How to Price Your Products & Services

Most new founders underprice. They confuse "affordable to me" with "what the customer will pay." This guide will walk you through the three ways to set price, when to use each, and how to test before committing.

1. The truth about pricing

Price is not what something costs. Price is what someone will pay. Those are two very different numbers, and your cost only sets the floor. Above the floor, your price is determined by perceived value, competition, and your positioning. The mistake new founders make is starting and ending with cost.

Three ways to set price, in order of how most businesses use them:

2. Cost-plus pricing

Formula: Cost per unit + desired profit margin = price.

Add up everything it costs you to make and deliver one unit: materials, direct labor, packaging, shipping, an allocation for overhead (rent, insurance, software). Then add the profit margin you want to keep per unit.

When to use it: When you know your costs precisely and you're selling a commodity or low-differentiation product where customers buy on price. Restaurants, retail, manufactured goods often start here.

Why it fails when used alone: It ignores what the customer will pay. You might be underpricing by 50% and never know.

Margin targets to know:

• Restaurant food: ideal cost is 28–35% of menu price (so a $4 cost should yield a $12–$14 menu price)
• Retail: typical markup is 2x to 2.5x wholesale cost
• Service business: at least 30% gross margin after labor
• Manufactured product: at least 50% gross margin to fund growth

3. Value-based pricing

The question: What is this worth to the customer?

If your product saves a customer $500/month, you can charge $100/month and they'll thank you. The cost to produce it is irrelevant to that pricing decision.

When to use it: When your product or service produces clear, measurable value (saves time, makes money, reduces risk). Most B2B services, professional services, software, and high-end consumer goods are priced this way.

How to find the value: Talk to your best customers. Ask them: "What would it cost you not to have this?" and "What did you have to do before?" Those answers tell you what the product is actually worth.

4. Competitive pricing

Where you fit: Below market, at market, above market. Each position sends a message.

Below market says "I'm the affordable choice." Hard to sustain without scale; price-sensitive customers are the least loyal.

At market says "I'm a standard option, choose me for other reasons." Works if you have a clear non-price advantage.

Above market says "I'm worth more." Requires you to clearly deliver more (quality, service, expertise, brand). Often more profitable than below-market positioning because you attract better customers.

5. Pricing services (where most new founders underprice)

If you charge by the hour, calculate your true hourly cost first:

1. Annual income you want to earn: $60,000
2. Add taxes (self-employment + income, ~30%): $78,000
3. Add business expenses (insurance, software, marketing, equipment): $93,000
4. Add retirement and benefits (~15% of base): $102,000
5. Divide by billable hours/year. You can't bill 40 hrs × 50 weeks; you're sales, admin, vacation. Realistic: 25 hrs × 48 weeks = 1,200 hours
6. Your true hourly rate: $85/hour

If you're charging $40/hour to make $60K, you'll work yourself sick and still come up short. Most new freelancers under-bill by half.

6. Raising prices on existing customers

The most overlooked profit lever in small business. Most founders are afraid to raise prices and never do. Then they wonder why they're burning out.

How to do it without losing customers

• Give 60 days' notice in writing. Customers respect transparency.
• Tie the increase to a specific reason: "Our costs have risen 12% over the past two years and we've absorbed it. As of [date], we'll be adjusting to reflect this."
• Grandfather your best existing customers for 6–12 months. They notice and remember.
• Expect to lose 5–10% of customers. The remaining 90% will pay more, often happily.

A 10% price increase, with 10% customer attrition, leaves total revenue unchanged but your workload reduced by 10% and your margins improved. That's almost always a good trade.

7. Common pricing mistakes

• Pricing based on what you'd pay. You are not your customer.
• Pricing too low to "get traction." Cheap customers are the hardest to keep and the loudest to complain. Better to start with fewer, better-paying customers.
• Never raising prices. Costs rise every year. Your prices should too.
• One price for everyone. Different customers value different things. Offer tiers: basic, standard, premium. Some will choose the premium just because it exists.
• Negotiating against yourself. If a customer pushes back, don't reduce the price; reduce the scope. "We can do that at $X, for the lower budget, here's what we'd remove."

8. Use the pricing calculator

The fastest way to settle on a number you can defend is to run the math three ways: cost-plus, value-based, and competitive. Whichever yields the highest defensible number is usually right. Use our free calculator to compare.