How to Price Your Product or Service So You Actually Make Profit
To price a product or service in a small business so you actually make a profit, work out your full cost per unit (including a fair share of overheads and your own salary), decide the profit margin you need, and then check the result against what customers will pay and what competitors charge. Price from your costs up and from the market down, and settle where the two meet. Never price only by copying the business down the road.
Plenty of busy owners are underpriced without knowing it. Sales look healthy, the diary is full, yet there is never money left at month-end. Often the problem isn’t sales at all. It’s that every sale carries too little profit to cover the costs you forgot to include.
Why pricing matters more than almost any other lever
Small price changes have a big effect on profit. In its well-known 2003 article “The power of pricing”, McKinsey calculated that, based on the average income statement of an S&P 1500 company, a 1% price rise with stable volumes would lift operating profit by 8%. The same work showed that after a 5% price cut, volumes would have to rise by 18.7% just to make up the lost profit.
Those figures come from large US listed companies, so your numbers will differ. The principle holds for a spaza shop as much as a listed retailer: a discount hits your profit far harder than it hits your turnover.
If your revenue is growing but your bank balance isn’t, underpricing may be part of the reason. Our article on why busy businesses still run out of cash looks at the other common causes.
Step 1: Know your real cost per unit
Most pricing mistakes start here. Owners count the obvious costs and forget the rest. Split your costs into two groups, using the definitions from the US Small Business Administration’s break-even guide:
- Variable costs change with each sale: ingredients, materials, packaging, delivery, card fees, commission.
- Fixed costs stay the same regardless of how much you sell in a month: rent, salaries, insurance, software, loan repayments.
Then add the costs owners most often leave out:
- Your own salary. If you don’t pay yourself, your price is subsidised by your unpaid time.
- Wastage, breakages and returns.
- Time spent quoting, travelling and doing admin that you can’t bill for.
- Equipment that will need replacing.
Step 2: Understand markup vs margin
This single mix-up costs small businesses a lot of money. Markup is profit as a share of cost. Margin is profit as a share of the selling price. They are not the same.
| Cost of product | Method | Selling price | Profit | Actual margin |
|---|---|---|---|---|
| R60 | 40% markup (R60 + 40%) | R84 | R24 | About 29% |
| R60 | 40% margin (R60 ÷ 0.6) | R100 | R40 | 40% |
If you think you’re making 40% but are actually adding a 40% markup, you are earning far less on every sale than you think. To price for a target margin, divide your cost by (1 minus the margin). For a 40% margin, that is cost ÷ 0.6.
Step 3: Work out your break-even point
The SBA gives a simple formula: break-even units = fixed costs ÷ (price per unit minus variable cost per unit). The amount left from each sale after variable costs is your contribution towards fixed costs.
Say a small Pretoria bakery has fixed costs of R45,000 a month. Each cake sells for R100 and costs R60 in ingredients, packaging and card fees, leaving R40 contribution.
- Break-even = R45,000 ÷ R40 = 1,125 cakes a month.
- That is roughly 43 cakes a day over 26 trading days, before a cent of profit.
If that number looks impossible, you have three options: raise the price, reduce the variable cost, or cut fixed costs. Knowing the break-even point turns a vague worry into a clear choice.
Step 4: Pricing a service by the hour or the project
Service businesses often set an hourly rate by guessing. Build it from your costs instead.
- Add up your monthly costs, including your own salary. Example: R30,000 salary plus R15,000 overheads = R45,000.
- Estimate honest billable hours. Not every working hour can be billed. Quoting, admin, travel and sales take time. Suppose you can bill 80 hours a month.
- Divide. R45,000 ÷ 80 = R562.50 an hour just to break even.
- Add profit. For a 20% margin, divide by 0.8: roughly R703 an hour.
Many freelancers in Cape Town or Durban quote R400 an hour because it “feels right”, then wonder why they’re exhausted and broke. For project work, estimate the hours, apply your rate and add a buffer for revisions.
Step 5: Check the market and your value
Cost-based pricing tells you the lowest price you can survive on. It doesn’t tell you the highest price customers will pay. For that, look outward:
- Competitors. Find out what three to five similar businesses charge. Don’t copy them; understand where you sit.
- Customer value. What does your product save or earn the customer? A plumber who arrives within two hours can charge more than one who arrives tomorrow.
- Your position. Decide whether you compete on price, quality, speed or convenience. Trying to be cheapest is a hard fight for a small business.
If your cost-based price is well below the market, you have room to raise it. If it is well above, look hard at your costs or at how you explain your value.
Step 6: Don’t forget VAT
If your business is VAT-registered, SARS charges VAT at 15% on standard-rated goods and services. That 15% belongs to SARS, not to you. Work out your price before VAT, then add it on, and make sure quotes clearly say whether VAT is included.
Registration becomes compulsory once your taxable supplies exceed R2.3 million in any 12-month period. If you’re close to that line, plan ahead: a customer who was paying R1,000 may now see R1,150, or you may have to absorb some of it. Build this into your cash flow forecast before it happens.
How to raise prices without losing good customers
- Give notice. Tell regular customers a few weeks ahead.
- Explain briefly. Rising supplier costs, better service or new features. One or two sentences is enough.
- Raise regularly and modestly rather than rarely and sharply.
- Protect your best customers with a short grace period if needed, but don’t freeze their prices forever.
- Watch the results. Track sales volume and margin for the next two to three months.
Most owners find they lose fewer customers than they feared. The ones who leave over a small increase were often the least profitable.
How B.E.T helps you price with confidence
Pricing is one piece of a bigger picture: costs, cash flow and growth plans all connect. B.E.T’s business diagnostic shows whether pricing and margins are a weak spot compared with the rest of your business. The plan builder’s guided prompts help you set margin targets and a plan to reach them, and dashboards let you watch the effect over time.
To see where your pricing fits in the bigger picture, run the free B.E.T business health check.
Frequently asked questions
What is the simplest way to price a product for a small business?
Add up the full cost per unit, including a share of overheads, then divide by one minus your target margin. For a 40% margin, divide the cost by 0.6. Then compare the result with competitors’ prices and adjust.
What profit margin should a small business aim for?
It depends heavily on the industry, so there is no single right number. Work backwards from what you need: your costs, your salary and the profit you want to reinvest. Compare with businesses like yours, and ask your accountant what is typical in your sector.
Should I charge less than competitors to win customers?
Usually not. Cutting prices eats into profit much faster than it grows sales, and it attracts customers who will leave for the next cheaper option. Compete on speed, quality, reliability or service instead.
How often should I review my prices?
At least once a year, and any time your main costs rise noticeably. Many small businesses review prices every six months so increases stay small and predictable.
Do I include VAT in my prices?
If you are VAT-registered, you must charge VAT at 15% on standard-rated sales. Set your price before VAT so you know your real income, then add VAT and state clearly on quotes and invoices whether prices include it.
Price for the business you want to run
Good pricing isn’t greedy. It covers your costs, pays you properly and leaves money to grow. Start with your real costs, check the market, and review every six months.
For more on keeping the money side healthy, read our guide to small business funding in South Africa, and see how funders look at your margins before you apply.
