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.
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.
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:
Then add the costs owners most often leave out:
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.
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.
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.
Service businesses often set an hourly rate by guessing. Build it from your costs instead.
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.
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:
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.
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.
Most owners find they lose fewer customers than they feared. The ones who leave over a small increase were often the least profitable.
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.
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.
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.
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.
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.
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.
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.
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