How to price a product for a small business

Having trouble deciding the correct price for your product? Do you find yourself caught between wanting to draw customers with competitive pricing and a need to keep your small business in profit?

Setting the right price is a key aspect of your business strategy that can often feel like walking a tightrope.

Pricing a product is a science, and finding that sweet spot will help you succeed. Yet it can often be one of the most challenging tasks, given factors like cost of goods, competitor pricing, market demand and perceived value all come into play.

Whether you're launching a new product or reassessing your current pricing strategy, knowing how to properly price your product is vital. It not only affects your sales and revenue but also influences your brand perception and customer loyalty.

This guide simplifies things. We'll take you through practical steps, simple formulas and real-world advice to help you figure out what to charge – and why.

1. Why is pricing such a big deal?

Pricing your product correctly goes beyond the need to cover costs. It affects your profits, how customers perceive your brand and how well your product sells.

Here are a few reasons why pricing is so crucial:

• Profitability: The most clear-cut reason – if you misprice, you could lose money on every sale. Bad pricing decisions can stop your business being sustainable, even if your product is popular.

• Perception: Pricing has a big influence on how people view your product. Set the price too low and the product might seem "cheap" or poorly made. A higher price, on the other hand, can convey greater value – as long as it's backed up by good branding and customer experience.

• Positioning: Your price acts as a signal. Are you the reasonably priced, everyday choice or the luxury, handmade, limited-edition brand? Pricing helps you create your own space in the market.

• Cash flow: Pricing has a direct effect on how much money you bring in. That influences what you can reinvest in your business – whether it's buying more stock, marketing or broadening your product range.

Consider pricing as a potent tool in your business toolkit. And the best part? You don't have to be a financial whizz to use it well.

2. How do you price a product?

If the ideas behind pricing are still new to you, the easiest place to start is with a straightforward, proven method known as cost-based pricing.

With this approach, you can be sure you're covering all your expenses while remaining profitable at the same time. Here's how to do it:

Step 1: Work out your costs

First, figure out what making or buying your product actually costs you. There are two types of business costs to include:

• Direct costs: Expenses directly tied to the product itself. For example:

  • raw material costs (wood, fabric, packaging and so on)

  • production or manufacturing costs

  • shipping from suppliers

• Indirect costs: The overhead costs of running your business, such as:

  • website hosting

  • marketing

  • insurance

  • rent or workspace costs

  • utilities

Even if your business is operating from your kitchen table, those indirect costs still count!

Step 2: Add your profit margin

Once you've totalled all your expenses, make a decision about how much profit you want to generate. We call this your mark-up.

Let's assume your total cost per product is £10, and you want to turn 50% profit. You'd work out your selling price like this:

£10 (cost) + £5 (mark-up) = £15 selling price

This way, you're not selling at a loss – something that occurs all too readily when you're not tracking your true costs.

Lucy Harper, founder of bakery brand A Taste of Heaven, encountered some issues with pricing in her early days, but soon realised how important it was:

"Not getting my pricing right at the beginning had a massive impact on my profit margin – there wasn't one!

"Now I have everything in place, I can be sure to start earning an income from my products. The lesson is to always ask for help if you're not sure how to do something – it saves so much time."

A simple formula

Product cost + Mark-up = Selling price

This is just a starting point, of course. You'll still need to take account of what your competitors are charging and how much customers are prepared to pay (see section 3).

But cost-based pricing gives you a strong basis to price from, instead of relying on guesswork.

Tip: Use an online pricing calculator or a spreadsheet to track your expenses and put different profit margins to the test.

It might feel a bit too much like maths at first, but it's a one-time arrangement that could prevent many problems further down the road.

3. How is market price for a product determined?

Once you've outlined your costs and worked out your profit margin, you now need to understand the market around you.

Why? Because even if your pricing method is fully accurate, customers will still judge you against other businesses. As such, knowing the market price becomes vital.

How do you ascertain that figure? Ultimately, it's the price that people are willing to pay for a similar product, based on what's available and what value they see.

Here's how to find and understand your market price.

Research the competition

What are competing businesses charging for products like yours? Compare products that are as close to yours as possible in terms of:

• quality

• materials

• size or features

• packaging

• target audience

• where it's being sold (online, markets, boutiques and so on)

Ask yourself these three questions:

• What's the price range for products like mine?

• Which position in the market best suits me – budget, mid-range or premium price?

• How unique (or not) is my product from what's already on the shelves?

Moyin Odeniran, Enterprise Nation member and founder of Mr Desserts, explains how he used a similar method to set his prices:

"Pricing is a big thing in the cake industry. There's so much range in what people charge for the same product. Some will compare my prices to a company at the cheaper end, but they're two different products. A Range Rover and a Ford Fiesta aren't the same!

"I always push quality as my explanation for the price. I wouldn't be comfortable charging what I do if the quality wasn't there. My prices are probably three times what they were when I started, but I've got better at baking, I use better ingredients and there's also inflation to factor in."

Where to look for pricing information

There are a number of ways you can carry out quick and meaningful market research:

• Online marketplaces: Etsy, Amazon, eBay (particularly the "sold" listings), Not On The High Street, etc.

• Google Shopping: A fantastic method for seeing a range of pricing at a glance.

• In-person shops or markets: Visit local shops or craft fairs to see how comparable goods are priced.

• Social media: Instagram shops or Facebook Marketplace can tell you what people in your niche are paying.

Think about your audience

While considering what rival companies are charging is important, you also need to think about what your ideal customers are prepared to pay.

A luxury skincare product will have a very different audience than a handmade candle targeted at students.

Ask yourself:

• Who is this for?

• What do they value – price, quality, exclusivity, sustainability?

• Are they more likely to buy based on looks, ingredients or story?

The more you know about the people you want to buy from you, the easier it becomes to price your product in a way that makes sense to them.

Esther Knight, who runs the ethical clothing brand Fanfare Label, had this very challenge to contend with:

"We had to strike a balance between sustainability and affordability. While we strive to create ethical and sustainable products, we also want them to be accessible to a wide range of customers.

"As such, we have to carefully consider price, as sustainable materials and ethical manufacturing processes can sometimes carry higher production costs."

Don't just copy competitor prices – interpret them

Though researching your competitors can be valuable, don't fall into the trap of simply setting the same prices. Use what you learn to direct your decision, not make it for you.

Your pricing should reflect your costs, your value and your market. The goal is to find the sweet spot where your price feels fair to the customer and profitable for you.

4. Key factors that affect the price of a product

There are several things that affect product prices. Some are within your control, while others you'll need to adapt to.

Understanding these factors helps you set a reasonable yet competitive price and providing confidence when things change (which they often do in small business!).

Your production costs

First, the obvious – what it costs to make or source your product. If materials or packaging become more expensive, you might need to raise prices accordingly.

Always keep an eye on your suppliers' costs and routinely update your calculations.

Mr Desserts' Moyin Odeniran says: 

"It's important to know the value of your time. One of the biggest things in baking, apart from the ingredients, is your time.

"At the end of the day, if you're not going to charge the price it's worth, you might as well work another job."

Market demand

If people are actively searching for a product like yours, you may be able to charge more.

If there's little demand or the market is saturated, it could mean having to price more competitively – or focus on what sets your product apart.

Use tools like Google Trends, Etsy search or even social media hashtags to get a feel for what's popular right now.

Customer perception

People's idea of value is just as important as actual value. Professional packaging, product photography, storytelling and branding all help to define how customers view your product – and what they're ready to pay.

Two identical products can sell at wildly different prices simply due to how they're presented.

Seasonal variations

Some products sell better (and for more) at certain times of the year. Think Christmas hampers, Valentine's Day gifts or summer festival equipment. You can adjust pricing slightly to match demand during these busy periods.

Consider offering bundles or seasonal versions of your product to make the most of this.

Your business goals

Are you launching a new product and want to quickly amass a group of reviews? You might make your initial price a bit lower at first.

Are you well-established and seeking to increase your profit margins? A slightly higher price might be the right move.

Your pricing strategy should support your goals – whether that's to grow, remain stable or scale.

The current economy

Small businesses in the UK have faced rising costs across the board for a long time now. Keep an eye on market conditions (like inflation), shipping costs and supply chain issues that might affect your pricing.

Don't hesitate to make changes if you need to. Customers are often more sympathetic than you think, particularly if you're open about what you're doing and why.

Your brand positioning

Where in the market do you want to sit? Reasonably priced and accessible? Luxury and exclusive? Artisan and handmade? Your pricing greatly reinforces that.

If your brand feels upscale but your pricing is too low, it might leave your target market confused – or even put them off buying altogether.

Pricing calls for context as much as numbers. The more you understand the things that influence your price, the more confidently you can set it, explain it and adjust it as your business grows.

VIDEO: Why brand positioning matters for growth

Branding consultant Matt Davies discusses brand-building fundamentals to help your business stand out, attract more customers and help you grow:

5. Common pricing strategies for small businesses

Choosing a pricing strategy is where things get a bit more creative. But don't worry, you don't need a business degree to get it right.

Think of a pricing strategy as your method or "formula" for setting prices. It helps you make deliberate and informed decisions based on your goals, your target customers and your product.

Here are some effective pricing strategies that many of the UK's small businesses are using – and when they work best.

Cost-based pricing

• Good for: Getting started

We covered this earlier – it's the most basic strategy and a great place to begin. You take your total costs and add a set mark-up to generate a profit.

• Pros: Easy to figure out, guarantees you're covering costs

• Cons: Doesn't factor in what potential customers are willing to pay, or what competitors are charging

Competitive pricing

• Good for: Crowded markets

This is about taking what direct competitors charge and pricing products around the same level. You can use this approach when you're in a busy market and need to stay competitive.

But don't just match prices mindlessly. Instead, make sure your product pricing still works for your business.

• Pros: Keeps your prices in line with the market

• Cons: You may underprice yourself if you don't know your actual expenses

Value-based pricing

• Good for: Unique or high-quality products

Here, you price your product based on the value it gives the customer, not merely your costs.

You can usually charge more if your product solves a particular problem, is beautifully made or feels exclusive.

This method comes into its own when you have a strong brand or distinctive unique selling points (USPs).

• Pros: Can result in higher profits and stronger customer loyalty

• Cons: Harder to work out – demands a good knowledge of your audience

Penetration pricing

• Good for: Launching new products

This entails keeping your price low to draw attention and build up interest. It's especially helpful when you're introducing something new into the market.

However, take care that your "intro" price still covers your costs, or set a time limit on the offer.

• Pros: Helps increase awareness and attract buyers quickly

• Cons: You'll need a plan to raise prices later or introduce premium versions

Bundle pricing

• Good for: Increasing order value

Offer several products together at a slightly lower combined price. For example, "Buy two, get the third half price" or "Gift set of three candles for £20".

• Pros: Encourages larger purchases, ideal for gifting or seasonal promotions

• Cons: Can get complicated to manage if you don't track costs properly

Which pricing strategy is best?

There isn't a definitive answer, and it's different from business to business. The right strategy depends on:

• your product

• your audience

• your brand

• your goals (for example, rapid growth vs. high margins)

Many small businesses actually use a blend of strategies – starting with cost-based, using competitive pricing to check the market and moving into value-based pricing as their brand grows.

Have the courage to experiment, test and tweak over time. Your pricing structure doesn't have to be permanent.

6. How to know if your price is right

You've set a price – but how do you know if it's the right one? Is it too high? Too low? Should you alter it?

Truthfully, pricing isn't a decision you make once and then forget about. It's something you'll likely come back to as your business grows, the market shifts or your costs change. The key is to watch for signs and be open to testing and adjusting.

Signs you've set your price too low

1. You're making sales but making very little profit (or worse, you're merely breaking even).

2. Customers often say things like "Wow, that's cheap!" (Sounds nice but it may mean you're undervaluing your product.)

3. You're having trouble covering costs or reinvesting money into your business.

4. Your pricing doesn't match the quality or effort behind the product.

Signs you've set your price too high

1. Lots of views or interest but not many conversions (people are browsing but not buying).

2. People often leave items in their carts without buying (especially online).

3. You hear frequent comments like "It's a bit expensive…" (and they're not from your mum!)

4. Your competitors offer similar products at noticeably lower prices – and are selling more.

How to test and adjust your pricing

If you're not sure, try running different price points or offers. Here's what to do:

• A/B testing (for online sales): Try two slightly different prices on your product and track which performs better.

• Customer feedback: Ask your current customers how they found the price – was it fair, too high or surprisingly low?

• Introductory offers: Launch a new product with a limited-time price, then charge more once you've built up interest or generated reviews.

• Small increases: Raise your price in increments and check whether sales dip. Often, slight increases don't affect buying behaviour but greatly boost your margin.

Tools to help you monitor how you're pricing is doing

• Use website or shop analytics (like Shopify, Etsy or Google Analytics) to track conversion rates, abandoned carts and average order value.

• Track profit margins for each product using a spreadsheet or accounting software like QuickBooks or Xero.

• Review sales often – either every month or quarter – to spot market trends and pricing issues early.

• Pricing is flexible. The best businesses routinely review and tweak their pricing model, based on data, feedback and experience. You're allowed to test, change and grow into the proper price for your brand.

VIDEO: Pricing your products for profit

Find out how to price your products in a way that supports your brand, attracts your ideal customers and ensures you're making the profit you need:

7. Realistic pricing tips for small business owners

By now, you should have a solid understanding of how to price a product. But before we wrap up, here are some extra tips tailored specifically for small UK businesses.

These little details can make a big difference when you're setting (or reviewing) your prices.

Include VAT (if you're VAT-registered)

If your business is VAT-registered, your prices need to take account of that. You can either:

• show prices including VAT (particularly if you're selling to the public), or

• show ex-VAT prices (more common in B2B)

Be clear and consistent – especially on your website or when selling at markets. This kind of openness builds trust.

Factor in shipping costs

Whether you're sending products across the UK or to other countries, shipping can cut into your profits if you don't budget for it. But you do have options:

• Include postage in your price and offer "free delivery" (great for marketing).

• Charge separately but fairly and explain why (especially if your products are bulky or handmade).

Either way, include the cost of packaging and postage in your pricing strategy – don't treat it as an afterthought.

Offer tiered pricing or versions

Give your customers choices. For example:

• a small vs. large candle

• basic vs. premium finish

• single item vs. multi-pack

This helps you raise your average order value without putting off customers whose budgets are tight.

Use psychological pricing

This traditional pricing tactic still works:

• £9.99 feels more affordable than £10

• £14.50 seems more "considered" than £15

It's a minor change, but it can influence people's impressions of your value – as well as their inclination to buy.

Set prices for long-term sustainability

It's tempting to price low as a way to encourage sales – but consider where you want your business to be in six or 12 months. Your pricing should support that expansion rather than restrict it.

That means:

• covering all your expenses

• paying yourself a fair wage

• leaving room for future growth (for example, when costs rise or you improve your offering)

Review your pricing every few months – especially if your costs have changed or your product range has evolved. It's not "set and forget" – it's "set and check".

Final thoughts

If you're still feeling uncertain about pricing your product, that's completely normal. All small business owners battle it at some point – and most alter their prices more than once.

The secret is having somewhere to begin. Use the tools and techniques in this guide to set a price that covers your costs, represents your value and makes sense for the customers you're targeting.

As your confidence and customer base grow, your pricing can grow too. And remember, it's okay to adjust, raise prices and experiment.

What matters most is that your pricing supports a sustainable, profitable business – and that you feel comfortable with what you're charging.

Relevant resources

• Cost-based vs. value-based pricing: Which is right for you?

• How to develop a promotional and pricing strategy when launching a retail brand

• Lunch and Learn: How to charge correctly as you scale