Pricing for Profit: What to Charge
Three ways to set prices, how to make sure your own pay is built in, and the markup versus margin mix-up that quietly drains profit.
Most new owners set prices by looking at competitors and shaving a little off. It feels safe. But underpricing is one of the most common reasons busy businesses still struggle: plenty of sales, not enough left over.
A good price does three jobs. It covers what you spend, pays you for your time, and leaves profit to grow and weather slow months.
Three ways to set a price
| Method | How it works | Watch out for |
|---|---|---|
| Cost-plus | Add up your costs and add a set percentage | Ignores what customers would pay |
| Market-based | Price near competitors | Their costs and quality may not match yours |
| Value-based | Price on the result for the customer | Needs a clear, provable benefit |
Most owners blend them. Cost sets your floor (the price you cannot go below). The market shows what customers expect to pay. Value tells you where you can sit within or above that range.
Build your pay into the price
A common trap is counting materials and fees but treating your own time as free. If you could not afford to hire someone to do the work at your price, the price is too low.
A simple cost-based floor
- 1
Direct costs
Materials, packaging, shipping, and payment processing fees for one sale.
- 2
Your labor
Hours per job times a fair hourly wage for that work.
- 3
Overhead share
Rent, software, insurance, and phone, divided across the jobs you expect each month.
- 4
Profit
A cushion on top for reinvestment, slow seasons, and taxes.
Owner story
Tasha charged $60 for a two-tier cake because that is what the grocery store charged. When she added it up, ingredients and boxes were $18, and each cake took about four hours. After overhead, she was earning less than $9 an hour. She moved to $95, explained her custom design work on her order page, and lost very few customers. Her weekend hours dropped because she stopped taking every order.
Illustrative composite, not a real customer.
Markup vs. margin
Markup is profit as a percentage of cost. Margin is profit as a percentage of the price. They use the same dollars but different bases, so the percentages never match.
The costly mix-up
If you need a 40% margin to cover overhead and you add a 40% markup instead, you end up with about a 29% margin. Over a year of sales, that gap can wipe out your profit.
Try it
Pricing & Margin
Enter your cost and either a target margin or markup to see the price you need and how the two numbers relate.
Charge at least
$33.33
Gross margin
40.0%
profit ÷ price
Markup
66.7%
profit ÷ cost
Where each sale goes
Gross margin covers only direct costs. Your overhead and your own pay still come out of it.
Myth or fact? Tap to flip
Quick check
An item costs you $20 and you sell it for $30. What is your margin?
Words to know
- Markup
- Profit expressed as a percentage of cost.
- Margin
- Profit expressed as a percentage of the selling price.
- Overhead
- Ongoing costs of running the business that are not tied to a single sale.
- Price elasticity
- How strongly customer demand responds to a change in price.
Finished reading?
Track your progress through Stage 1: Start.
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