Pricing is part math, part psychology, part experimentation. Here's how to approach it without just guessing.

Three Pricing Strategies

1. Cost-Plus Pricing (The Foundation)

Formula: Cost × (1 + Markup %) = Price

Calculate all your costs (materials, labor, overhead), then add your target markup.

Example:

• Materials: £15
• Labor (1 hour @ £20/hr): £20
• Overhead per unit: £5
• Total cost: £40
• Target markup: 60%
• Price: £40 × 1.6 = £64

Pros: Simple, guaranteed margin

Cons: Ignores what customers will actually pay

2. Competitor Pricing (The Reality Check)

Look at what competitors charge for similar products.

• Premium position: 10-30% above average
• Match position: At average
• Value position: 10-20% below average

Pros: Market-tested, customers expect it

Cons: Ignores your unique costs or value

3. Value-Based Pricing (The Ideal)

Charge based on the value you create for customers, not your costs.

If your £40-cost widget saves a business £500/year, you could charge £200 and still be a bargain.

Pros: Captures maximum profit

Cons: Harder to calculate, requires strong positioning

The Hybrid Approach (Recommended)

1. Start with cost-plus to find your minimum price

2. Check competitors to find market expectations

3. Identify value to find your maximum price

4. Test and adjust to find the optimal point

Pricing Psychology Tricks

Charm Pricing: £99 feels much cheaper than £100

Prestige Pricing: £100 feels more premium than £99 for luxury items

Anchor Pricing: Show a £200 "was" price next to your £150 actual price

Bundle Pricing: £47 for one, £80 for two (encourages higher spend)

When to Raise Prices

• Costs increase and you can't cut elsewhere
• You're too busy (demand > supply)
• Competitors have raised theirs
• You've added significant value
• Your margin is below industry average

Most businesses wait too long to raise prices. Test small increases (5-10%) with new customers first.

When to Lower Prices

Almost never.

Lowering prices trains customers to wait for sales. Instead:

• Offer bundles
• Add value (free shipping, bonus features)
• Create a cheaper alternative product
• Target different customers who value price less

Common Pricing Mistakes

1. Underpricing because "we're new" (sets wrong expectations)

2. Pricing based on hours worked (penalizes efficiency)

3. Never raising prices (inflation eats your margin)

4. Complicated pricing (confuses customers)

5. Discounting too quickly (trains customers to negotiate)

The Bottom Line

Your price should:

• Cover all costs + target profit (cost-plus)
• Be competitive with market rates (competitor check)
• Reflect the value you create (value-based)
• Feel right psychologically (pricing tactics)

Use our calculator to test different prices and see their impact on margin.