How to Price Your Products and Services (A Simple Formula)

Pricing is where a lot of small businesses go wrong. Price too low and you work hard for nothing. Price too high and customers go elsewhere. Here's a simple way to find a price that works.

Step 1: Work out your direct costs

These are the costs for each item or job: materials, packaging, delivery and any labour that goes into that one sale.

For example, a cake might cost J$2,000 in ingredients, J$300 for the box and J$200 in gas.

Step 2: Add a share of your overheads

Overheads are costs you pay no matter what: rent, light bill, internet, phone, equipment and transport. Add up your monthly overheads and divide by how many items or jobs you do in a month.

If overheads are J$40,000 a month and you sell 80 cakes, each cake needs to cover J$500 of overheads.

Step 3: Pay yourself

Your time isn't free. Decide what you need to earn per hour or per job, and include it. If a cake takes you two hours and you want J$1,000 an hour, that's J$2,000.

Step 4: Add profit

Profit is different from your pay. It's what lets the business grow, replace equipment and survive slow months. Add 15 to 30% on top, depending on your industry.

Our cake example:

• Direct costs: J$2,500
• Overheads: J$500
• Your pay: J$2,000
• Total cost: J$5,000
• Plus 20% profit: J$6,000

Step 5: Check the market

Look at what similar businesses charge. If you're much higher, think about what makes yours worth more, like quality, speed or service, and make sure customers can see it. If you're much lower, you may be leaving money on the table.

Tips

• Don't compete only on price. There's always someone cheaper.
• Review your prices every few months. Costs go up, and your prices should too.
• Offer packages or bundles instead of discounts.
• Raise prices for new customers first, then for regulars with fair notice.