How to Price a Product So You Actually Make Money

Your price is one of the most important decisions you’ll make as a business owner. It determines whether your business can cover its costs, pay you and grow. Yet many new owners guess at prices or simply copy competitors without understanding their own numbers. Pricing too low can leave you working hard without making money, while pricing too high without justification can drive customers away. Here’s a better way to set prices.

Know your costs

Start by understanding exactly what it costs to make or deliver one unit of your product. These are your direct costs, sometimes called cost of goods sold. They include materials, labor directly involved in making the product, packaging, shipping and payment processing or platform fees.

Be thorough. Small costs like labels, boxes, tape and transaction fees can add up. If you make products yourself, include the value of your time, since your labor has a cost even if you aren’t paying yourself a wage yet.

Then consider overhead, which includes expenses that aren’t tied to individual units but must be covered by your sales overall. Overhead may include rent, utilities, software subscriptions, insurance, website costs, equipment and marketing. Your prices need to cover both direct costs and overhead to make a profit.

Understand gross margin

Gross margin is the percentage of each sale left after direct costs. It shows how much money each sale contributes toward covering overhead and generating profit.

Healthy gross margins vary widely by industry. Handmade goods, digital products and specialty items often have higher margins, while some retail and food businesses operate on thinner margins and rely on higher volume. Understanding typical margins in your industry can help you evaluate whether your pricing is sustainable.

Calculate your break-even point

Your break-even point is the number of units you need to sell to cover all your costs. To find it, divide your monthly overhead by your gross profit per unit. If your overhead is $1,500 a month and each candle generates $15 in gross profit, you need to sell 100 candles a month to break even. Every sale beyond that contributes to profit.

Knowing your break-even point helps you set realistic sales goals and see how price changes affect your business.

Common pricing approaches

Cost-plus pricing means adding a markup to your cost. If a product costs $10 to make and you apply a 150% markup, you’d price it at $25. It’s simple and ensures you cover your direct costs, but it doesn’t consider what customers are willing to pay or what competitors charge.

Competitor-based pricing involves looking at what similar products sell for and pricing yours accordingly. This helps you stay competitive, but your costs and value may differ from competitors’, so their prices may not work for your business.

Value-based pricing sets prices based on the value customers place on your product or the result it provides. This approach can support higher prices for unique, high-quality or specialized offerings, especially when customers see clear benefits. Understanding your customers and what they value most is key.

Most businesses blend these approaches, using costs to set a minimum price, competitors to understand the market and customer value to determine where within the range to price.

Pricing psychology and structure

How you present prices can affect how customers perceive them. Offering tiers, such as basic, standard and premium versions, lets customers choose the option that fits their needs and budget, and many choose the middle option. Bundles that combine products at a slight discount can increase average order size.

Consider your positioning too. A premium price can signal quality, while a very low price may raise doubts about quality in some markets.

Test and adjust

Pricing isn’t a one-time decision. Try different prices, bundles or tiers and watch how customers respond. Track sales, margins and customer feedback.

If almost everyone says yes instantly and you can barely keep up with demand, you may be priced too low. If customers consistently hesitate or you’re rarely making sales, your price, product or marketing may need adjustment.

As your costs rise because of inflation, supplier price increases or higher shipping fees, review your prices regularly so your margins don’t quietly shrink. Small, periodic price increases are often easier for customers to accept than large, sudden ones.

Don’t race to the bottom

Competing only on low prices is difficult for small businesses, which usually can’t match the purchasing power and economies of scale of large companies. Instead, focus on what makes you different. Quality, exceptional service, a unique product, a compelling story and a clear brand can justify fair prices and attract customers who value what you offer.

Pricing with confidence, based on a clear understanding of your numbers and your value, is essential to building a business that’s sustainable and rewarding.