How do I price my product or service?

Price by starting with your full cost basis (materials, labor, overhead), adding a margin that sustains your business, then validating against what the market will bear. Underpricing is the most common small-business mistake — it creates cash flow problems even when sales are strong.

Pricing is not a gut-feel decision. Set it too low and you're profitable on every sale but insolvent as a business — overhead and fixed costs eat the margin. Set it too high without differentiation and you lose customers. The goal is a price that covers all costs, funds growth, and is defensible in your market.

Step 1: Calculate your full cost basis

Your minimum viable price must cover three layers of cost. Direct costs (also called cost of goods sold, or COGS): materials, direct labor, packaging, and any cost that varies directly with each unit or job. Indirect operating expenses: rent, utilities, insurance, administrative payroll — costs you pay whether or not you make a sale. Debt service: loan payments, equipment financing, and credit lines. The IRS guidance on business expenses defines which costs are deductible, which helps you understand the true tax-adjusted cost floor.

Step 2: Set a target gross margin

Gross margin = (Price - COGS) / Price. This is what remains to pay overhead and profit after direct costs.
Product businesses typically need 40–60%+ gross margin to cover overhead; service businesses often run 50–70%+ because COGS is primarily labor.
A $100 product with $60 in COGS has a 40% gross margin. If monthly overhead is $10,000, you need 250 units sold per month to break even — before any profit.
Use your profit and loss statement to see what gross margin your business has actually generated historically.

Step 3: Validate against market rates

Your cost floor tells you the minimum price. Market rates tell you the ceiling. Research what competitors charge for comparable offerings. The SBA's guide to market research outlines how to assess competitive pricing without expensive research firms. If your cost floor is above the market ceiling, you have a cost problem — not a pricing problem.

Step 4: Price for value, not just cost

Cost-plus pricing sets a floor. Value-based pricing captures what customers will pay for the outcome you deliver. If your service saves a client $50,000 in time or errors, a $5,000 fee is priced on value, not on your hourly cost. The SBA's SCORE mentors provide free guidance on pricing strategy and value proposition for small businesses.

When and how to raise prices

Raise prices when: your costs have increased materially, your customer base has proven willing to pay, or demand consistently exceeds your capacity. Do it incrementally (5–10% at a time), communicate value clearly, and grandfather existing long-term customers where practical. Most businesses underestimate how rarely customers leave over a modest, well-communicated price increase.

What the SBA says about pricing

The SBA identifies pricing strategy — including understanding your costs, competition, and customer perceived value — as a core component of a sound business plan and ongoing business management. — SBA — Market research and competitive analysis
The IRS defines ordinary and necessary business expenses — the direct costs and overhead that form the cost floor for pricing decisions — in IRS Publication 535. — IRS — Publication 535 (Business Expenses)
SCORE, the SBA's volunteer mentoring network, offers free one-on-one guidance on pricing, financial projections, and business planning for small-business owners. — SBA / SCORE

Key takeaways

Calculate full cost basis first: COGS + overhead + debt service. That's your price floor.
Gross margin must cover overhead — model the break-even unit count before setting a final price.
Market rates set the ceiling; if your floor exceeds the ceiling, attack costs, not price.
Value-based pricing captures what an outcome is worth to the customer, not just what it costs you.
Small, well-communicated price increases rarely drive significant customer loss.