150% markup, the price is $6 × 2.5 = $15.
Cost-plus is easy and guarantees you cover costs, which makes it a good starting point. Its weakness is that it ignores what customers are willing to pay. You might be leaving money on the table, or pricing above what the market will accept.
Markup vs. margin: don’t mix them up
These two terms are often confused, and the mistake can wipe out your profit.
- Markup is profit as a percentage of cost. Cost $6, price $15: markup = $9 ÷ $6 = 150%.
- Margin is profit as a percentage of price. Same example: margin = $9 ÷ $15 = 60%.
If you want a 50% margin, you need a 100% markup, not a 50% markup. A 50% markup on a $6 cost gives a $9 price and only a 33% margin.
Method 2: Competitor-based pricing
Look at what similar businesses charge for comparable products or services in your market. Visit their websites, ask for quotes, check menus or marketplaces, and note what’s included at each price.
Then decide where you want to sit:
- Below the market: only sensible if your costs are genuinely lower or you’re deliberately building volume, and you can sustain it. Being the cheapest attracts price-sensitive customers who leave for the next cheaper option.
- At the market: you compete on service, convenience, reliability or specialization.
- Above the market: works when you offer clearly more: expertise, speed, quality, guarantees, convenience or a premium experience.
Competitor prices tell you what customers are used to paying. They don’t tell you whether those competitors are profitable, so always check your own costs as well.
Method 3: Value-based pricing
Value-based pricing starts with the customer: what is the result worth to them?
A same-day emergency repair, a wedding photographer with an outstanding portfolio, a bookkeeper who saves a client hours every month, or a mobile service that saves a two-hour round trip are all worth more to the customer than the time and materials involved. Value-based pricing captures some of that.
To find the value, use what you learned when you validated your idea: what customers paid for alternatives, what the problem cost them, and what they said mattered most. Then test prices with real customers and watch how they respond.
Most successful small businesses use all three methods together: costs set the floor, competitors show the range, and value tells you where in that range, or above it, you can sit.
Pricing a service business
Service businesses often underprice because owners forget how many of their working hours are unpaid. Quoting, travel, invoicing, buying supplies, marketing and admin all take time you can’t bill for.
Work out your minimum hourly rate:
- Decide the take-home pay you need for the year.
- Add your yearly business costs.
- Allow for taxes.
- Divide by your billable hours, not hours worked.
The service pricing calculator does this for you. Many owners are surprised by how high the result is, and that’s the point: it’s the floor below which the business can’t support you.
Worked example: pricing a standard house clean
Say a solo residential cleaner wants to take home $45,000 a year, has $9,000 a year in business costs (supplies, insurance, phone, software, vehicle costs) and sets aside 25% for taxes. They can realistically bill 30 hours a week for 48 weeks: 1,440 billable hours.
Revenue needed: $45,000 ÷ 0.75 + $9,000 = $69,000 a year. Minimum rate: $69,000 ÷ 1,440 ≈ $47.92 per billable hour.
If a standard clean of a three-bedroom home takes three hours, the floor for a flat price is about $144. If local competitors charge $130 to $170 for that clean, a price around $150 to $160 for a reliable, insured, well-reviewed cleaner is sensible, with a modest discount for weekly clients and a higher price for first-time deep cleans.
Notice what the example shows: a cleaner charging $110 because "that seems fair" would fall well short of their income goal, however busy they are.
The figures are illustrative; use your own costs and local prices.
Hourly, per job or packages?
- Hourly pricing suits work with unpredictable scope, but it penalizes you for getting faster and makes customers watch the clock.
- Per-job (flat) pricing suits repeatable work. Customers like knowing the price upfront, and you earn more as you become efficient. Estimate carefully and define the scope in writing.
- Packages and tiers, such as basic, standard and premium, let customers choose their level and often lift your average sale.
- Recurring plans, such as monthly maintenance, memberships or retainers, smooth out your income and keep customers coming back.
Pricing a product
For physical products, include every cost: materials, manufacturing or wholesale cost, packaging, shipping (in both directions if you accept returns), marketplace and payment fees, and an allowance for damaged or unsold stock.
If you plan to sell wholesale to shops, remember that retailers typically expect to roughly double the wholesale price. Your wholesale price must still leave you a profit, which means your retail price needs to be set with that in mind from the start.
For online sales, include your advertising cost per sale. A product that looks profitable before ads can lose money once you account for what it costs to win each customer.
The psychology of pricing
A few principles help customers accept your price:
- Show the value before the price. Explain what’s included and the result the customer gets.
- Offer choices. Three options, with the middle one as the best fit for most people, help customers compare value rather than focus on cost alone.
- Be clear and consistent. Hidden fees and surprise charges damage trust and reviews.
- Bundle smartly. Packages raise your average sale and make direct price comparisons harder.
- Use discounts carefully. Frequent discounts train customers to wait for the next sale. Prefer added value, such as an extra service, over cutting the price.
When and how to raise prices
Signs your prices are too low:
- You win almost every quote.
- You’re fully booked weeks ahead.
- Customers rarely question the price.
- You’re busy but not making a healthy profit.
- Your costs have risen since you set your prices.
Raise prices in modest, regular steps rather than one big jump. Give existing customers notice, explain briefly what’s changed or improved, and consider honoring the old price for a short period for loyal clients. Most will stay. Those who leave over a fair increase were often the least profitable customers.
A pricing checklist
- List every variable cost per sale.
- Total your monthly fixed costs, including your own minimum pay.
- Calculate your break-even point at your proposed price.
- Research competitor prices and what they include.
- Estimate the value to the customer.
- Choose your pricing structure: hourly, flat, packages or recurring.
- Test with real customers and watch how they react.
- Review your prices every six to twelve months.
Common pricing mistakes
- Pricing to be the cheapest. It’s the hardest position to defend and the least profitable.
- Forgetting overhead and your own pay.
- Confusing markup and margin.
- Ignoring payment and platform fees, which can take a noticeable share of every sale.
- Never raising prices as costs rise.
- Discounting by default to win work you could win on value.
Pricing isn’t set once and forgotten. Treat it as something you test and adjust as you learn what customers value and what your business really costs to run.
Next: get your first 10 customers and see the Start a Business A–Z guide.
Last reviewed October 17, 2026. Startup costs are estimates; check local prices, licensing and tax rules before you commit money.
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