Price so that every sale covers what it cost you, contributes to the bills, and leaves real profit — then check the market would pay it, not the other way round. Most new businesses price backwards: they look at competitors first, pick a number slightly lower, and only discover later that the number never worked. This guide does it in the right order, with the actual arithmetic.
At a glance
| Feature | Detail |
|---|---|
| The right order | Costs first, margin second, market check last |
| The commonest mistake | Pricing low to win customers — it attracts the customers who leave over 50p |
| Margin vs markup | Margin is profit as a share of the price; markup is profit as a share of the cost. Mixing them up loses money |
| For services | Price the value and the year, not just the hour |
| When to raise prices | Sooner than feels comfortable — most small businesses run underpriced for years |
Step 1 — Know what a sale actually costs you
Not roughly — actually. For a product: materials, packaging, delivery, card fees, returns, waste. For a service: travel, materials used on the job, the software and kit that only exist because you do this work. These are the costs that happen because the sale happened — the bills that arrive anyway (rent, insurance, your phone) come later, in the plan, not in the unit price.
Founders who skip this step price on instinct, and instinct always forgets something. It is usually the delivery, the card fees or the waste.
Step 2 — Set the margin deliberately
Your margin is what is left of the price after the sale's own costs, and it has three jobs: pay the fixed bills, pay you, and leave profit. So it cannot be an accident.
One warning that saves real money: margin and markup are not the same number. A £6 cost sold at £10 is a 40% margin (£4 of £10) but a 67% markup (£4 on £6). People quote "keystone" markups and margin targets interchangeably, price off the wrong one, and wonder where the money went. Our margin guide makes it stick.
There is no universal right margin — a florist and a software business run on completely different numbers — but there is a wrong one: any margin that, multiplied by the sales you can realistically make, does not cover the bills and pay you. Which is a sum you can do tonight.
Step 3 — Then, and only then, look at the market
Now check the number against reality. What do established competitors charge? Not to copy them — to place yourself deliberately. If your calculated price sits above the market, that is not automatically bad news: it means you need a reason to be worth more (speed, reliability, specialism), or a different cost base, or a different customer. If it sits below, do not celebrate — raise it toward the market and bank the difference.
What you must not do is let the market set a price your costs cannot support. Competitors' prices tell you what customers will pay; only your costs tell you what you can afford to charge.
Pricing a service: the hour is not the product
Service pricing has a trap products do not: the hours you can sell are finite and fewer than you think. Travel, quoting, admin and empty gaps mean a 40-hour week might carry 25 chargeable hours — so the rate has to fund the whole week, plus holidays, sick days and your pension, from the hours that actually bill. That is why tradespeople who "charge well" are often earning modestly, and it is worked through properly in our hourly rate guide.
Where you can, price the job or the outcome rather than the hour — customers compare hourly rates, but what they really want is a fixed price for the whole job. And if your work repeats, sell it as a monthly round or retainer rather than job by job — the same hours are worth more sold that way, which is the whole subject of subscription pricing.
A worked example
Take City Florists, a subscription flower business. The weekly bouquet plan sells at £40 a month, and each of the four deliveries costs £6 — flowers, wrap, fuel — so £24 of every £40 is spent before anything else. That is a £16 margin per subscriber per month, a 40% margin, and every business question the founder faces runs through that number: 250 subscribers means £4,000 a month of margin to pay all the bills and herself; a £2 price rise would lift it to £4,500 having changed nothing else; a rival at £35 is only a threat if customers value nothing but price — and subscription customers rarely do.
Notice the example never asked "what do flowers usually cost?" It asked what these flowers cost this business — the only version of the question that matters.
Work out your pricing with Plan, free. Plan does the pricing maths with you — costs, margin and what to charge — one short question at a time, in your browser.
The mistakes that keep businesses poor
Pricing low to get started. Cheap attracts the customers with the least loyalty and trains everyone else to expect it. Raising a too-low price later is far harder than starting right.
Forgetting the invisible costs. Card fees, delivery, waste, returns, the drive between jobs. Individually small; collectively they are why "profitable" businesses feel skint.
Copying competitors blind. Their price fits their costs, their volumes and their mistakes. You are borrowing all three.
Never revisiting. Costs creep up every year, so a price that stays the same is really getting lower. If you have not raised prices in two years, you almost certainly should — our raising prices guide covers doing it without losing the customers you want to keep.
What is Plan?
Plan is a free business operating system for people starting or newly running a UK business. It walks you, one simple step at a time, from your elevator pitch through brand, product and pricing, to a complete business plan — then uses everything it now knows about the business to help with the basics: logo and brand, marketing, a website, a bank account, funding, insurance, company registration. You can use as much or as little as you want.
Frequently asked questions
How do I work out what to charge? Costs first: what does each sale cost you to make or deliver? Then margin: what must be left over to cover bills, pay you and leave profit, given realistic sales? Then the market check: would customers pay it, and if not, what would make you worth it? In that order.
What is a good profit margin for a small business? There is no universal number — a café and a supermarket run on completely different margins. The test is yours alone: margin per sale, times realistic monthly sales, minus your fixed bills, must pay you properly. If it does not, the margin is wrong for your business whatever the industry average says.
Should I charge less than my competitors when starting out? Usually not. Undercutting attracts price-shoppers, starves you of margin to improve anything, and makes the eventual rise painful. If you must differ, differ on something you can sustain — speed, reliability, a niche — and hold a price your costs support.
How do I price my time as a freelancer or tradesperson? Start from the year, not the hour: the income you need, divided by the hours you can genuinely bill — usually far fewer than the hours you work. Then add what each job costs you in travel and materials. Pricing the job rather than the hour is usually better for both sides.
When should I put my prices up? When costs have risen, when you are booked solid, or when it has simply been more than a year — whichever comes first. A full diary is the clearest signal in business: more people want you than you have hours — so put the price up.
Two ways to do this
Do the maths with Plan, free. Put in what a sale costs you, what you charge and what the bills are, and Plan shows you the margin, the break-even point and what different prices would do — in your browser, one short question at a time.
Or do it by hand. Everything you need is on this page: cost the sale, set the margin, check the market. An evening with a notepad and your receipts gets you a defensible price — and the spoke guides above go deeper wherever you need it.