How to price a product – complete with worked examples

When you run a business, you’re selling something to make a profit. Whether that something is a product or a service, you’ll need to work out your price. And rather than relying on guesswork, it’s better if you can calculate that price like a pro.

Since setting up my own small business, I’ve seen oh-so-many products that aren’t priced right, and usually they’re priced too low.

As well as undervaluing their skill or product (and as a knock-on effect, others in the same industry), those businesses are missing out on sales and profit. And that’s a problem, because if you don't make a profit, you can’t run a sustainable business. We’re here to talk you through every step of pricing your product, complete with worked examples along the way so you can follow along with your own range of products.

Be honest with yourself. Are your products or services priced like a pro?

Many people are scared they’ll end up setting prices too high and that nobody will buy from them. Others (myself included) have been plagued by that awful niggling voice of self-doubt which tells you your product couldn’t possibly be worth that much. 

And it can work the other way too. 

I’ve seen a product fail online because customers perceived it as being too cheap. They couldn’t get their hands on the product to see the fantastic value it offered until they’d bought it, so they assumed that low price = cheap quality. 

 Confused? Yeah, I would be too.

So how do you work out that elusive 'right’ price?

There are five core elements to calculating your pricing so that it works for you. They are:

1 · Product costs
2 · Production time
3 · Overheads
4 · Profit margin
5 · Fees

I’m going to add one bonus sanity check, too. More on that one later, though.

First, let’s look at each element in turn (with examples – ooh exciting).

1 · Product costs

These are the costs of everything you need to make your product. Write a list of EVERYTHING you use to make the product and note their costs. You should include materials AND any fees attached to their delivery (to you or your customer), e.g. shipping cost, taxes for import. So for each product ask yourself some questions, like… 

• How much fabric did you use to make that cushion?

• How much ink did you use for your print?

• How much was the packaging?

Here’s a handy example…

To make the cushion you need:

Fabric (2m @ £10 per metre) + £2.95 shipping cost = £22.95
Pompom trim (3.5m @ £3 per metre) = £10.50
Thread (4m @ £2 for 10m) = £0.80
Cushion pad = £4.50
Packaging for delivery to your customer = £0.50

So the total PRODUCT COST of your cushion is £39.25.

2 · Production time

This is the cost of the TIME it takes you to make the product. This is always tricky. I see so many products that are obviously priced without taking into account the hours that were spent creating them.

But this is so important.

Just because this is your business, you shouldn’t be working for free. Would you expect someone to fix your dripping tap without charging you for their time?

Decide on an hourly rate for your time; how much would you pay someone else to make your product? Are you paying yourself at least the National Minimum Wage (in the UK)? It’s time (pardon the pun), to factor all this in. Lecture over (for now).

Here’s a handy example…

It takes you 2 hours to make your cushion.
Your hourly rate is £10 per hour.

So the PRODUCTION TIME cost for your cushion is £20.

3 · Overheads

Overheads are the costs of running your business. They are the supporting elements which allow you to deliver your product or service. They will include costs such as:

• Rent (if you have an office space or workshop, for example)

• Utility bills, (gas, electricity, phone)

• Office (website costs, software, accounting, receptionist)

• Marketing

• Research 

• Equipment and depreciation

• Maintenance

• Travel and entertainment

In a ‘true’ pricing calculation, you should add an overhead ‘cost’ to each product you make. To do this, add together all of your business costs and divide them by the number of sales you'll make in the same time. Then you’ll know your cost per product.

If you’re starting out, have a think about how many products you can make during your available working hours, and how many you will sell.
 

Here’s a handy example…

Rent: £700 per month 
Utility bills: £200 per month
Accountancy fees: £360 per year (£30 per month)
Marketing: £10 per month
Website costs: £18 per month

Want to refine this further by calculating your overhead percentage per product?

You’ll find some bonus insight on this, as well as a FREE Overheads Calculator, when you buy the Flourish Pricing Calculator.

4 · Profit margin

It’s that ‘P’ word again, and it's an important one.

There’s no point in selling something for £20 if you’ve spent 6 hours making it, spent £15 on components and ended up with no profit in your pocket. After all, sales are vanity, profit is sanity.

Here’s a handy example…

You’ve calculated that for your cushion:
Product cost: £39.25
Production cost: £20.00
Overheads: £15.97 

So the COST PRICE of the cushion is £75.22.

You want to make a 20% profit, so now you can work out how much to sell it for:
£75.22 / 80% (100% - 20% required margin) = £94.03

This means your SELLING PRICE is £94.03.

You like round numbers, so you decide to sell the cushion for £94.

That makes your CASH PROFIT £18.78 (£94 selling price - £75.22 cost price).

5 · Fees

There are two types of fees: selling platform fees, and transaction fees.

Selling platform fees are what you pay when you sell through a third party like Etsy, Notonthehighstreet (NOTHS) or eBay. The platform usually takes a percentage of your total selling price, and this may also include your postage cost.

Transaction fees apply if you use a payment provider (e.g. PayPal, Stripe, iZettle). Again, this will usually be a percentage of your total selling price, so may include your postage cost.

Fees are where it gets interesting and are actually why I built the Flourish Pricing Calculator. There aren't standard percentage fees for all platforms or all payment providers, so it can get complicated.

Here’s a handy example…

You’ve decided that the selling price of your cushion is £94.
You’re going to sell it on Etsy, eBay and NOTHS.
Your postage cost is £3.45.

That makes your TOTAL COST £97.45.

Your fees for selling your product will be:

Etsy
4% of total cost + £0.20 listing fee = £4.10

eBay (+ PayPal)
For eBay, 10% of total cost +£0.10 listing fee
For PayPal, 2.9% of total cost + £0.20
= £12.87

NOTHS
25% of selling price = £23.50

You can work out your total income (excluding the postage) by taking the fees from the selling price (£94):

For Etsy, £94 - £4.10 = £89.90
For eBay, £94 - £12.87 = £81.13
or NOTHS, £94 - £23.50 = £70.50

Oh. There’s quite a bit of a difference between the platforms. So what does this mean for your profit?

Let’s look at your selling price minus your cost price and your fees.

For Etsy, £94 - £75.22 - £4.10 = £14.68 
That’s +16% profit.

 For eBay, £94 - £75.22 - £12.87 = £5.91
That’s +6% profit.

 For NOTHS, £94 - £75.22 - £23.50 = -£4.72
That’s 5% LOSS. Eek.

None of those give you the 20% profit you wanted, so how do you get back to that elusive 20% AND keep your prices the same across all your platforms? I'll show you.

You have to add the fees into your selling price as the fourth element of pricing. It’s essential to include it, as it impacts your profit.

But hang on, if you increase the selling price, then your fee percentage will increase too, won’t it? Hmm.

All of this means you have to add the fees into your selling price, then recalculate your fees, see what the margin is, then maybe add a bit more, or take a bit off and... repeat.

Sorry.

ALTERNATIVELY you could grab yourself a copy of my Flourish Pricing Calculator and let it do the hard work for you. Its fancy formula saves you time AND headaches. Winning!

Alas, there’s no way of making all the fees flat, so there will be a difference if you sell on more than one platform or use different payment providers. But, if you use our Fixed Selling Price Calculator (included for FREE when you buy the Flourish Pricing Calculator), you can compare up to four different combinations and see what your cash and percentage profits will be. And that makes sure you aren’t out of pocket. 

 Phew.

Want another tip on fees? I’d always advise that you generate your selling price based on the main platform you sell on. For example:

You mainly sell on Etsy, but you also use NOTHS. You can set your selling price on NOTHS to break even or make a small profit, and at the same time set the same selling price on Etsy, which because of the different percentage fees, gives you a profit margin on there of OVER 20%. That’s more like it.

The biggest message here? Platforms are complicated, so please do ask me if you need any help!

Hoorah! You’ve conquered all five steps and calculated your perfect selling price!

I did promise to tell you about the bonus ‘sanity check’ you should always consider, though…

Your competition

You should always take a look at what your competitors are doing. First up you’ll need to decide where your product sits in the market. Is it a premium product with a unique selling point (USP), or is it an entry-level product offering great value to the customer? 

Next, ask yourself:

• Who are your competitors? 

• What do they charge? 

• Are they undercharging (your expert eye will now be able to spot this at 10 paces!)?

• If not, is their selling price similar to yours, or is it a lot higher?
  Remember what I said earlier. Cheaper isn’t always better!

Reviewing your competition is an ongoing exercise, so you should keep a regularly watchful eye on your sales, competitors, and customers if you want to stay one step ahead.

Here’s a handy example…

As well as Flourish Retail, I used to have a small business selling baby mobile kits. Once I’d calculated the pricing for the kits, I looked at other comparable products on the market. I found a few similar kits, but no one else was offering what I had (an all-in-one, PRE-CUT kit, meaning no faffing with scissors and templates, and with the right amounts of thread, stuffing and accessories included).

I could see that, even though it was a little more expensive than similar products, the selling price I’d calculated was right because my kit has the added bonus of reducing the faff!

But what would I have done if it had looked a bit too expensive? 

I’d have looked at either saving costs (materials or time), or perhaps at taking a hit on my profit margin.

And what if it had looked REALLY expensive and I couldn’t sell it for less?

That would have been a good test. It’s not always easy, but sometimes you have to ask yourself if it’s really worth selling the product? If it isn't going to generate enough profit, then perhaps you have to walk away.

Alternatively, you might look at the benefits of ‘range planning’ to see if, overall, you can balance a lower margin on one product with a higher one on another. 

Get your hands on the quickest and smartest way to price like a pro.

Now that you understand all that you have to do to set the right price, how would you like a tool to help you calculate your best prices as quickly and painlessly as possible? I thought so…

Buy the Flourish Pricing Calculator →