How to Price Your Products and Services (The Right Way)
Most small businesses underprice. The right price is not the lowest you can afford to charge — it is the highest a customer will happily pay for the value they receive. Start with your costs, benchmark competitors, and then test whether value-based pricing can take you higher. Raise your prices every year — inflation means standing still is cutting your margin.
- Why most small businesses underprice
- Cost-plus pricing: the starting point
- Competitor benchmarking: finding your range
- Value-based pricing: charging what you are worth
- How to structure your pricing (tiers and packages)
Why most small businesses underprice#
Underpricing is one of the most common and most costly mistakes small business owners make. The psychological drivers are understandable: fear of losing customers to cheaper competitors, imposter syndrome about the value you provide, and not wanting to appear greedy. But underpricing is not just leaving money on the table — it signals low quality to buyers who use price as a quality signal, it attracts the most price-sensitive and difficult customers, and it makes your business financially fragile with no margin to absorb cost increases or bad months.
Cost-plus pricing: the starting point#
Cost-plus pricing means calculating your costs and adding a margin on top. Start with direct costs (materials, labour time, packaging, delivery). Add a share of indirect costs (rent, utilities, software, insurance — divide your monthly overhead by the number of units or hours you sell each month). This gives you your break-even price. Then add your target margin. For products, a 40–60% gross margin is typical in retail. For services, many businesses target a 50–70% gross margin on billable time. Cost-plus pricing ensures you do not lose money, but it ignores what customers are willing to pay.
Competitor benchmarking: finding your range#
Research what competitors charge for equivalent offerings. Look at three to five direct competitors and note their price points, what is included at each price, and how they position themselves (premium vs budget vs value). This gives you a market range. Decide where in that range you want to sit. If you are charging at the bottom of the range, ask why — is it genuinely because you offer less value, or is it fear? If you are already at the top, is your positioning supporting that premium? Benchmarking alone does not set your price, but it tells you what customers are already accepting.
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Value-based pricing: charging what you are worth#
Value-based pricing sets the price based on the value the customer receives, not on your costs. A bookkeeper who saves a client £5,000 in tax could charge £1,500 for that service and still deliver 3.3x value to the client. A web designer whose site generates £50,000 in additional revenue for a client could charge £8,000 and still be excellent value. To price on value, understand the outcome your customer actually wants and estimate what achieving it is worth to them. Then price at a fraction of that value — typically 10–30%. This approach requires confidence and clear communication of the value you deliver.
How to structure your pricing (tiers and packages)#
Offering three tiers (good, better, best) consistently increases average order value compared to a single price. The middle tier does most of the heavy lifting — most buyers choose it. The top tier makes the middle look reasonable. The bottom tier reduces the risk for cautious buyers. For services, package your offering rather than billing by the hour — packages are easier to price on value, easier for clients to budget for, and encourage clients to focus on outcomes rather than time spent. Name your packages by outcome ("Starter," "Growth," "Scale") rather than by features.
How and when to raise your prices#
You should raise your prices every year. UK inflation means that flat prices are a real-terms cut. Most small businesses raise prices once a year, typically at the start of their financial year or at the start of January. Give existing customers 30 days' notice of any price increase. Frame it around the value you provide and any improvements you have made, not around your costs. Most well-served customers accept annual increases of 5–10% without complaint. New customers should be quoted the new price immediately — there is no need to grandfather them in at the old rate.
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People also ask
How do I work out what to charge for my services?
Start with your costs (time, materials, overhead per job), then check competitor prices to understand the market range. If your costs are covered with margin at a competitive price, test raising your price — many service businesses find they can charge 20–40% more without losing customers.
What is value-based pricing?
Value-based pricing means charging based on the outcome your customer receives, not your costs. If your service saves a customer £10,000, charging £2,000 is excellent value for them and profitable for you. It requires understanding the financial value of your outcome to the specific customer.
How much should I mark up my products?
A typical retail markup is 40–100% on cost. In wholesale-to-retail, a 100% markup (doubling the cost) is common. For handmade or bespoke products, higher margins of 200–400% on materials are normal because the price includes skill and time. Always check that your markup covers all costs including overheads, not just material cost.
How do I raise my prices without losing customers?
Give 30 days' notice, frame the increase around the value you deliver, and be confident about it. Most loyal customers expect annual price increases. You will likely lose some price-sensitive customers — and that is fine. The customers who leave on a 10% price increase were probably not profitable anyway.
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