How to Price a Product, With Real Numbers

Most people price a product by looking at the shelf next to theirs.

Learning how to price a product properly means three passes. Cost sets the floor. Value sets the ceiling. The competitor range tells you where to land between them, and then you test the number for a week before you trust it.

The shelf method works until it doesn't. It fails when the number sits below what the product costs you. The sale feels good, the month feels good, and the margin is gone before anyone checks the sums.

The rest of this post walks through each pass with numbers you can plug in today. The examples are a hypothetical mug and a hypothetical bookkeeping service. Swap in your own figures as you read.

How to price a product starts with your cost

Your cost is the floor. Every dollar above it is margin, and any price below it loses money on every sale. Shopify's 2026 guide to pricing describes the most common starting point, cost-plus pricing, as taking the total cost to make the product and adding a percentage markup to reach the selling price (Shopify, How to Price a Product in 2026). The arithmetic is short. The hard part is counting every cost, and most people count only the materials.

Work through the list in order:

1. Write down the materials cost per unit from the supplier invoice, not from your estimate.
2. Add labour per unit. Take the minutes you spend making, packing and posting one unit, multiply by your hourly rate, and divide by 60.
3. Add packaging, and the share of shipping you pay yourself.
4. Add payment processing as a percentage of the price you plan to charge. It is a cost, so it belongs in the total.
5. Add the markup. The formula is cost plus a margin percentage times cost, the form LitCommerce lays out in its product pricing guide.

Here is the mug, worked through. Materials cost $3.20. Making, glazing and packing one takes 20 minutes, and at $18 an hour that is $6.00 of labour. Packaging is $1.10. You absorb $1.70 of shipping. The total cost is $12.00.

With a 60% markup, the price is $12.00 plus 60% of $12.00, which is $19.20. You can round it to $19.00 if the market sits there.

The two words in that calculation get mixed up constantly, and the gap between them is large. A 60% markup on cost is a 37.5% margin on price. On $19.20, the gross profit is $7.20, and $7.20 divided by $19.20 is 0.375. If your pricing sheet says 60% and your bank statement says 37.5%, you have used markup where you meant margin.

Write the floor on the sheet next to the price. For this mug it is $12.00. Any discount that lands below it is a loss on every order, even if the sale doubles how many orders you take.

Price the value the buyer sees

Cost tells you the floor. Value tells you the ceiling. The buyer never sees your invoice and does not care about it.

They care what the product does for them compared with doing the job another way, or not doing it at all.

Market conditions move the ceiling too. Qualtrics makes the point in its guide to product pricing: in a growing market a higher price can work, because the demand already exists, while a shrinking market may need lower prices to keep buyers moving (Qualtrics, Product Pricing: How to Price a Product). Check which kind of market you are in before you cut anything. A price also only holds for a product people want, and the product market fit guide sets out how to check that before you spend a week on the number.

To find the ceiling, put a number on what the buyer gets. Write down the time they save, multiplied by what that time is worth to them. Then write down the money they save or earn, measured in their money, not yours.

Here is the service version. A bookkeeper charges $350 a month. A client who spends 12 hours a month on receipts and invoices values that time at the $40 an hour they pay a part-time assistant. The work costs them $480 of time. The service saves $480 of time for $350.

That $480 is a ceiling, not a target. Price below it and the buyer has a reason to say yes without a long conversation. Price well above it and you need a story they can repeat to their partner or their accountant, because the arithmetic will not carry the decision for you.

Before the price goes on paper, the buyer's saving needs to be one number, in their currency, that came from their situation and not from your pitch. Your price sits under it, with a reason you can say in a sentence. If you cannot write the one number, you do not yet know what the product is worth to the person buying it, and the price will be a guess. Go and ask five buyers what the last time this problem cost them looked like. The answers will be more useful than any calculator.

Check the competitor range, then pick a spot in it

A competitor's price is the range the buyer already carries in their head. It is not the floor, and it is not the price you must copy. It is the map of options they can compare you against.

List five alternatives before you pick a spot: the direct competitor, the cheapest substitute, the premium option, the free option and the do-it-yourself option. Open each pricing page the day you check it and write down the price with the date. A price you saw in a forum last spring is a rumour.

For the mug, the list might look like this, with the hypothetical prices written as of the day of checking:

Pick the spot where your edge is clearest. A mug that is better than the $9 option and cheaper than the $22 one has a case you can make in a sentence. A $19 mug with no reason to prefer it is a $9 mug that costs $10 more.

Write the reason next to the price. If the reason is "it's a bit better," you have not found it yet. Go back to the buyer's saving from the last section and find the number that makes the difference.

Review the range again at 30 days. Competitors move their prices, and a competitor who dropped to $17 last month changes the case for your $19 mug. Set a calendar entry for the review so it does not depend on memory.

Run a one-week price test before you trust the number

A price is a hypothesis until buyers have answered it. Test it for a week, change one thing at a time, and decide on numbers you wrote down before the test began.

1. Write the old price, the new price and the cost per unit on one sheet, with today's date at the top.
2. Split new visitors between the two prices if your store or page tool can do it. If it cannot, switch the price for seven days and compare with the same weekdays the week before.
3. Count visitors who reach the buy step, and completed orders, every day. Two numbers a day are enough.
4. Calculate conversion as orders divided by visitors, and profit per order as the new price minus the cost per unit.
5. Multiply conversion by profit per order to get profit per visitor. That single number is the one to compare.
6. On day seven, or after 100 orders, whichever comes later, keep the new price if profit per visitor rose. Go back if it fell.

Here is the mug, tested. Under the old price of $15, the page converts 4.0% of visitors. Profit per order is $3.00, which is $15.00 minus $12.00. Profit per 1,000 visitors is 40 orders times $3.00, or $120.

Under the new price of $19, conversion drops to 2.8%. Profit per order rises to $7.00. Profit per 1,000 visitors is 28 orders times $7.00, or $196.

Conversion fell by a third, and the price still won. The lower conversion is a cost you accepted on purpose, and the test shows it was worth paying. Most price changes look like a loss when you watch the order count alone.

Do not change the price and the photograph in the same week. You will never know which change moved the number.

The seven days is a floor, not a rule. A page with 20 orders a week needs five weeks before a half-point change in conversion means anything. In that case, run the test for longer and accept that the decision comes later.

Paid visibility is a test of demand, with its own cost

Paid placement is one way to bring a test the traffic it needs in a week, and it has a cost of its own. Measure it the same way you measured the price. If a channel sends visitors who would have bought at the old price anyway, the test is only telling you what you already knew.

Disclosure: The Board is a paid placement. Its leaderboard sorts brands by the money they put in, a listing starts at $1, and taking the top spot costs $351 right now, with 26 brands on the board at the moment. Put the clicks it sends through the same profit-per-visitor sum as every other channel. If the clicks do not pay for themselves at the price you set, stop buying them.

For the order in which to test acquisition channels, with a budget for each step, the customer acquisition strategies guide goes through the sequence. Pricing and acquisition interact. A price that converts well at a small budget can fail when the traffic gets colder, so run the test on the channel you intend to scale.

A service prices differently in one place

Services often start from an hourly rate, and an hourly rate caps your income at the hours you can physically work. The bookkeeper above does not charge $29 an hour across 12 hours. They charge $350 a month for a system that clears the receipts before the client notices them.

Hourly pricing rewards slow work. Flat pricing rewards the system you build to make the work fast. Keep the hourly rate for work the client cannot predict, such as a one-off audit. Use a fixed monthly price for anything that repeats, because the repeat is where the margin lives.

The cost list still applies. Count the hours you spend on onboarding, the software you pay for, and the time you spend answering the client's questions in the evening. Those costs go into the floor, the same way the packaging went into the mug's floor.

If the service is a subscription, the price has a second test. A price that wins the first month can lose the second, so watch churn rate alongside conversion. The SaaS pricing models guide covers how to move between tiers once the floor is set, and the rest of the SaaS category collects the other posts on running a product as a business.

Three mistakes that cost the most

The first mistake is pricing from the competitor and forgetting the cost. The $9 mug looks fine on the shelf until packaging and shipping arrive in the same month. Fix it by writing the floor first, the way the cost list above builds it, and only then checking the competitor range. If the floor sits above the cheapest alternative, the honest move is to change the product, not the sums.

The second mistake is making discounts the default. A discount you cannot end becomes the new price, and the buyers who arrived on it will not pay the old one. Put an end date on the calendar before a discount goes live, and write the price it returns to beside it. A discount with no end date is a price cut you have not admitted to yet.

The third mistake is treating the first price as permanent. Most first prices are guesses with a good story attached. Review the price at 90 days with three numbers in front of you: the cost per unit, the competitor range on the day you check it, and conversion over the last 30 days. If any of the three has moved more than the margin you are holding, the price moves with it.

Set the number before the week is out

Work through it in this order, and finish each step before the next one starts:

1. Write the cost of one unit tonight, down to the packing tape.
2. Find the cheapest alternative and the one you would most like to beat.
3. Pick a price between them and write the reason in one sentence.
4. Set the test for next Monday, with the old price and the new price on one sheet.
5. Write the day you will read the result on the calendar before the price goes live.

The first two steps take an evening. The rest takes a week, and at the end of it you will have a number that someone else tested for you and a reason to keep it.