Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.
3 min. read
Updated October 29, 2023
Setting a product price requires research, a little math, and a willingness to test with customers.
This article will provide the basic knowledge needed to price your products.
Product pricing is the process of determining the amount customers will pay for a product. It’s a balance of covering costs, ensuring profitability, and aligning with market expectations.
You’ll want to know these business terms to get the most out of this article.
How much does it cost to make your product? This is your cost of goods sold (COGS) and includes:
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When setting prices you should also account for your operating expenses. These are the fixed costs you pay no matter how many products you produce. This may include:
Note: COGS and operating expenses are tracked separately in your income statement.
Consider how much profit you hope to make to arrive at a starting price. This is a percentage you add on top of the production costs.
When choosing a percentage, you’ll want to consider:
Once you have a percentage convert it to a decimal and apply it to the following calculation:
Price = Variable cost per product / (1 – profit margin)
You’ll notice that this calculation did not consider your earlier fixed costs. To bring this into your pricing exploration, consider how much you’ll need to sell to break even.
Use the price you found after applying your desired profit margin and the following formula to find your break-even point.
Units sold = Fixed costs / (Price per unit – Variable costs per unit)
With your calculations out of the way, you need to see how the price compares to competitive items in the market.
You need to take into account what your:
Depending on these factors, you may need to adjust your price point. Use the previous calculation to understand how pricing changes impact your break-even point and profitability.
Don’t get hung up on finding the perfect price point. Instead, arrive at a few options and test them with your customers.
You may find that you can sell at a higher price than expected with the right pricing strategy. But you’d never know without testing it with potential customers. If the price doesn’t stick, review any feedback, adjust your price, and try again.
Need additional guidance to set your prices? Check out our other pricing resources: