A Step-by-Step Guide on How to Price Your Products for Profit in Your Small Business

Getting your pricing right can make or break your small business. Price too high and you risk turning customers away. Price too low and you can end up busy but barely breaking even. The aim is to hit the sweet spot where your prices reflect the value of your product and leave you with a healthy profit.

I’m Katie, an ex-corporate merchandiser and costing analyst turned Stock & Profit Specialist for small businesses. I help product brands price with confidence, protect their margins, and free up cash.

Here’s how to do it step by step.

1. Work Out the True Cost of Your Product (Your Landed Cost)

Before you can price your products profitably, you need to know exactly what they cost you to make or buy, also known as your landed cost. This includes everything it takes to get your product ready to sell, not just the supplier price.

If You Buy Your Products (Ready-Made or Manufactured)

Start with your supplier’s price, then add:

• Freight or delivery costs
• Import duties and taxes
• Packaging costs (boxes, tissue, tape, labels, etc.)
• Currency conversion if you buy from overseas

Here’s an example:

• Supplier cost: $10 per item
• Freight and duty: $120 total for 20 items = $6 each
• Total cost per item: $16
• Exchange rate: 1.3

Landed cost = £12.30

This is the true cost per item once it’s in your hands and ready to sell.

If You Make the Product Yourself

You’ll need to add up every component and materials and a fair rate for your time.

Example: Handmade Scented Candle

• Candle container: £0.80
• Wax: £2.00
• Wick: £0.05
• Fragrance oil: £1.00
• 15 minutes of making time: £3.75 (at £15/hour)
• Other materials (labels, glue dots, etc.): £0.25

Total cost: £7.85

Even if you’re not paying yourself a wage yet, include your time, because as your business grows, you’ll need to factor it in to keep your pricing sustainable.

2. Calculate Your Product Margin

Before you can make confident pricing decisions, you need to know your product margin, essentially, how much profit you’re making on each product. This helps guide what your price needs to be to stay profitable.

Use This Simple Product Margin Formula

📱 Formula:

Product Profit = (RRP ÷ (1 + VAT%)) – Landed Cost
Product Margin % = Product Profit ÷ (RRP ÷ (1 + VAT%))

Example:

• RRP = £30
• Net price (excluding VAT) = £30 ÷ 1.2 = £25
• Landed cost = £12 (suppliers, packaging, shipping, etc.)
• Profit = £13
• Margin = 52%

How to Set Prices Based on Your Target Margin

If you know what margin you want to achieve, you also can reverse the calculation to find your ideal RRP.

📱 Formula:
Target RRP (ex VAT) = Landed Cost ÷ (1 – Target Margin%)
Then multiply by (1 + VAT%) to get your RRP including VAT.

Example:

• Target margin: 70%
• Landed cost: £12
• Net RRP (ex VAT) = £12 ÷ (1 – 0.7) = £40
• RRP (inc. VAT) = £40 × 1.2 = £48

What Margin Should You Aim For?

Your ideal margin depends on your:

• Overheads – the higher your ongoing costs (software, rent, packaging, etc.), the more profit you’ll need to cover them.
• Sales volume – if it’s a best-seller, you’ll want the strongest margin possible, but you might also have more buying power to negotiate better supplier costs.
• Product mix – slower-selling items can sometimes carry a lower margin if your higher-volume products balance things out.

That’s why it’s also important to review your margins by product and across your business as a whole, so you know your average product margin.

Remember to Include Platform Fees

If you sell on marketplaces like Etsy or Not On The High Street, remember to factor in their commission fees. These can significantly reduce your true margin compared to selling on your own website.

For example, if a platform takes 25%, divide your net price (ex VAT) by 1.25 to find your real revenue coming into your business before calculating profit.

Sometimes this might even help you decide which products to sell (or not sell) on those platforms.

Once you’ve worked out what your price needs to be to make a healthy profit, the next step is to sense-check it. In other words, how does it compare to what’s already out there? That’s where competitor benchmarking comes in.

3. Check Your Price Against Competitors (Benchmarking)

Once you’ve worked out what your price needs to be to make a profit, it’s time to sense-check it against your competitors. This isn’t about copying their prices. it’s about understanding where your product sits in the market and what feels fair to your customer.

Start by researching what similar brands are charging. You don’t need anything fancy,a simple spreadsheet will do. Include:

• Product name and brand
• Materials or ingredients used
• Features or functionality
• Extras that add value (e.g. handmade, eco-friendly, premium packaging)
• Postage and packaging costs

When you line these up side by side, you’ll get a clear picture of how your pricing compares.

Ask yourself:

• Does your product sit at the higher, mid, or lower end of the market?
• Does the price reflect the quality and effort that goes into it?
• Would a customer see your product as good value for what they’re getting?

Benchmarking gives you confidence that your pricing is both competitive and profitable, the ideal balance for small businesses.

Once you’ve got a sense of where your prices sit in the market, it can be tempting to undercut competitors to win more sales, but that’s not always the best move. In fact, pricing too low can do more harm than good.

4. Don’t Undervalue Yourself: Why Cheaper Isn’t Always Better

It might feel like lowering your prices will attract more customers, but pricing too low can actually have the opposite effect. Shoppers often link price to quality, especially when it comes to lifestyle, gift, or homeware products.

If your products are significantly cheaper than similar ones, it can make customers wonder:

• Is it lower quality?
• Is something missing?
• Why is it so much cheaper than the rest?

Instead of competing purely on price, focus on the value your product offers, whether that’s quality materials, sustainable production, small-batch craftsmanship, or thoughtful design.

Your price should reflect the story and effort behind what you make. Confident pricing not only protects your profit but also helps customers trust your brand and see your products as worth every penny.

Once you’re confident your pricing reflects the value of your product, the next step is to make sure it actually covers your costs and contributes to your overall profit. That’s where understanding your break-even point comes in,  the point where your sales start turning into real profit, not just covering expenses.

5. Work Out Your Break-Even Point and Target Sales

Your product margin tells you how much profit you make on each item, but your net margin (after overheads like rent, software, marketing, and your time) shows what actually lands in your bank account.

• Common overheads include:
• Rent and utilities
• Office or studio costs
• Website and domain fees
• Software subscriptions
• Accounting or bookkeeping
• Marketing and advertising
• Equipment and maintenance
• Research and development
• Travel or events
• Staff costs and salaries
• Your own pay

How to Calculate Your Break-Even Sales

To work out the minimum sales you need to cover your costs:

📱 Formula:
Break-even sales = Total overheads ÷ (1 – Average product margin)

This shows the minimum revenue your business needs to bring in before it starts making a profit.

How to Use This Number

Once you know your break-even point, you can make smarter pricing and sales decisions. If you want to increase your profit, to reinvest, grow, or pay yourself more, you’ll need to:

• Improve your product margins (reduce costs or increase prices)
• Increase your sales
• Or a mix of both

Knowing this number gives you clarity and control. You’ll understand exactly what’s driving your profit and where to focus next.

If you’re not yet reaching your break-even point, don’t panic, you’ve got options. You might find these blogs helpful next:

• How to Negotiate Better Cost Prices for Your Small Business (Even If You’re an Introvert or People-Pleaser)
• How to Grow Your Small Product Business Sales in 2026

Find Your Pricing Sweet Spot

Pricing isn’t just about covering your costs, it’s about building a sustainable business that values your time, effort, and creativity. The goal is to find that sweet spot where:

• You’re making a healthy profit.
• Your price reflects your product’s quality and story.
• Your customers feel confident they’re getting great value.

Small tweaks to your prices (or your costs) can make a big difference to your profit. Once you understand your margins, overheads, and break-even point, you’ll have the confidence to make decisions based on facts, not guesswork.