For many new entrepreneurs, pricing is a problem. Set the price too high for your product or service, and you worry about scaring off potential customers. Undercut yourself, and you not only leave money on the table, but you may not earn enough to cover your expenses.
Pricing doesn’t have to be complicated, and it doesn’t even have to be perfect from day one. This short guide helps you understand how to price products and services without stressing yourself out. It starts with an overview of how to price a service or product in general, and walks you through the process for several common startups. The best part? You don’t need to be a math whiz to figure it out.
What pricing really means (and why it’s not just math)
For anyone learning how to start your own business, pricing is one of the first major decisions that feels high-stakes. It influences your revenue, your positioning, and even the type of customers you attract. While it may seem intimidating at first, pricing becomes much more manageable when you approach it as a structured business decision rather than a guessing game.
The price for any product or service needs to take into consideration four key factors:
- The actual costs
- How customers perceive the value of a product or service
- The market where the business is operating
- The goals of the business
It is not unusual for several businesses to offer similar products or services at different price points. That doesn’t mean one of the businesses is wrong. A solopreneur with an online business in an upscale community will probably not have the exact same pricing strategy as a multinational corporation. There is nothing inherently wrong with that.
At the end of the day, how much your business is asking customers to pay does more than affect your revenue. It has an effect on:
- Profitability, and whether your business can continue to sustain itself
- Market positioning, if the public views your business as a discount or premium provider
- The type of customer your business attracts
- Growth potential, including speed and reach
It may seem complicated, but pricing isn’t about guessing or even finding the perfect number; it’s a business decision that you can work through, step by step.
What you need before you set a price
Having good, up-to-date information makes pricing decisions easier, but that doesn’t mean you need to wait until you have “bulletproof data” before moving forward. Remember, even with the most accurate figures, you’re likely to have to adjust your pricing somewhere down the road. Many experienced business owners prefer to have access to the following metrics during the pricing process:
- A clear offer description. What are you selling? What guarantees or extras does it come with? Are there any limitations?
- Costs. What does it cost you to produce a unit or offer a service (COGS)? What about your fixed costs (overhead)?
- Capacity. How many sales can you make per week or per month? Higher volumes can often make lower prices more feasible due to economies of scale.
- Target customer. Who do you expect to purchase your product or service? Are your potential customers price-sensitive, or are they willing to pay more for a perceived premium product or convenience?
- Financial goals. You don’t need to have a specific financial model or projections, but a rough estimate, such as “I want to earn at least the same amount of money as my current job,” is a great starting point.
Taking the time to write this information out before going through the guided steps below can help you clarify your own business for yourself.
The most common ways to price a product or service
Whether it is a home-based startup or a corporate behemoth, all businesses struggle with pricing. Over time, a wide variety of practical strategies were developed to help business owners arrive at the proper price. And while the pricing strategies below can be great starting points for you to consider, they are only guidelines for how to determine the price of a product or service, and not guaranteed prescriptions for proper pricing.
Cost-plus pricing
One of the easiest approaches to pricing is using the cost-plus pricing model. This model takes the total cost of selling an item or service, from production to shipping to marketing, and then adds a healthy markup.
For example, if the per-unit cost of a dress shirt is $12 is 200%, the retail price should be set at $36. Typically, similar products will have the same markup, but the markup usually varies for each product category.
Although cost-plus pricing is a simple way to arrive at a starting point, it fails to take into consideration other pricing factors, such as how you want to position your business and what your targeted customers are willing to pay.
Value-based pricing
How much would someone pay to improve their life? That’s the core question in a value-based pricing model, which focuses on potential outcomes for the customer, rather than the cost borne by the provider, as the basis for pricing. This method of pricing is common for services such as coaching, therapy, and consulting.
The risk of using this type of pricing method is that it’s too easy to over- or underestimate the value of the service you are offering without substantial customer feedback.
Competitor-based pricing
Some business owners think it is safest to follow the crowd when it comes to choosing a price. This approach to pricing solely focuses on setting the price in relation to similar products already on the market.
Many businesses that use a competitor-based pricing strategy set their prices to approximately match the price of similar products already for sale. But companies aiming for a premium option may choose to charge more, and those trying to capture competitors’ market shares often sell their products for cheaper.
The biggest problem with the competitor-based pricing method is that it doesn’t take into consideration the four key factors of pricing for your unique business.
Hourly pricing vs package pricing
Pricing is often more difficult for service providers, especially when they start a job without knowing exactly how long it will take to complete. This is a common problem for those who are brought on for project-based work where the scope can shift over time.
Hourly pricing is simple to calculate and protects against scope creep, but it can severely limit the amount of money you can make. When you charge by the hour, customers tend to focus on hours spent on a job, not the end results, which can lead to micromanagement.
On the other hand, using package pricing is a good choice when you know exactly what is expected. Being paid for a result, and not your time, not only allows you to work quicker to make more money, but it keeps your clients from hovering around you when you are “on the clock.”
How to price a product (and choose a starting price)
With your available business information in hand, it’s time to get started pricing your new product or service. This step-by-step guide can help get you started.
Step 1: Define exactly what you’re pricing
Start off the pricing process by being specific about what the customer is buying. Is it a finished deliverable? A set number of hours of work? A particular outcome? Is there anything that is not included in the price, like add-ons or extras? Write it all down to help yourself understand what you are selling.
Taking this first step protects both you and your future customer.
Step 2: Calculate your real costs (including time)
List all the expenses involved in selling this product or service. Be sure to include the costs of materials, tools, and software associated with the sale. Don’t forget to include the cost of labor throughout the entire process. Add on any fixed costs, like rent, insurance, storage, and utilities. Finally, include a small buffer for unexpected expenses of about 10 percent, and don’t forget to pay yourself!
Once you identify your real costs, you can determine your floor price by dividing them by the number of sales you expect. The floor price is not your selling price, but the minimum you need to charge to prevent yourself from losing money.
Step 3: Choose a pricing approach that fits your business
Now is the time to choose which pricing strategy is best for your situation.
- Cost-plus pricing is a good option when you have fixed known costs.
- Competitor-based pricing is smart if you are entering a saturated market.
- Value-based pricing makes sense for service providers that have low costs but offer valuable outcomes.
You can also combine these pricing strategies, such as using cost-based pricing as your minimum selling price, and then adjusting it upwards based on what your competitors are charging.
Step 4: Check the market (without copying competitors)
This is also where broader market research becomes especially helpful. Looking at industry trends, customer expectations, and competitor positioning can give you useful context before finalizing your price. While you shouldn’t copy competitors blindly, understanding how similar offers are structured—and how customers respond to them—can prevent you from pricing too far outside realistic expectations.
Step 5: Pick a starting price and a simple pricing structure
After reviewing your available numbers and conducting market research, you can’t put it off any longer. You need to choose the price. But now is the time to keep it simple. Avoiding too many options makes things easier for you and your potential customers. You can always add more options in the future.
Offering only one price for your product or service is easy to understand and avoids confusion, but you may earn more when you offer multi-tier pricing or add-ons.
Step 6: Test your pricing with real customers
Asking people what they think of a price will never be as helpful as going live with it. Small-scale testing of your product or service and its price can be very revealing. If real customers:
- Offer no resistance to the price may mean you are undercharging.
- Are confused about the pricing, the value of the product or service probably isn’t clear.
- Strongly object to the price; your positioning may be off, or you may be targeting the wrong customers.
Step 7: Adjust pricing over time (especially for new products)
Prices aren’t permanent.
To maximize your profit, raise prices when demand is high or availability is low. Streamline your pricing options when customers are confused or ask too many clarifying questions. When potential customers show interest even after hearing the price, but they still don’t purchase, there is another issue besides price, usually confusion about what exactly they are buying.
Pricing mistakes to avoid
When pricing your product or service, make sure you are not making these common mistakes:
- Lowering your prices just to “get customers” with the intention of raising prices later.
- Not including labor and overhead when calculating costs.
- Including personal income desires as part of the pricing process.
- Focusing only on price when considering value.
- Offering too many options and pricing options.
- Sticking with a price even if it isn’t working.
How to tell if your pricing is working
So, you’ve priced your product or service and started selling. But did you get the price right the first time? You don’t need a metrics-heavy dashboard to find out. Just ask yourself a few simple questions:
- Do you always have customers, but feel tired or are always running out of stock? Then there is a good chance that you could get away with charging more money.
- Are there no sales or loud complaints about the price? Then there’s probably a disconnect between how much you are charging, where you are positioning your business, or the way the offer is being presented.
- Are customers always looking for a discount or negotiating over what is included in the price? Then there is a good chance you have misjudged the perceived value of what you are offering or are marketing to the wrong potential customers.
To further drill down where the problem may be, consider these additional questions:
- What percentage of leads do you close? Low close rates mean marketing is working, but there is some sort of friction that must be identified and corrected.
- What’s the average order value? If you offer multiple add-ons and upgrades to a product or service, but customers are not purchasing them, then they probably can’t see the value of these upsells. You may want to adjust the way you present them.
- What’s your profit per completed job? If you aren’t earning money, or enough money to justify the work, you need to increase the price.
- Are many customers coming back? Repeat customers mean they see value in what you sell, but if you don’t have a lot of returning customers, you may want to find out why.
How to price different types of products and services
Some sectors tend to have their own twist on pricing. Below are some common types of startups, and what you should consider when pricing these products and services.
How to price digital products
Prices for digital products should be based on the perceived value, not their production cost. Since reproducing digital products is almost free, many sellers feel pressured to charge only a few dollars for them, but racing to the bottom attracts the wrong customers and makes the business difficult to sustain. If you are fearful of missing out on sales, consider offering a lower-cost basic version and a more premium option.
How to price SaaS products
Software as a Service (SaaS), or subscription-based digital products, are usually priced to include access and future updates. Often, companies can encourage a longer-term commitment and increased cash flow by offering annual subscriptions for a discounted price over monthly ones. It’s smart to keep plans simple at first, but consider having an option for per-user scalability, as well as flat pricing for businesses that want more predictability.
How to price consulting services
Consulting services are often priced around expertise and desired outcome, not just the amount of time spent on the project. Hourly rates may work when newer clients have poorly defined targets, packages are often preferred by existing clients, or those who know what they want. However, for package deals, make sure you clearly define what is included to prevent scope creep and pricing issues.
How to price SEO services
When dealing with a new client, one-time SEO projects can be a big time sink due to unknown expectations and adjustments. That’s why they should come at a premium price point over monthly retainers. Whether you are charging for one-time projects or a monthly retainer, it’s important to be clear with your clients that the prices reflect only deliverables, and not outcomes.
How to price accounting services
Most accountants charge a monthly fee based on the complexity of the accounts and the reporting needs of the client. Since complexity varies by company, having a set price can wind up costing you money. Tiered price or individual quotes are ideal, but be certain to outline what is and isn’t included in the quoted price.
How to price bookkeeping services
Bookkeeping services often charge based on transaction volume, account complexity, and reporting frequency. Opting to use tier pricing allows flexibility for the client and gives the bookkeeper peace of mind to avoid scope creep. Bookkeepers often charge new clients onboarding and setup fees so they are paid for their time.
How to price cleaning services
A cleaning business typically sets a price based on the square footage, the frequency of cleaning, and what is included in the cleaning service. Clients often prefer flat-rate prices so they don’t feel like they need to oversee the work, but charging by the hour can prevent losing money on one-time or irregular jobs. Regardless if you go with an hourly or a flat rate, make it clear what is included in the price and what costs more as an add-on.
How to price janitorial services
Janitorial services usually charge for the square footage, cleaning schedule, and required supplies and equipment to do the job. The price can be secondary for clients, as reliability and thoroughness are often more important to commercial clients. Since services are frequent and ongoing, it is critical to create a clear service agreement to clarify client expectations.
How to price lawn care services
Lawn care pricing depends on the property size, client requirements, service frequency, and seasonal demand. Bundling related services such as mowing, trimming, and cleanup simplifies pricing and tends to increase the average order value over charging for each individual service separately. Don’t forget to factor in travel time and expenses in your final prices.
How to price nail services
When setting the price for nail services, the length of the appointment and product cost need to be the main factors. More experienced nail technicians can also charge a premium, but the client’s value is always based on results. Add-ons like designs and extensions can increase income per appointment, but the price of the extras must pay for the potential loss of additional appointments due to timing.
Getting prepared before you price (and before you sell)
Knowing your business is legally set up will give you more confidence in your pricing strategy. Gain the peace of mind you need by creating an LLC, filing for an EIN, and opening a business bank account.
Don’t know where to start when it comes to starting a business? Tailor Brands can help with paperwork, so you can concentrate on your business.
Conclusion
Your first price for a product or service will probably not be its last. Think of the price as a starting place, and don’t be afraid to adjust it as needed based on real customer feedback and the current market. Things change, so your prices don’t need to stay stagnant. But what they need to do is reflect value in the eyes of your target customers and sustainable profitability for your company.