How to Price a Product or Service

Cost-Plus Pricing

Cost-plus pricing starts with your total cost per unit and adds a target margin. It's the most common approach for product businesses because it's simple and guarantees profitability — as long as your cost estimates are accurate.

The formula is: Price = Unit Cost ÷ (1 − Target Margin). If your product costs $30 to make and you want a 40% gross margin, the price is $30 ÷ 0.60 = $50. The common mistake is confusing markup with margin: a 40% markup on $30 gives you $42 — not $50 — and a gross margin of only 28.6%, not 40%.

Cost-plus requires knowing your true cost per unit — including materials, direct labour, packaging, and an allocated share of overhead. Many businesses underprice because they only count direct material cost and forget that overhead has to be recovered somewhere.

Contribution Margin and Why It Matters

Contribution margin is the amount each sale contributes to covering fixed costs after variable costs are paid. Contribution margin = Price − Variable cost per unit. If you sell a product for $80 and variable costs are $35, your contribution margin is $45. Every unit sold contributes $45 toward your fixed costs (rent, salaries, software) and then profit.

This matters for pricing decisions because it tells you the minimum price needed to stay viable. If your contribution margin goes negative — if you're selling below variable cost — you lose money on every unit regardless of volume. More sales just creates bigger losses.

Contribution margin also helps you evaluate discounts. A 20% discount that takes your price from $80 to $64 drops contribution margin from $45 to $29 — a 35% reduction in profit contribution. You'd need to sell 55% more units just to stay even. Most discounts don't generate that volume.

Value-Based Pricing

Value-based pricing sets the price based on what the outcome is worth to the customer, not what it costs you to deliver. A tax consultant who saves a client $50,000 in taxes can charge $5,000 — their cost is irrelevant to the client. The price is anchored to the value delivered.

To use value-based pricing: (1) Identify the measurable outcome your product or service delivers — time saved, revenue increased, cost reduced, risk avoided. (2) Quantify it in dollars. (3) Price at a fraction of that value, leaving the customer with clear ROI. This approach typically yields 20–50% higher prices than cost-plus for the same service.

Value-based pricing requires confidence and good positioning. You need to be able to articulate the outcome clearly and the customer needs to trust you can deliver it. It works best for professional services, SaaS, and any product with a measurable business impact.

How to Raise Prices Without Losing Customers

Fear of customer pushback keeps most small businesses underpriced for years. The reality: a well-executed 10% price increase typically results in far less than 10% customer attrition, and the net revenue outcome is usually positive. The math often surprises business owners.

Before raising prices, model the impact. If you raise price by 10% and lose 8% of customers, are you better off? At $100 price with 100 customers ($10,000 revenue), raising to $110 and losing 8 customers leaves you with 92 customers × $110 = $10,120 — slightly more revenue but likely higher margin because you're serving fewer customers with the same fixed cost base.

Execution matters as much as the numbers. Notify existing customers 30–60 days in advance. Frame it as a quality investment, not a cost increase. Grandfather loyal customers at current rates for 6–12 months. New customers pay the new price immediately. This approach typically retains 90–95% of existing customers.

Finding Your Floor: Minimum Viable Price

Your minimum viable price is the lowest price at which your business remains financially sustainable. Below this floor, you're subsidizing customers with your own capital. It's calculated from your break-even point — the revenue needed to cover all fixed and variable costs.

Break-even gives you a floor. Value gives you a ceiling. Your optimal price lives somewhere between them, ideally closer to the ceiling. Most small businesses price near the floor because that's where they feel "safe" — but safe pricing often means slow death from insufficient profit margin to reinvest in growth.

FAQ