Ever felt like setting prices for your products or services is a bit like throwing darts in the dark? You’re not alone. For many small business owners, pricing can feel like a mysterious balancing act between what you think your customers will pay, what your competitors are charging, and what your gut tells you. But here’s the truth: getting your pricing right is one of the most important things you’ll ever do for your business’s health and growth. Let’s turn on the lights and get practical about how to set prices that don’t just keep the doors open—but drive real profit.
Why Pricing Isn’t Just About the Numbers
Think of pricing like planting a garden. If you plant seeds too close together (set prices too low), nothing has room to grow. Set them too far apart (prices too high), and you’re left with bare patches—empty order books and lost customers. The sweet spot is finding that fertile ground where your business thrives, and your customers feel they’re getting real value.
Before we dig into formulas and strategies, let’s get clear: pricing is as much about perception and value as it is about costs and margins. Customers don’t buy numbers; they buy solutions to their problems, trust in your expertise, and the feeling of getting a fair deal.
Step 1: Know Your Costs—All of Them
Before you can price for profit, you need to know what it actually costs you to deliver your product or service. Sounds obvious, but many small business owners underestimate or overlook “hidden” costs.
Direct Costs: Materials, labor, or anything directly tied to making your product or serving your client.
Indirect Costs: Rent, utilities, insurance, software subscriptions, marketing, and your own salary.
Variable Costs: Costs that go up or down with each sale (e.g., packaging, shipping, transaction fees).
Fixed Costs: Costs that stay the same regardless of sales (e.g., monthly rent, website hosting).
Example: Let’s say you run a bakery. For each loaf of bread, you have direct costs (flour, yeast, baker’s wages) and indirect costs (portion of the rent, electricity, admin costs). Miss these, and your “profitable” loaf could actually be costing you money.
Step 2: Understand Value from Your Customer’s Perspective
Great pricing doesn’t just cover your costs—it reflects the value you provide. Think about why someone chooses your business over a competitor. Is it speed, quality, expertise, convenience, or something else?
A plumber who shows up on time and fixes the problem right the first time can charge more than one who’s always late and leaves a mess. The value isn’t just in the parts, but in peace of mind.
Step 3: Check Out the Competition (But Don’t Copy Blindly)
It’s smart to know what others in your field are charging, but resist the urge to simply match or undercut them. Your business is unique. Copying someone else’s prices is like wearing their shoes—might look okay, but you’ll probably get blisters.
What do your competitors offer that you don’t (or vice versa)?
Are they targeting a different type of customer?
Do they compete on price, quality, speed, or something else?
Use competitor pricing as a data point—not gospel.
Step 4: Choose a Pricing Method That Fits Your Business
There are several practical ways to set your prices. Here are three of the most common for small businesses:
Cost-Plus Pricing: Calculate your total cost per unit, then add a markup for profit. For example, if your product costs $10 and you want a 50% profit margin, you’d price it at $15.
Value-Based Pricing: Price based on the value to the customer, not just your cost. If your service saves a client $1,000 a month, charging $200 is a win-win.
Market-Based Pricing: Set your price based on what the market (your competitors) charges, then adjust for your unique strengths or weaknesses.
Case Study: Susan’s Mobile Dog Grooming
Susan started by charging what the local pet store salon charged—$40 per dog. But her costs were higher (she drove to customers’ homes, used premium shampoos, and blocked out more time per appointment). After breaking down her real costs and talking to loyal customers, she realized her value was convenience and stress-free service. She raised her price to $65, lost a few budget-conscious clients, but gained more loyal ones—and finally started making a healthy profit.
Step 5: Factor in Profit—Not Just Survival
Remember, you’re not running a nonprofit (unless you are!). Your price needs to include a fair profit margin, not just enough to “get by.” Profit is what allows you to invest in better equipment, hire help, or simply take a holiday without sweating next month’s bills.
Set a target profit margin. For most small businesses, aiming for a net profit margin of 10-20% is realistic, but this varies by industry. Check out average margins for your industry here.
Don’t be afraid to charge more if you deliver value. If your clients are happy and you’re booked solid, it’s probably time to raise prices.
Step 6: Test Your Prices—And Listen to Feedback
Pricing isn’t a “set it and forget it” exercise. Don’t be afraid to test different prices, offer packages, or adjust your approach based on customer reactions.
Do customers consistently say you’re a bargain? You might be leaving money on the table.
Is business slow, even though you’re cheaper than the rest? Maybe customers don’t see the value, or your price signals “low quality.”
Hypothetical Example: Tom’s Tech Repairs
Tom noticed that every time he offered a discount, customers flocked in, but then business dropped off. He raised his prices by 20%, added a “no fix, no fee” guarantee, and suddenly clients valued his service more. The higher price covered his costs, and the guarantee built trust.
Actionable Takeaways: Pricing for Profit Checklist
Know your true costs—direct, indirect, fixed, and variable.
Understand what makes your business valuable to customers.
Check competitor prices, but don’t just copy them.
Choose a pricing method that fits your business and industry.
Build in a profit margin that allows your business to grow.
Test, tweak, and don’t be afraid to adjust as you learn.
Resources to Go Deeper
Wrapping Up: Don’t Settle for Break-Even
Pricing for profit isn’t about squeezing every last dollar from your customers—it’s about building a business that supports your goals, rewards your hard work, and delivers real value. Take the time to get your pricing right, and your business won’t just survive—it’ll thrive.
The last thing you need is a business that just breaks even. You're not in business just to pay bills.
Ready to take action? Review your costs, talk to your customers, and give your pricing strategy a check-up this week. Your bottom line will thank you.