Guides / Business Strategies
Pricing Your Products and Services: A Basic Review
Pricing is one of the hardest calls a small business owner makes. Get it wrong and you either scare off customers or quietly give away your profit.
In this guide
Where most businesses start
Many small businesses simply follow the manufacturer's suggested retail price. It's an easy default, but it has a real weakness: it ignores your local competitive picture entirely. Two stores selling the identical product can have very different cost structures, customer bases, and reasons to charge more or less.
Back to topPricing against your competition
A more useful benchmark is what comparable businesses in your market are charging, comparable meaning similar size and customer volume. Comparing yourself to a large national chain is risky. They buy in volume and their per-unit cost is lower than yours will ever be. Instead, price against local competitors your own size, then compete on the things a big-box store can't easily match: personalized service, convenience, and a location your customers actually want to visit.
Back to topPricing below the competition
Undercutting the market can work, but it demands discipline. To sustain lower prices you generally need to negotiate the best possible cost on your merchandise, keep overhead down with a leaner location, control inventory tightly, focus your product line on fast-moving items, and lean your advertising into price as the message. The risk is that this strategy is hard to sustain. Every cost has to be watched constantly, and if a competitor matches your price, both of you lose margin with nothing gained.
Back to topPricing above the competition
Charging more works when price isn't your customer's primary concern. That's usually true when you offer meaningfully better service (faster delivery, easier returns, more attentive staff), a more convenient or exclusive location, or merchandise your competitors simply don't carry. If none of those are true for your business, a premium price is much harder to defend.
Back to topBuilding price around your real costs
Every product or service has three cost components, and most small businesses underprice because they don't account for all three:
- Material cost: the direct cost of everything that goes into the finished product.
- Labor cost: wages for the people producing the product or delivering the service, including the dollar value of benefits like payroll taxes, workers' compensation, and retirement contributions, not just the hourly wage.
- Overhead: everything else: rent, utilities, insurance, depreciation, advertising, and indirect labor like bookkeeping or administrative support.
Overhead is usually expressed as a percentage or hourly rate, and it's worth reviewing periodically since inflation and rising benefit costs will quietly erode a rate that was accurate a year or two ago.
Back to topPricing an hourly or consulting service
If you bill by the hour, remember that not all of your working time will actually be billable. Slow periods, administrative work, and business development all eat into your capacity. Many service businesses build their hourly rate around roughly half of total working hours in a year, which builds in a cushion for the time that isn't billed to a client. Where possible, favor longer-term or retainer engagements over one-off projects; they smooth out the feast-and-famine cycle that hourly work tends to create.
Back to topThe formula that ties it together
However you arrive at your number, the underlying equation is always the same: cost, plus operating expenses, plus the profit you need to sustain the business, equals price. Set your pricing policy deliberately, then monitor it. Costs shift, competitors change their approach, and a price that made sense last year may not this year.
Related guide
Evaluating Your Market: A Basic ReviewFrequently asked questions
Should I always try to be the cheapest option in my market?
Not necessarily. Competing purely on price is difficult to sustain for a small business and exposes you to margin-eroding price wars. Competing on service, convenience, or product quality is often more durable.
How do I know if my overhead rate is accurate?
Review it at least annually, and sooner if you have added staff, moved locations, or seen a jump in insurance or benefit costs. An outdated overhead rate quietly turns profitable-looking sales into break-even ones.
What is the biggest pricing mistake small businesses make?
Failing to fully account for labor and overhead costs, especially the value of benefits, when setting prices. This leads to sales that look profitable on paper but aren’t once true costs are counted.
Want a second opinion on your growth strategy? Legacy CPAs works with small business owners on pricing, marketing budgets, and cash flow decisions every day.
Schedule a ConsultationThis guide is for general informational purposes only and is not tax, legal, financial, or investment advice. Every business situation is different, so consult a licensed professional before making decisions based on this content.