How to Price Your Product or Service (Without Guessing)
Ask most small business owners how they set their prices and you'll hear some version of the same answer: "I looked at what competitors charge and went from there," or "I added up my costs and tacked on a margin." Both of those are starting points. Neither is a pricing strategy.
Pricing is one of the highest-leverage decisions you'll make. Research consistently shows that a 1% improvement in pricing generates more profit than an equivalent improvement in sales volume — yet most small business owners set prices once, early on, and rarely revisit them. The result is almost always the same: undercharging, eroding margins, and leaving real money on the table.
Here's how to think about it properly.
Start With Your Cost Floor — But Don't Stop There
The first step is non-negotiable: know exactly what it costs you to deliver your product or service. That means direct costs (materials, labor, packaging, delivery) and indirect costs (rent, software, insurance, marketing, and — critically — your own time at a realistic hourly rate). Most owners forget to include overhead, which creates an artificially low sense of what they need to charge.
Once you've done this math, you have your absolute floor. You cannot price below this number and survive long-term.
But here's the mistake: treating your cost floor as your pricing strategy. Your costs tell you the minimum you can charge. They say nothing about what you should charge.
The Two Main Approaches — and When Each Makes Sense
Cost-plus pricing is simple: take your total cost per unit or per hour and add a fixed markup (say, 30% or 50%). It's easy to calculate, ensures you cover costs, and works well when your costs are predictable and your product is relatively standardized — think manufacturing, retail, or government contracting.
The problem is what it misses. Your markup is arbitrary. It doesn't reflect what customers are actually willing to pay, what the market will bear, or what makes your offering different from a competitor's. Businesses that price purely by cost often leave significant margin on the table.
Value-based pricing starts from a different question: what is this worth to the customer? If your bookkeeping service saves a client 10 hours a month and $8,000 a year in accounting fees, charging $200/month isn't a reflection of your value — it's a reflection of your reluctance to ask for it.
Value-based pricing works best when your product or service is differentiated, solves a high-impact problem, or clearly saves the customer time, money, or risk. It requires knowing your customer well enough to understand what outcome they're buying — not just what service you're providing.
The practical approach for most small businesses: use cost-plus to establish your floor, then use value-based thinking to decide where to actually set your price.
The Most Common Pricing Mistake
It's not overcharging. It's undercharging.
Research suggests that 80–90% of poorly chosen prices are set too low, and the majority of small business owners default to undercharging. The reasons are psychological as much as financial: it feels safer to win on price, it avoids difficult conversations, and it seems easier to raise prices later than to lose a customer now.
But chronic underpricing creates its own problems. It attracts price-sensitive customers who are hardest to retain. It signals lower quality to customers who use price as a proxy for value. And it makes it nearly impossible to invest in the things — people, tools, marketing — that would actually grow the business.
A good diagnostic: if every prospect converts immediately without hesitation or negotiation, your price is probably well below what the market would bear. Some friction in the buying conversation is normal and healthy.
Four Practical Steps to Setting a Better Price
1. Know your numbers before you set anything. Build a simple spreadsheet that captures every cost associated with delivering your product or service — including your own time. This is your floor. Don't price below it.
2. Research what customers actually value — not just what competitors charge. Talk to 10 to 15 customers or prospects. Ask them: what would it cost you not to have this? What would feel like a bargain? What would feel too expensive to be credible? Their answers will tell you far more than a competitor's price list.
3. Check competitors as one input, not the driver. Your competitor's price reflects their cost structure, their brand position, and their circumstances — none of which are yours. Use competitor pricing to understand the range the market expects. Don't let it become your ceiling.
4. Treat your price as a hypothesis, not a final answer. Set a price based on your research, launch it, and watch the signals. Low conversion rate and lots of price objections? You may be above what the market will bear. Every single prospect converts without blinking? You're probably leaving money behind. Revisit your pricing at least every six months as your costs, market, and offering evolve.
A Note on Raising Prices
At some point, every growing business has to raise prices — but many owners put it off indefinitely out of fear of losing customers. The reality: most customers, particularly loyal ones, will accept reasonable price increases if you communicate them well. A brief, confident explanation ("our costs have increased and we're investing in better service") is almost always enough.
What loses customers isn't price increases — it's surprise. Give adequate notice, explain the reason briefly, and hold firm.
Pricing Is a Strategy, Not a Guess
Your price is the single most direct statement you make about the value you deliver. Set it too low and you're not just leaving money behind — you're signaling to the market that you don't fully believe in what you offer.
Getting pricing right is one of those areas where experienced perspective matters enormously. A BBM mentor who has built and priced products or services in your industry can help you stress-test your numbers, understand your market's pricing dynamics, and find the confidence to charge what your work is actually worth.
Want to pressure-test your pricing? Connect with a BBM mentor.
This article is intended for general informational purposes. Pricing decisions involve many factors specific to your business, market, and cost structure. A mentor or financial advisor can help you apply these concepts to your specific situation.
