Pricing
Set a price between your full cost and what the result is worth to the customer. Learn why a small discount can wipe out a large share of your profit, and how to compete without being the cheapest.
Two ways to set a price
Cost-plus
Add up what it costs you, then add a fixed extra on top. Simple and safe from loss. But it ignores the customer: you may charge far less than they'd happily pay.
Value-based
Start from what the result is worth to the customer and what their alternatives cost. Harder to work out, but it can pay you fairly for work that matters a lot to them.
Nazanin's custom birthday cake
Ingredients + box 20
Her time: 3 h x 10 30
Full cost (the FLOOR) 50
Cost-plus: 50 + 20% 60
Nearest alternative:
patisserie custom cake 90 (the CEILING)
Price range: 50 ... 90She chooses 80: well above cost, still better value than the patisserie.Cost-plus would have given her 60 and left 20 on the table for every cake. Counting her own time is part of the floor, not a bonus.
Check yourself
Maryam writes calligraphy wedding invitations. Each one costs her 8 in paper, ink and her time. Other calligraphers nearby charge about 30. Where should her first price sit?
- About 8, just covering her costs, so nobody can say she's expensive
- About 5, below cost, to win lots of customers quickly
- Somewhere around 22 to 28
- About 45, well above the others, to look premium from day one
Show the answer
Somewhere around 22 to 28
Yes. It's well above her full cost and a little under what buyers pay elsewhere, which gives a new name a reason to choose her.
THE PRICE TRAP
Don't compete only on price
Being the cheapest feels like a safe way in. It rarely is. A bigger rival can almost always go lower for longer. Customers who came for the price leave for a lower one. And a thin profit leaves no room for a mistake, a slow month or a price rise from your supplier.
Two phone repair stalls cut prices in turn until neither earns enough to pay for good parts. Quality drops, reviews drop, and both lose.
Price 100, cost per sale 70
Profit per sale 100 - 70 = 30
10 sales: 10 x 30 = 300
After a 10% discount: price 90
Profit per sale 90 - 70 = 20
Sales to earn 300 300 / 20 = 15A 10% price cut needs 50% more sales (15 instead of 10) just to earn the same.The discount comes straight out of profit, not out of the price as a whole. The thinner your profit per sale, the more a discount hurts.
Check yourself
Dariush sells a lamp for 50 and each one costs him 40. If he cuts the price by 10%, he needs only about 10% more sales to keep the same profit.
Show the answer
False
False. His profit per lamp is 50 − 40 = 10. At 45 it becomes 45 − 40 = 5, half as much. So he needs twice as many sales, 100% more, just to stand still.
Ways to win that aren't 'cheapest'
- Specialise: be the go-to for one kind of customer or job.
- Speed and convenience: same day, at their door, no hassle.
- Trust: reviews, a guarantee, photos of real past work.
- Personal service: remembering names, answering fast, fixing problems without a fight.
Set your first price
- Work out your full cost per sale
Materials, packaging, delivery, fees, and your own time at a fair hourly rate. This is your floor.
- Find the customer's alternatives
What do competitors and workarounds cost them, in money and hassle? This hints at your ceiling.
- Pick a price between them and test it
Offer it to real buyers. Watch what they do, not what they say.
- Adjust with evidence
If almost everyone says yes instantly, you're probably too cheap. Raise it for new customers and watch again.
Check yourself
Competing on value, or only on price?
- Offering a free redo if the customer isn't happy
- Undercutting the shop next door by a bit every month
- Specialising in repairs for one popular brand
- A permanent 'lowest price in town' sign
- Same-day delivery within the neighbourhood
- Cutting prices whenever a customer hesitates
Show the answer
On value: Offering a free redo if the customer isn't happy, Specialising in repairs for one popular brand, Same-day delivery within the neighbourhood
Only on price: Undercutting the shop next door by a bit every month, A permanent 'lowest price in town' sign, Cutting prices whenever a customer hesitates
Check yourself
Ali builds websites for small restaurants. A big agency has just advertised websites at half his price. What is his best response?
- Match the agency's price so he doesn't lose his next few clients
- Go even lower than the agency, so price is never the reason a restaurant says no
- Lean into his niche and show results from past restaurant clients
Show the answer
Lean into his niche and show results from past restaurant clients
Right. He can't outlast a big agency on price, but he can be the clear choice for restaurants, with proof. That keeps his profit and his best clients.
Lesson recap
- Your price lives between a floor (full cost, including your time) and a ceiling (the customer's alternatives and the value of the result).
- Cost-plus is safe but often too low; value-based pricing starts from the customer.
- A discount comes straight out of profit: with thin margins, a small cut needs many more sales.
- Compete on specialism, speed, trust and service, not only on being cheapest.