An Entrepreneur’s Guide: How to Price Your Products or Services

Knowing what to charge as a business owner is one of the most critical—and also often one of the most difficult—decisions you can make. If you undercharge, you can find yourself burnt out and losing money. If you overcharge, you may turn your ideal customers away, who would otherwise pay for your service or product. In many ways, establishing your prices is one of the most important things you can do to build a sustainable, healthy business that also allows you to thrive day-to-day.

In this guide, we’ll dive into the must-knows for pricing your products or services, from understanding your direct costs to examining which pricing strategy will work best for your business. Keep reading for practical tips and realistic advice from Canadian business leaders in our network to help you establish or readjust your prices.

Understanding Your Costs

To make a profit and run your business sustainably, you need to know how much it actually costs you to operate your business. From paying for labour to setting your marketing budget, pricing your products or services is not solely about what you provide your customers.

When tracking your costs and determining the margins you need for profit, here are some considerations:

Direct Costs

A direct cost is an expense that can be linked to the production of your product or service. Additionally, a direct cost is also directly tied to your business’s revenue, if you don’t make sales, you don’t incur any direct costs. For example, labour, purchasing or leasing machinery, freight, and transportation are all direct costs that can be baked into your pricing. Calculating and keeping a record of these costs will help you assess and enhance your profitability.

Indirect or Overhead Costs

Indirect or overhead costs are expenses that are not directly linked to the production of your product or service, but are necessary for your business to function. In most cases, indirect costs can be separated into two categories: fixed costs and variable costs.

Fixed costs are the indirect costs that will always exist in your business, whether you make a ton of sales or not. For example, insurance, office rent or leases, and certain employee salaries are fixed costs. 

On the other hand, variable costs are the expenses that change as your sales increase. Credit card fees, raw materials, labour, and utilities are examples of variable costs. 

By having an understanding of both your fixed and variable indirect costs, you can better identify gaps in your business operations and establish a pricing strategy that is inclusive of these costs.

Connie Lo, Co-Founder of Three Ships, shares her advice for entrepreneurs setting their prices for the first time:

“Get a solid understanding of your cost of goods sold, shipping, and other variable costs associated with getting your product/service to the customer. Apply enough markup to cover middlemen/wholesalers to maintain a healthy gross margin. You can find industry gross margin benchmarks online. If your gross margin is too low, it's a sign that you may need to increase your prices.”

Do Your Research

In addition to understanding your costs, determining your pricing depends a lot on your competition and how much your customers are willing to pay for your service or product. This requires an in-depth understanding of the marketplace. 

Factor in these elements when establishing your prices:

Market Demand

Even if you have a new business idea, you don’t know how viable it is until you assess whether there is a demand for it. Market demand is the total amount of a product or service that customers are willing to pay for, even at differing price levels over a period of time. A few different factors contribute to a product or service’s demand, like price, a customer’s budget, societal trends or values, the availability of a product or service, and fluctuations in price. Get very specific about your product or service and do the research to determine how strong the demand is and how to price it.

Competitive Analysis

How much you decide to charge is also tied to what your competitors charge for similar products and services. To set a price you’re comfortable with, do your research by learning about your competitors and studying their offerings. Look into your competitors’ prices, what a customer gets for the price, and assess how you can differentiate yourself and what your business offers. Depending on how you want to be viewed in the marketplace, pricing your products or services significantly above or below what your competitors’ prices are can have an impact on your sales; make sure to charge a price that allows you to remain competitive and make a profit.

Customer Value

People will pay for what they value, and understanding the customer value of your target audience is integral to attracting them and keeping them engaged with your business. Think about your ideal customer, the value they would gain from your product or service, and what they would be willing to pay for it based on their perception of the value. This will further inform how you price your offerings.

Julie Cole, Co-Founder and Senior Director of Public Relations of Mabel’s Labels, shares her advice on the importance of understanding your customers, your market, and your competitors:

“Look at what your competitors are doing, look at the market, and consider what’s happening within your industry. You need to know everything about your potential customers because who you're selling to will greatly impact your pricing strategy. For example, Millennials and Boomers can spend money in vastly different ways. Know who your customer is, know their spending habits, and strategize on how you can meet them where they’re at.”

Determine Which Pricing Method is Best For You

Depending on the type of business you run, there are different ways you can approach what you charge. 

Here are five of the most common pricing methods:

1. Cost-Plus Pricing

This method factors all of the direct and indirect costs connected to your product or service. If you want to use this strategy, calculate the costs of your product or service and add a percentage on top of it. The percentage you add will be your profit margin.

2. Competitive Pricing

With competitive pricing, you need to constantly adapt to the changes your competitors make with their prices in order to remain competitive, attractive, and top of mind for your customers. While your costs are still a factor, you use the market as a guide to help you update your prices. To attract customers, you can be strategic with your pricing. You can price your offering below what your competitors are charging to attract price-conscious customers, you can price it above what others are charging to communicate a higher value, or you can keep your pricing the same.

3. Value-Based Pricing

How well a product or service meets a customer’s interests or needs determines what a business can charge for it. In many cases, value-based pricing works best for service-based businesses or unique products that stand out in the marketplace, like custom-made creations and innovative products. It can be challenging to quantify all that goes into creating a service or product that will best suit value-based pricing and establish a price that customers will be willing to pay, but you want to make sure that your customers’ perceived value of your offering is higher than what it costs you to produce it.

4. Price Skimming

This pricing strategy is often used when businesses are launching something new with very little competition. To make initial sales, a business can launch with a high price point after convincing customers that the offering is innovative or valuable enough to justify the high cost. Over time, the price for the offering is lowered to continuously attract new customers, but this method can be risky—the offering’s value needs to be communicated, and enough customers have to be willing to pay for it.

Amanda Smith, Co-Founder and CEO of Monday Creative, has advice for both service- and product-based businesses when establishing a pricing strategy.

“For service-based businesses, you have to figure out how much you need to make to make a profit. Track your time ruthlessly for your first three or four years so you can understand exactly how long it takes you to do things. Decide how much your time is worth and use that as a baseline. For product-based pricing, don’t underestimate your costs—including shipping and labour. Add marketing and internal costs when figuring out what your margin is. Don’t assume your margin will cover marketing and internal costs.”

5. Penetration Pricing

In a highly saturated or competitive market, penetration pricing is a method often used strategically to make one business’s offering stand out from the competition. The product or service is initiallypriced lower than others to attract a large number of customers. Once a large customer base has been established, a business will slowly raise prices. Customers who are price sensitive or not loyal to any one brand will be especially attracted to this pricing strategy, but once you decide to raise your prices, you may run the risk of losing customers if you don’t demonstrate your value in other ways, like offering free delivery, after-sales services, a points system, etc.

Test, Review, and Adjust

Even if you establish pricing you are satisfied with, remember that it’s not set in stone; your prices can always change depending on your business needs, the market, and what your competitors are charging. 

Revisit your pricing regularly and evaluate if your current pricing will allow you to meet your goals for revenue.

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