Core ConceptsModule 2 of 6
Costs, methods and break-even
Know your costs
- Variable costs per unit
- Materials, packaging and payment fees for each item or job.
- Your time
- The hours you spend making or delivering it, multiplied by a fair hourly rate. Leaving this out is the most common pricing mistake.
- Fixed costs
- Monthly costs you pay no matter what you sell, such as rent, software, insurance and booth fees.
Three pricing methods
- Cost-plus pricing: add a profit amount on top of your full cost, so every sale covers your costs.
- Competitor-based pricing: look at what similar businesses charge and decide where you fit: lower, similar or premium.
- Value-based pricing: price according to the value customers receive, such as time saved, quality or results.
Most businesses use all three: cost-plus to find the minimum, competitors to see the range and value to choose the final price.
Markup versus margin
These two terms are often mixed up, and confusing them can lead to underpricing.
| Term | Formula | Example: cost $10, price $15 |
|---|---|---|
| Markup | Profit ÷ Cost | $5 ÷ $10 = 50% |
| Margin | Profit ÷ Price | $5 ÷ $15 = 33% |
To price for a target margin, divide your cost by one minus the margin. For a 40% margin on a $10 cost: $10 ÷ (1 − 0.40) = $16.67.
Break-even point
Your break-even point is how many units you need to sell to cover your fixed costs. Each sale contributes its price minus its variable cost toward those fixed costs:
Break-even units=Fixed costs ÷ (Price − Variable cost per unit)
Common mistakes
- Forgetting your time, payment fees or shipping
- Copying a competitor's price without knowing your own costs
- Never raising prices as your costs go up
- Competing only on price, which is hard for a small business to sustain