Most new business owners set their first prices the same way: they look at what a competitor charges and go a little lower.
It feels safe. It is also how you end up busy and broke, because your competitor's price is built on their costs, their volume and possibly their mistakes. You need a price built on your numbers.
Step 1: Know what one sale costs you
List everything you spend to deliver one unit of what you sell: materials, packaging, payment fees, delivery, and the labor to make or do it. Include your own time at a real hourly rate. If you would have to pay someone $30 an hour to do the work, your time costs at least that.
This is your cost per sale.
Step 2: Know what it costs to be open
Now list what you pay every month whether you sell anything or not: rent, insurance, software, phone, loan payments, marketing, and a salary for yourself. Do not leave your salary out. A business that only works when the owner goes unpaid is not working.
This is your monthly overhead.
Step 3: Find your break-even
Here is a made-up example to show the math.
| Amount | |
|---|---|
| Price per sale | $120 |
| Cost per sale | $45 |
| Left over from each sale | $75 |
| Monthly overhead, including your pay | $6,000 |
| Sales needed each month to break even | 80 |
The formula is simple: monthly overhead divided by what is left over from each sale. In this example, $6,000 divided by $75 is 80 sales a month, about four every working day.
Now ask the honest question. Can you really make 80 sales a month in your first year? If the answer is no, something has to change: the price, the costs or the plan.
Step 4: Test the price, do not just hope
Look at what happens in the same example if the price is $140. Each sale leaves $95, and break-even drops to 64 sales a month. A $20 difference in price removed a fifth of the work needed to survive.
This is why underpricing is so dangerous for a new business. You have the least volume you will ever have, so every sale has to carry more of the load.
Step 5: Check it against the market
Now look at competitors, last instead of first. If your price is higher than theirs, that is fine as long as you can say why in one sentence: faster, more reliable, better guarantee, more specialized. If you cannot say why, work on the offer before you cut the price.
Three pricing mistakes new owners make
- Pricing to be the cheapest. There is always someone willing to lose money faster than you.
- Forgetting their own pay. Then wondering a year later why they are exhausted and have nothing to show for it.
- Never revisiting it. Your first price is a first draft. Review it after 90 days of real sales.
Get the numbers right before you launch
Pricing and break-even analysis are part of our Startup Launchpad, along with a business plan and a three-year financial model. The first conversation is free.