How to price your product or service: cost-plus, value-based pricing and raising prices

TUREFF• •0

Pricing is one of the biggest decisions in a small business and one of the least studied. Many owners pick a number by looking at a competitor or guessing what feels fair, then never touch it again. A few simple methods give you a much better starting point, and a habit of testing keeps it right as costs change.

Start by knowing your costs

Whatever method you choose, you must know your floor, the price below which you lose money.

Variable costs: what each extra unit or job costs you, such as materials, packaging, payment fees, delivery and any hours you pay for.
Fixed costs: rent, insurance, software, equipment and your own salary, which you pay whether you sell one or a thousand.
Break-even: divide fixed costs by the margin each sale leaves after variable costs, and you know how many sales a month cover the bills.

Service businesses forget their own time most often. Count the hours you spend on quotes, admin, travel and revisions, not just the work itself.

Cost-plus pricing

Add a mark-up to your cost: if something costs you 10 to make and you add 50%, you sell it for 15. It is simple, guarantees a margin on each sale and suits retail and manufacturing. Its weakness is that it ignores what customers would pay: you may be leaving money on the table, or pricing above what the market accepts.

Competitor-based pricing

Look at what similar businesses charge and position yourself deliberately: below them, level, or above with a reason. It is a sensible reality check. The trap is copying a competitor whose costs, quality or customers differ from yours, or starting a price war a small business cannot win against a larger one.

Value-based pricing

Price according to what the result is worth to the customer. A website that brings a client steady bookings, or a repair that keeps a café open on a busy weekend, is worth more than the hours it takes. To use it:

talk to customers about the problem you solve and what it costs them
understand the alternatives they have, including doing nothing
describe your offer in terms of outcomes, not hours or materials

It usually supports higher prices, but it needs confidence and a clear understanding of your customers.

Packages and tiers

Offering two or three options (basic, standard, premium) lets customers choose their own level and makes the middle option feel reasonable. For services, fixed-price packages are often easier to sell than hourly rates, and they reward you for working efficiently.

Psychological pricing

Charm prices ending in 9 or 99 are common in retail, where they signal value.
Round numbers suit premium and professional services, where they signal quality.
Anchoring: showing a higher-priced option first makes the next one look more affordable.
Bundles can raise the average order while feeling like a deal.

Use these as finishing touches, not as a substitute for a sound underlying price.

Raising prices

Costs rise, so prices have to as well. Small, regular increases are usually easier for customers to accept than rare large ones.

Give existing customers notice, in writing, with a date.
Explain briefly, without apologising at length.
Consider keeping loyal customers on the old price for a while.
Apply new prices to new customers first if you are nervous.

If nobody ever pushes back on your price, it is probably too low.

Testing

Try a new price on new customers or one product line, and compare sales and profit, not just sales volume.
Change one thing at a time and give it long enough to judge.
Track your margin every month so you notice rising costs before they eat it.
Check the rules where you trade on displaying prices and on whether listed prices must include sales tax or VAT.

How did you set your prices, and what happened when you raised them? Share your experience or ask for a second opinion in the comments.