How to Price a Product: From True Cost to a Shelf Price That Holds

By the BusinessLipTools editorial desk · Last updated 12 October 2026 · 5 min read

Most prices are inherited. A competitor charges this, the previous owner charged that, the number has always ended in a nine. Inherited prices carry an inherited assumption — that somebody, once, did the arithmetic — and that assumption decays every time a supplier, a courier or a card processor raises their charge by a few percent and nobody reopens the question.

Pricing properly is not mysterious, and it is not one calculation but a short sequence of them. First you establish what a unit truly costs, all-in. Then you decide what the business needs that unit to contribute, which produces a price from the inside out. Then you test the price from the outside in — against the market, against your volumes, against the discount you will inevitably be asked for — and adjust with your eyes open rather than discovering the adjustment in the annual accounts.

This article walks the sequence with one product, a jar of preserves sold by a small food producer, and keeps the numbers modest on purpose. The method does not change when the numbers grow; only the consequences do.

Step one: the true unit cost, which is never the invoice price

The jar's fruit, sugar and pectin cost 1.40. That is the number most first attempts at costing stop at, and it is roughly half the truth. The jar and lid add 0.55, the label 0.08, cooking gas and the market's per-sale card fee about 0.30, the box and padding the jar travels in 0.22, and an allowance for the jars that crack, ferment or simply do not sell — every food business has a waste rate, and pretending it is zero does not make it zero — another 0.15. The true unit cost is 2.70.

Two categories deserve special attention because they hide. Your own time belongs in the cost of anything you make: if a batch takes an afternoon, an hourly figure for that afternoon — even a modest one — spread across the batch belongs in the unit cost, or the “profit” the price produces is partly your unpaid wages wearing a disguise. And variable selling costs — marketplace commissions, card percentages, affiliate cuts — are unit costs too, because they are paid per sale and scale with it. Costs that do not scale, like the stall fee, belong elsewhere in the sequence; we will meet them at the break-even step.

Step two: choose a contribution, not a percentage out of the air

With a true cost of 2.70, the question becomes what each jar must contribute to fixed costs and profit. Suppose the producer sells through markets and a small online shop, carries fixed costs of about 900 a month, and realistically moves 600 jars a month. Each jar must contribute at least 1.50 merely to cover the fixed pile. A price of 4.20 would do exactly that and not a penny more — a business running to stand still. Pricing must aim above the floor: a contribution target of 2.30 gives a shelf price of 5.00, a gross margin of 46%, and a cushion of 0.80 a jar above survival for reinvestment, mistakes and growth.

Notice the direction of travel. The margin was not copied from an article about what food margins “should” be; it fell out of this business's fixed costs and this business's realistic volume. Industry margins are a sanity check to apply afterwards, not the source of the number — a producer selling 6,000 jars a month can thrive on a contribution that would starve this one, and copying their price copies their volume assumption too.

Step three: interrogate the price from the outside

A price derived internally must still survive contact with the world. Three tests matter. The market test: what do comparable jars sell for, honestly compared — same weight, same quality tier, same channel? If the shelf is crowded at 4.50, a 5.00 price needs a reason a shopper can see, not just a cost structure they cannot. The channel test: a retailer buying wholesale will expect to earn their own margin on your price, so the 5.00 retail price implies a wholesale price nearer 3.00 — run the costing again at that figure before agreeing, not after the first order ships.

The third test is the discount you have not offered yet. At some point a café will ask for 15% off for a standing order, or a seasonal sale will call. Take the intended discount off the price now and look at the contribution that remains: 5.00 less 15% is 4.25, contributing 1.55 — barely above the 1.50 survival line. That tells you something valuable before any negotiation: your walk-away is close, the discount must buy volume (a standing order of a guaranteed size) rather than be given for goodwill, and a 20% request is simply unaffordable at any plausible volume. Prices set without this test get negotiated blind.

Step four: round deliberately, then write the price down with its reasons

The calculated 5.00 sits happily on a round figure. Had the arithmetic produced 4.87, the choice would be deliberate: 4.95 if the product's positioning tolerates charm pricing, 5.25 if the brand sells on craft and scarcity. What rounding must not be is casual — drifting from 4.87 to 4.50 because it “feels friendlier” surrenders 0.37 of contribution per jar, which across 600 jars a month is 222, most of the cushion, surrendered to a feeling.

Then record the price's working: the unit cost build-up, the contribution target, the volume assumption, the discount walk-away. Prices need revisiting whenever a cost moves, and a price with its reasoning filed beside it can be reviewed in ten minutes. A price that exists only as a number in the till must be re-derived from nothing each time, which is why, in practice, it never is — and why inherited prices quietly rot.

Mistakes to avoid

• Costing only the obvious inputs and discovering packaging, fees and waste inside the “profit”.
• Copying a competitor's price, which silently copies their cost structure and volume assumptions too.
• Treating your own labour as free, then wondering why the profitable business leaves you exhausted and underpaid.
• Rounding a calculated price down out of politeness without computing what the rounding costs per month.

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