Pricing so you actually earn, instead of staying busy and broke

A customer looks at your price, pulls a face, and says it is too much. You knock ten percent off on the spot, because you want the sale and the silence is uncomfortable. It feels like a small thing. On most small businesses, that ten percent was somewhere between a quarter and all of the profit on that job, and you will do it again on Thursday.

The other version is quieter. You are busy. You sell out. People say nice things. And at the end of the month there is nothing left, so you assume you need more customers. When what you actually have is a price problem that more customers will only make worse. Selling twice as much at a losing price gets you into trouble twice as fast.

By the end of this guide you will be able to build a price from the bottom up for anything you sell, know the exact margin you are working on, know what a discount really costs you in extra sales, and raise your prices with a sentence that works. It takes an afternoon.

(This is written for any country. Money appears as plain numbers, read them in your own currency. The formulas and percentages are the part that transfers exactly.)

Two signs you are underpriced

Neither of these is about how you feel. Both are checkable this week.

Almost nobody argues. If essentially every customer accepts your price without a flicker, you are below what the market would pay. A healthy price gets resistance from some people. If nobody ever walks away, you are leaving money on the table with every single sale.

You are busy and broke. Full order book, empty account. That combination has exactly one common cause, and it is not the economy. It is that each unit of work is not carrying its share of what it costs to exist.

There is a third, subtler one: you are the cheapest in your area and you know it, and you say it like it is a strategy. Being cheapest is only a strategy if you also have the lowest costs, and small businesses almost never do. Someone bigger will always be able to go lower than you and survive it.

The three ways prices get set, and why two of them are guessing

Copying a competitor. You looked at the shop down the road and matched them. The problem is that you copied their price without copying their costs, their volume, their rent or their buying power. Their price might be wrong for them too. You have no way of knowing, and now it is wrong for you.

Picking a round number that feels right. It is memorable, it is easy to say, and it is unconnected to what the thing costs you. Most round-number prices were set once, years ago, and have quietly stopped covering their costs while everything got more expensive around them.

Building it from cost. You work out what one unit truly costs (including your own time) decide what proportion of the price should be left over, and calculate. Then you sanity-check it against the market and position yourself deliberately.

Only the third one is a method. The other two are hoping. But building from cost only works if you do the arithmetic correctly, and there is one specific error that quietly ruins it, so deal with that first.

The arithmetic mistake that costs the most

Most owners say something like "I add fifty percent". They then believe they are working on a fifty percent margin. They are not. They are working on thirty-three.

Two different words, and the difference is real money:

• Markup is measured against what it cost you. Cost 100, add 50%, sell at 150.
• Margin is measured against what you sold it for. Sell at 150 having spent 100, and 50 of that 150 is left over. That is a 33% margin.

Here is the full translation. Read your own habit off the left column and see what you are actually earning.

This matters because every other number in your business is measured as a share of sales, not of cost. Your rent is a share of sales. Your wages are a share of sales. Your breakeven is a share of sales. If you are thinking in markup while everything else is in margin, your planning is wrong by a third and you will not be able to see why.

So stop working in markup. From here on, decide the margin you need and calculate the price backwards from it:

Price = Cost ÷ (1 − target margin)
Cost 600, want a 40% margin:
600 ÷ (1 − 0.40) = 600 ÷ 0.60 = 1,000

That single formula is the engine of everything below. Before you can use it, you need the honest version of "cost", which is where nearly everyone underestimates, because the biggest cost in a small business is usually invisible.

Gather these, for one thing you sell, before you go further: what the materials or the stock cost you, what you pay anyone else to help make or deliver it, how long it takes you personally, what proportion gets wasted or returned, and what percentage the payment method takes. Have those five in front of you.

What one hour of your time must cost

This is the number that is missing from most small business prices, and it is why owners work sixty hours and pay themselves last.

Your time is not free, and your hourly rate is not "what I would earn as an employee". It has to carry two things: the pay you want, and every fixed cost the business has whether or not it makes a sale.

Your hourly rate = (annual pay you want + annual fixed costs)
                    ÷ chargeable hours per year

The trap is in the last line. Chargeable hours are not working hours. You work forty-five hours a week; you spend a large part of that buying stock, cleaning, travelling, answering messages, chasing payments and doing nothing because it is Tuesday afternoon. In most small businesses, half of the working week is chargeable, and for a one-person service business it is often less.

Work it out honestly:

Annual pay wanted                        600,000
Annual fixed costs (rent, power, tools)  360,000
                                       ---------
Total to recover                         960,000
Weeks worked per year                         48
Chargeable hours per week                     25
Chargeable hours per year                  1,200
Hourly rate = 960,000 ÷ 1,200 =               800

Eight hundred an hour, in a business where the owner had been mentally valuing their time at nothing. Every price built without that number in it is a price that quietly donates the owner's labour to the customer.

Two rules once you have it:

• If you cut your chargeable hours estimate to be "realistic" and the rate comes out uncomfortably high, that is information, not an error. It means your fixed costs are large relative to how much work you can actually sell.
• Recalculate the rate whenever your fixed costs change by more than about a tenth. A new rent, a new employee, a new vehicle, all of it lands in this number.

Building the price of a product

Now the whole thing, on one worked example. A made item, read it as your cake, your bag, your batch of soap, your assembled unit.

Materials                                     220
Packaging                                      30
Wastage at 5% of materials                     11
Your time: 45 minutes at 800/hr               600
Someone else's time                             0
Delivery (customer collects)                    0
                                            -----
TRUE UNIT COST                                861
Target margin                                 45%
Payment fees                                 2.5%
Price = 861 ÷ (1 − 0.45 − 0.025)
      = 861 ÷ 0.525
      = 1,640      → sell at 1,650

Three things about that calculation are worth stopping on.

Fees come out of the price, not the cost. Card and mobile money charges are a percentage of what the customer pays, so they belong in the denominator alongside the margin. Putting them in the cost line underprices you slightly on every sale.

Wastage is real and must be in every unit. Spoilage, offcuts, breakages, the batch that failed, the return you could not resell. Estimate the percentage honestly from last month and put it in. If you throw away one in twenty, every nineteen good units must pay for the twentieth.

The time line is usually the shock. Forty-five minutes at a real rate dwarfs the materials. This is normal, and it is exactly why handmade and service businesses undercharge: the materials are visible, the labour is not.

Now the same for a service. There is no stock, so the rate carries almost everything:

Consumables used                              300
Your time: 3 hours at 800/hr                2,400
Travel                                        150
                                            -----
TRUE JOB COST                               2,850
Target margin on top                          20%
Payment fees                                 2.5%
Price = 2,850 ÷ (1 − 0.20 − 0.025) = 3,680  → quote 3,700

Note that the service margin is lower than the product margin, and that is correct. Your pay and your overheads are already inside the hourly rate; the margin on top is the business's profit. The money that buys equipment, survives slow months and eventually pays for someone else to do the work. It should not be zero. If it is, you have bought yourself a job, not a business.

Target margins to aim at

Your own costs decide your price, but these ranges tell you whether your answer is sane. If you land far outside the band for your kind of business, check your arithmetic before you change your price.

These are gross margins. After the cost of the goods and the direct labour, before rent and general overhead. Ranges vary by country and by city, so treat them as a sanity check rather than a target handed down from above.

Checking against the market, without copying it

Once you have your number, go and find three prices for something comparable: the cheapest you can find, the most common, and the most expensive. Write them down. You are looking for one thing only, where your calculated price falls.

• Below the cheapest. Something is wrong in your costs, or you have forgotten your own time. Recheck before you celebrate.
• Around the common price. Fine. You are viable at the market rate, and you now know exactly how much room you have.
• Above the most expensive. Do not automatically drop. Either your costs are genuinely higher and you must fix that, or you are selling something better and the job is to make the difference visible, faster, guaranteed, delivered, cleaner, longer-lasting, actually answers the phone.

The one thing you must not do is set your price at the cheapest number you found. That business may be about to fail, may buy at volumes you cannot, or may not be counting their own time either. Copying a price is copying someone else's arithmetic without seeing it.

What a discount actually costs you

This is the table to keep. It answers the question "if I cut the price by this much, how much more must I sell just to end up where I started?"

Read the 30% row, because a lot of businesses live there. Taking ten percent off means you must sell half as much again to make the same money. Nobody sells half as much again because they knocked ten percent off.

The formula, if you want to run your own numbers:

Extra volume needed = margin ÷ (margin − discount) − 1
At 40% margin with 10% off:
0.40 ÷ (0.40 − 0.10) − 1 = 1.333 − 1 = 33% more sales needed

So when the discount conversation comes, do not cut the price. Change what is included instead: a smaller size, a longer lead time, collection instead of delivery, the basic version without the extra. Give less for less. A price you drop once is a price the customer will expect forever, and they will tell their friends what they paid.

Raising your prices

Most small businesses are one price rise away from being comfortable, and they postpone it for years out of fear that has almost no evidence behind it.

Raise by a meaningful amount, once, rather than trickling. Somewhere around eight to fifteen percent is normal for a business that has not moved in a year or more. A three percent rise costs you as much goodwill as a ten percent one and does not fix anything.

Give notice to regulars, not to strangers. New customers simply see the new price. For existing regulars, a short message two to four weeks ahead:

Hello, a quick note that from the 1st our prices are going up by
about 10%. It is the first change in two years and it is down to
the cost of materials. Anything already booked is at the old price.
Thank you for your business. It is genuinely appreciated.

Do not apologise or over-explain. One sentence of reason is plenty. Long justifications invite negotiation and signal that you do not believe the price yourself.

Expect to lose some customers, and count who. Losing about five percent is normal and usually profitable, the ones who leave over a small rise are typically the slowest to pay and the quickest to complain. If you lose thirty percent, the rise was too large or too sudden; that is a real signal, not a nerve.

Change the price everywhere on the same day. Catalogue, price list, website, printed menu, quotes in progress, the number your staff say out loud. Half-updated prices produce arguments at the counter and staff who quietly keep giving the old one.

When they say it is too expensive

Four responses, in order of usefulness. None of them is dropping the price.

Ask what they are comparing it to. Often the comparison is a different thing entirely, a smaller size, a lower grade, no delivery, no warranty. You cannot answer an objection you have not identified.

Restate what is included. Not features, consequences. Not "we use better thread" but "it will not come apart when it is washed, and if it does, bring it back."

Offer a smaller version. A cheaper thing, not a cheaper price for the same thing. This keeps your price intact and still gives the customer a way to buy.

Let them go, politely. "I understand, that is fine. If it does not work out, we are here." Some customers are not yours. A business that never loses a customer on price is a business charging too little, and chasing the bottom of the market costs more than it earns.

What goes wrong

Your own time stays out of the price. The most common and most expensive error. Every hour you work for free is a permanent discount that never appears on any page.

You price the materials and forget the batch that failed. Wastage, spoilage, returns, rework. If it does not appear in the price it comes out of your pocket.

You calculate a price and then round it down. 1,640 becomes 1,500 because it sounds nicer. That is a ninety percent margin cut on some products, made for aesthetic reasons. Round up to the nearest sensible number, never down.

Prices sit unchanged while costs rise. Materials, rent, power and wages all move. If your price has not moved in two years it has effectively fallen. Put a date in your calendar once a year to review every price.

Everything gets the same markup. Fast-moving items and slow ones, easy jobs and awful ones, should not carry the same margin. Charge more where the work is unpleasant, urgent, custom, or ties up your money for a long time.

Staff can give discounts without asking. Set a rule: nobody below the price on the list without your approval, and write down every exception with a reason. Read the list monthly. Most owners are shocked by how much has been given away.

Undercutting is used as the entire strategy. You can win a price war only if you are the lowest-cost operator. If you are not, you are choosing the one competition you are guaranteed to lose.

Your first week

When you finish Day 2, you will have one number that most owners never see: the gap between what your best-selling item should cost and what you are charging for it. If that gap is negative, you now know exactly which of your products has been funded by your own unpaid hours, and you can fix it on Monday.