How to Price Your Products and Services

The two core methods for pricing a product or service are cost-plus pricing (add a margin on top of what it costs you) and value-based pricing (price to what it's worth to the customer). Most small businesses start with cost-plus because it's simple, then move toward value-based pricing once they understand their market position, because value-based pricing generally captures more profit for the same product.

What is cost-plus pricing?

Cost-plus pricing means you calculate your total cost per unit or per job, then add a fixed markup to arrive at your price.

• Add up direct costs: materials, labor, and any per-unit costs tied directly to delivering the product or service.
• Add a share of overhead: rent, insurance, software, admin time, spread across your expected volume.
• Apply a markup on top of that total, commonly 20~50% depending on the industry, to arrive at your price.

The advantage is that it's fast and guarantees you cover your costs. The disadvantage is that it ignores what the customer is actually willing to pay, which means you can leave significant profit on the table if your value to the customer is higher than your costs suggest.

What is value-based pricing?

Value-based pricing starts from the customer's side of the equation: what is the outcome worth to them, not what did it cost you to produce.

• Identify the outcome you deliver, not the task. A plumber isn't selling an hour of labor; they're selling a working kitchen tonight instead of next week.
• Price against alternatives, including the cost of the customer doing nothing, doing it themselves, or hiring a competitor.
• Segment by willingness to pay where you can. Rush jobs, premium tiers, and bundled service commonly command a higher price for a similar underlying cost.

Because pricing has such a large lever on profit, getting this step right matters more than most owners assume. McKinsey's research on pricing found that a 1% price increase lifts operating profit by about 8% on average, more than a matching 1% improvement in either volume or fixed costs typically delivers.

Cost-plus tells you what you have to charge to survive. Value-based pricing tells you what you're allowed to charge to thrive.

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Which pricing method should I use?

Neither method is "correct" in isolation, they answer different questions and most businesses blend them.

• Use cost-plus as a floor, not a ceiling. Know the minimum price that keeps you profitable, but don't stop there.
• Use value-based pricing to set the actual price, especially for services where expertise, speed, or outcome quality varies by provider.
• Reassess by product or service line. A commodity item may need to stay close to cost-plus to stay competitive, while a specialized or high-demand offering can be priced closer to its value.

How do I know if my price is too low?

• Check whether you're winning every single bid or quote. If you never lose on price, you're likely priced below the market.
• Compare against local competitors directly, not just national averages, since real customer decisions happen locally.
• Watch your margin trend, not just revenue. Rising revenue with flat or shrinking margin often means costs are quietly outrunning price.

How often should I revisit my pricing?

• At least annually, tied to a cost or market review.
• Whenever a major cost changes (materials, wages, rent).
• When you notice a shift in demand, either turning away work (raise) or discounting to win it (reassess value).
• After a competitor changes their pricing, so you're reacting on purpose rather than drifting.

What mistakes do owners make when pricing for the first time?

• Forgetting overhead entirely. New owners often price off materials and labor alone, then wonder why revenue never turns into real profit once rent, insurance, and software are paid.
• Copying a competitor's price without knowing their cost structure. A competitor with lower rent, older equipment, or unpaid family labor can profitably charge less than you can.
• Never revisiting the number after launch. A price set in year one, based on year-one costs, quietly erodes margin every year costs rise and the price doesn't.
• Treating every customer and every job the same. Rush work, custom work, and repeat simple work rarely deserve identical pricing, even within one product line.

Cost-plus tells you your floor; the missing piece for most owners is knowing where they actually sit against the local market. SharePop's Price Position tool benchmarks your pricing against comparable businesses nearby, so you can see the room you have to price on value instead of just cost.