The Complete Guide to Small Business Pricing

Find your price floor first

Your floor is the price at which you cover direct costs, a fair share of overhead and your own pay. Anything below it loses money.

Start with the cost to deliver one unit of what you sell. Include materials, labor, shipping, payment processing and anything that rises with each sale. These are direct costs.

Then add overhead: rent, insurance, software, vehicles, admin time. Divide your yearly overhead by the number of units you expect to sell to get a per-unit share. Finally, add what you need to earn as the owner. The result is your floor. If competitors or customers push the price below it, the answer is to change the offer or the costs, not to sell at a loss.

Many owners leave out their own labor. A business that only pays for materials and not for the owner's hours is not profitable, it is a job with no salary.

A cost-plus worked example

Cost-plus adds a markup to cost. Use margin, not markup, to check what you really keep.

This is an illustrative example. A custom cabinet maker has $400 of materials and 10 hours of labor at $35 an hour ($350) per job. Overhead assigned to each job is $150. Total cost: $900.

At $1,000 the job leaves $100 for the owner, taxes and any rework. A single mistake wipes it out. Margin is the share of the price you keep, and it is the number to watch. Our profit margin guide explains the calculation.

Check the market and your position

Compare your price with competitors, but position yourself on value. Being cheapest is a hard strategy for a small business.

Collect competitor prices for comparable work. Note what each includes: warranty, speed, quality, convenience. Place yourself honestly: below, at or above the market, and be ready to say why.

A small business seldom wins by being the cheapest, because larger rivals can usually run on lower costs. Customers often pay more for reliability, speed, expertise, a local relationship or lower risk. If your value is real, say so in plain words on your site and in your quotes. Positioning is covered in the competitive analysis guide.

Price by value when you can

Value pricing sets the price from what the result is worth to the customer, not just what it costs you. It works best when outcomes are measurable.

If your service saves a customer $20,000 a year, charging $4,000 is a bargain for them even if it takes you a few days. A bookkeeper who finds missed deductions, an installer who prevents downtime, a marketer who brings in leads: each can anchor price to results.

Value pricing needs a clear explanation of the outcome and some proof, such as before-and-after numbers from your own work. Where outcomes are hard to measure, use packages, such as good, better and best, to let customers self-select and to make the middle option look sensible.

Discounts, deals and rules for saying yes

Discount for a reason, with a limit and something in return. Never discount just because a customer asks.

A discount of 10 percent on a 30 percent margin takes a third of your profit. To make up that lost profit, you must sell about 50 percent more. That math discourages casual discounting.

Better approaches: trade a discount for something, such as prepayment, a larger order, a longer contract or a referral. Remove scope instead of cutting price. Offer a limited-time promotion with a clear end. Record every discount so you can see how often you give them and whether they bring profitable customers.

When and how to raise prices

Raise prices when costs rise, demand outpaces capacity or you are consistently winning every quote. Give notice and explain the change.

Signs it is time: you are booked solid, nobody ever questions your price, supplier costs are up, or your margin has slipped over the past year. Start with new customers, then existing ones with 30 to 60 days of notice. Keep the message short and factual.

Some customers will leave. Often those are the ones who cost the most to serve. Check your numbers after the change. A 5 percent increase with a 5 percent loss in volume usually leaves you with more profit and less work. Use your own margin to test it.

Common pricing mistakes to avoid

Pricing from fear, copying competitors without knowing their costs, forgetting owner pay and never reviewing prices are the usual mistakes.

• Copying a competitor. You do not know their costs or whether they are profitable.
• Ignoring hidden costs. Card fees, returns, rework, travel and unpaid quoting time add up.
• Hourly pricing for a one-person shop with no growth plan. You cap your income at your hours.
• Never reviewing. Set a calendar reminder to check margins each quarter.

Review prices alongside your budget. Our small business budget guide shows how to connect them.

Pricing, cash flow and funding

Prices set how fast cash builds. Thin margins make every loan payment harder, so fix pricing before you borrow.

A business with 10 percent margins feels any fixed payment far more than one with 35 percent margins. Before taking financing, check whether pricing supports the repayment. Our revenue available for loan payments article offers a framework.

If pricing is healthy and you have a project that will earn a clear return, ROI Funder can help with working capital for businesses with 500+ FICO, 6+ months in business and $20,000+ monthly revenue. We show true cost and payback before you sign.