How to price what you sell
Price is one of the most powerful levers on profit, yet many founders set it once by guesswork and rarely revisit it. This guide covers the numbers, the research and the habits behind better prices.
Know your numbers first
Start with unit cost: everything it takes to produce and deliver one more sale, including materials, direct labor, packaging, shipping and payment processing fees. Price minus unit cost is your contribution margin, the amount each sale contributes toward rent, salaries and other fixed costs.
Break-even volume is fixed costs divided by contribution margin. For example, a product that sells for $50 and costs $30 to make and deliver contributes $20 per sale, so $6,000 in monthly fixed costs means you need 300 sales a month to break even. Every sale above that line adds profit.
Pick a pricing approach
There are three basic approaches, and most businesses blend them: costs set the floor, competitors provide context and customer value sets the ceiling you aim toward.
- Cost-plus: add a set markup to unit cost, which is simple but ignores what customers would pay.
- Competitive: price against the alternatives buyers already compare you with, using only public information, since agreeing on prices with a competitor is illegal price fixing.
- Value-based: price on the value your offer creates for the customer, which takes research but often supports higher prices.
Research what customers will pay
Customer interviews beat guessing. Ask what buyers use today, what it costs them and what happens when the problem goes unsolved, rather than asking whether they would buy at a given price, a question people tend to answer too politely.
For a quick survey, use the Van Westendorp price sensitivity questions. Ask a few dozen target buyers these four questions, then plot the answers to see the range of prices most find acceptable. Treat the result as a starting point and test real offers, because what people say and what they pay can differ.
- At what price would this be so expensive that you would not consider buying it?
- At what price would it be so cheap that you would doubt its quality?
- At what price would it start to seem expensive, though still worth considering?
- At what price would it be a bargain, a great buy for the money?
Package your offer in tiers
Good, better and best versions let customers choose a level instead of making a yes-or-no decision. Build each tier around a distinct type of buyer and what that buyer needs, rather than just piling on features, and make the reason to step up obvious.
Presentation matters because of anchoring: people judge a price against the first numbers they see. Showing the premium tier first makes the middle option look reasonable, and many buyers gravitate toward the middle anyway. Keep the menu short, since three options are easier to compare than six.
Do the math before you discount
Discounts come straight out of gross profit, so they cost more than they appear to. Suppose a product sells for $100 at a 40 percent gross margin, earning $40 per sale. A 20 percent discount drops the price to $80 while the cost stays at $60, so profit per sale halves to $20 and you need twice the unit sales to earn the same gross profit.
The general rule is that the extra volume you need equals the discount divided by the difference between your margin and the discount. At the same 40 percent margin, even a 10 percent discount requires about a third more sales.
Before discounting, consider adding value instead, such as a bonus, a bundle or faster delivery. If you advertise a sale against a former price, make sure you genuinely offered that price for a reasonably substantial period, because the FTC’s Guides Against Deceptive Pricing and many state laws target fake reference prices.
Raise prices without losing trust
Customers accept increases more readily when they understand why. Tie the change to added value or real cost increases, give clear advance notice, and check your contracts and terms of service for notice requirements first.
- Grandfather existing customers at the old price for a set period.
- Raise prices for new customers first and watch how they respond.
- Time increases to renewals, new features or the start of a year rather than mid-contract.
- Prefer regular, modest increases to rare, large ones.
Adjust for your buyers and review regularly
Business buyers usually involve several decision makers, judge your price against a budget or the return it produces, and expect quotes, contracts and some negotiation. Decide in advance how much discount you will allow and who can approve it.
Consumers decide faster and compare against reference points, such as competitors’ prices and what they paid last time. Show the full price clearly, because fees revealed only at checkout erode trust and often lead to abandoned carts.
Review prices at least once a year and whenever costs, competitors or demand shift. Track gross margin, conversion rates and how often you discount, and change one thing at a time so you can tell what worked.