How to price a product: steps, formulas and 6 pricing methods
Work out your minimum price, choose the method that fits your product and avoid discounts that erode its value
Do you price your products by guesswork? Or do you check what the competition charges and go a little below it?
Got you there, didn’t I?
It’s the most common approach, especially when you sell online. But knowing how to price a product is a business decision, not a formality. Price is the only variable in the marketing mix that brings in revenue, it changes how customers perceive you and you can adjust it in minutes.
If you get it wrong, two things happen. In the short term, you sell without a margin or you don’t sell at all. In the medium term, the mistake is strategic: prices that don’t convey the value of what you offer and discounts nobody believes. That’s why a badly set price is among the most frequent marketing problems.
In this guide you’ll find the formulas to calculate the selling price and the 6 steps I follow to set the price of a product. You’ll also see the most widely used pricing methods, with examples you can adapt.
Why you shouldn’t price by guesswork
I see it often with infoproducts, although it happens with any product or service. The price comes from one of these two calculations:
It took me so many hours to make and I charge so much per hour, so it’s worth this much.
I’ll set this price because it seems right to me.
The problem is that neither of them looks at the customer or the market. The result is unrealistic prices and, when it’s time to make an offer, poorly planned discounts.
Does a course that “was worth” €599 and is suddenly sold for €199 sound familiar? That discount isn’t credible. And it damages the perceived value of the product, because the customer wonders how much it’s really worth.
How to calculate a product’s selling price in 6 steps
A bit of method avoids almost all of those mistakes. These are the steps I follow to calculate a product’s selling price.
The first two are about strategy; the next four, about numbers. If you’d like to sort out your strengths and weaknesses first, a quick SWOT analysis will help.
Step 1: define your business goals
The ultimate goal is usually to make money, but you need to make it specific. How much do you need to bring in to cover expenses and reach the profit you’re after?
That gives you a minimum price. Below it you won’t reach your goals, no matter how much you sell.
Step 2: decide what role price plays in your marketing
Price is also a marketing tool. You can use it to attract customers with a cheap entry product and then sell them more expensive ones.
That’s the logic behind cross-selling and upselling and the freemium model. You’ll find more ideas in our guide to business models.
Decide beforehand whether this product has to make money on its own or open the door to others.
Step 3: calculate the unit cost
This is where the numbers come in. Separate direct costs, which depend on each sale, from indirect costs or fixed costs, which you pay however much you sell.
This is the unit cost formula:
Unit cost = variable costs + (fixed costs ÷ units you expect to sell)
Imagine you sell an online course. Creating it cost you €40, each student needs an hour of mentoring that costs you €10 and you’re going to invest €500 in advertising. If you expect to sell 20 units:
€10 + ((€40 + €500) ÷ 20) = €37 unit cost
An infoproduct seems to have no per-unit costs. But support, one-to-one sessions and refunds are variable costs. Don’t forget them, or what it costs you to win each customer: your CAC.
Step 4: calculate your break-even point
The break-even point tells you how many units you need to sell so you don’t lose money at a given price:
Break-even point = fixed costs ÷ (selling price − variable cost)
Following the example, if you want to sell the course for €50:
€540 ÷ (€50 − €10) = 13.5. You need 14 sales to cover costs.
Every sale from the 15th onwards is profit. With this figure you know whether your sales target is realistic or whether you need to revisit the price.
Step 5: estimate demand and what your customer would pay
Estimating demand isn’t easy. Consider whether you already have a subscriber list, which campaigns you’re going to launch and what substitute products exist.
Market research, even a simple one, saves you a lot of guesswork before pricing a new product.
Not every customer perceives the same price in the same way. What’s expensive for one is fair for another.
With luxury goods, the opposite of what you’d expect happens: if the price drops too much, sales are lost. Can you imagine diamonds at €1? They don’t seem so special anymore.
You’re not looking for an exact figure here. You’re looking for a credible range.
Step 6: choose a method and set the final price
With the data above you can now choose a pricing method (you’ll find them in the next section) and calculate the final figure.
If you work with a margin, be careful with the formula. Adding a percentage to the cost is not the same as reserving that percentage of the price:
| Calculation | Formula | With a cost of €37 and 30% |
|---|---|---|
| Markup (percentage on cost) | cost × (1 + %) | €48.10 |
| Margin (percentage of price) | cost ÷ (1 − %) | €52.86 |
With markup you earn €11.10, which is only 23% of the price. With the margin formula you do keep 30%.
And if you sell to consumers in Spain, remember that the selling price you display must include VAT: €52.86 plus 21% is €63.96.
6 pricing methods (with examples)
You’ll find many pricing methods in marketing textbooks. These are the six I use most, from the simplest to the most strategic.
You’ll see that the further you go, the more you look at the customer and the less at your costs.
| Method | What it’s based on | When to use it | Risk |
|---|---|---|---|
| Cost plus margin | Your costs | To know your minimum price | Ignores the customer and the competition |
| Target price | A price you choose | When the market already sets the figure | May not cover costs if you sell little |
| Demand | What the customer would pay | When you deliver clear savings | Requires a good analysis of the customer |
| Competition | Other people’s prices | In markets with clear benchmarks | Price war |
| Value | What the customer gets | Differentiated products | You have to prove that value |
| Psychological | How the figure is perceived | As a final adjustment | Overusing it hurts credibility |
1. Cost-based pricing (cost plus margin)
What it is: you add a margin to the unit cost. It’s the easiest method and probably the most widely used.
Example: with a cost of €37 and €5 profit per unit, the course comes to €42.
Its limitation: it only looks at your costs. It doesn’t take into account what the competition charges, whether the customer would pay more or what happens to your margin when you apply a discount.
Use it to know your minimum price, not as a strategy.
2. Target pricing (or break-even pricing)
What it is: you do the calculation the other way round. You choose the price you want to sell at and calculate how many units you need to cover costs.
Example: you decide to sell the course for €50. As you saw in step 4, you need 14 sales so you don’t lose money.
Its limitation: it has the same flaws as the previous one, because it still doesn’t look at the customer. But it gives you something useful: the price and volume from which you start making money. That’s where the real strategy begins.
3. Demand-based pricing
What it is: you set the price according to what your potential customers are willing to pay, not what it costs you.
Example: your course teaches how to design a website in WordPress, and having a website built costs about €500 on average. Your students could pay €150 for the course and still save money.
As you can see, you can sell well above your €37 cost.
Its limitation: you need to measure the savings you generate accurately. If you asked €1,000 for a course on building a €500 website, you’d sell very little. Don’t cut it so fine that you’re left with no margin for discounts later, either.
4. Competition-based pricing
What it is: you use what your competitors charge for similar products as a benchmark. Porter’s 5 forces help you understand how much margin your industry leaves you.
Example: you wanted to sell the course for €150, but your main competitors sell similar courses for €399. If your brand is as well known as theirs and your product is similar, why not charge something similar?
Or even a little less, so they choose you.
Its limitation: what if a competitor drops to €20? They may have so many customers that it pays off for them. Not for you, because you’d be below your unit cost.
Getting into a price war is almost never worth it. It’s better to differentiate yourself, as we explain in the strategies for selling in saturated markets.
5. Value-based pricing
What it is: you charge according to the value the customer receives, which can be much greater than the product itself.
Example: you want to sell the course for €950, more than having the website built. To make it worthwhile, you add value: one-to-one sessions in which the student also learns SEO, how to prepare a visibility strategy and how to work with their website.
You’re no longer selling a course. You’re selling a more complete service.
Its limitation: the customer who buys at €950 isn’t the same as the one who buys at €150. You need to analyze demand and the competition again for that new audience.
6. Psychological pricing
What it is: you adjust the final figure to how the customer perceives it. It works because the brain uses shortcuts, heuristics, to decide quickly.
Example: €49 reads as “forty-something”, even though it’s only €1 less than €50. Another technique is anchoring: if you offer three versions at €29, €59 and €99, the middle one looks like the reasonable option and is the one most people choose.
You’ll find more cases in our article on cognitive biases in sales and in Cialdini’s principles of persuasion.
Its limitation: it’s a final touch, not a method for calculating the price. And if you overuse it, the customer notices.
Are you going to change your prices?
Let your customers know with a clear, segmented email before they find out by surprise.
How your customers perceive price
You may be convinced that your product is worth €950. But the customer doesn’t compare it with your costs: they compare it with their own references. These are the five that carry the most weight:
| Reference | What the customer compares | What to do |
|---|---|---|
| Usual price | What they’ve paid you before | Justify any increase |
| Prestige price | What the best-known brands charge | Don’t charge more than they do without a clear reason |
| Reference price | The usual market range | If you go outside the range, explain why |
| Assimilation | If your price is similar to others’ | They’ll assume the quality is similar |
| Contrast | If your price is very different | They’ll assume the product is better or worse |
That’s why the price has to fit your brand and your strategy. If your brand is well known, you can probably charge more.
If you’re just starting out, a tighter price and an entry product that attracts your first customers may suit you better. In a product launch, this decision matters as much as the product itself.
Discounts: how to apply them without damaging your price
Let’s go back to the €599 course that’s sold for €199. If your customers don’t know your usual price, they don’t perceive the discount as a discount.
If it’s your first product and you announce it’s worth €750 but drop it to €125, it isn’t credible.
It’s different when people already know you or you have other products with stable prices. Then a heavily reduced price does make sense, for example as a penetration strategy so a launch gains volume quickly.
Before discounting, do this calculation to find out how much more you need to sell to earn the same:
Extra sales needed = discount ÷ (margin − discount)
With a 40% margin and a 20% discount, you need to sell twice as much. With a 50% margin and a 10% discount, selling 25% more is enough.
You’ll find more examples in our guide to promotions and discounts and in these sales tactics.
Two more tips. Use big discounts only occasionally, because if they’re constant, customers learn to wait for the offer.
And in the European Union, when you announce a price reduction, the previous price you display must be the lowest of the previous 30 days.
Launch your offers by email
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How to communicate a price increase to your customers
Sooner or later you’ll have to raise prices. The worst thing is for your customers to find out by surprise at checkout.
Give advance notice, explain the reason and, if you can, offer something in return: keeping the old price for a few weeks or an extra for those who renew early.
Send it only to those it affects, with a list segmented by product or plan.
Here’s a template you can adapt:
Subject: Changes to the price of [product] from [date]
Hi [name],
From [date], the price of [product] will change from [current price] to [new price]. We have [specific reason: added new features, increased the costs of…].
As you’re already a customer, you keep the current price if you renew before [date].
If you have any questions, reply to this email and we’ll get back to you personally.
Best regards,
[Signature]
An email like this comes across as a thoughtful gesture rather than bad news. If you’re going to run a launch campaign, here’s how to promote your infoproducts and how to turn your newsletter into email sales.
How Mailrelay helps you sell at your new price
Setting the price is half the job. The other half is telling the right people.
With Mailrelay you can segment your list by product, plan or purchase date to notify only those affected by a price change.
You can also run A/B tests with two different offers and see in the reports which one gets more clicks and sales.
If you have an online store, our guide to email marketing for ecommerce will help.
The free account lets you send up to 80,000 emails a month to 20,000 contacts, with human support on every plan. You’ll find all the details on our pricing page.
Conclusion: your price is a marketing tool
If you take away one idea, let it be this: calculate your minimum price first and then decide with the customer in mind.
In three steps:
- Calculate your unit cost and your break-even point to know the price you can’t go below.
- Choose the method that fits your product: demand, competition or value.
- Fine-tune the final figure, be careful with your discounts and communicate any change clearly.
That way, price stops being just “something you have to fill in” and becomes what it should be: one more tool to outperform your competition.
And now I’d like to hear about your experience. Tell me what criteria you follow to set the prices of your products!
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Frequently asked questions about how to price a product
These are the most common questions when it’s time to set a product’s price.
How do you calculate a product’s selling price?
To calculate the selling price, first work out the unit cost: variable costs plus fixed costs divided by the units you expect to sell. Then apply the margin with the formula cost ÷ (1 − margin) and add taxes, such as VAT.
What profit margin should I put on a product?
It depends on the industry, your fixed costs and what the competition charges. Rather than a universal figure, calculate your break-even point and check that the margin leaves you room to offer discounts without losing money. The psychological triggers you use when selling also influence how much you can charge.
What’s the difference between margin and markup?
Markup is a percentage you add to the cost. Margin is the percentage of the final price you keep as profit. A 30% markup on €37 gives €48.10, while a 30% margin gives €52.86.
What are the pricing methods?
The six most widely used pricing methods are cost-based, target pricing, demand-based, competition-based and value-based, plus psychological pricing as a final adjustment. It’s common to combine several.
How do you price a handmade or artisan product?
Add up the materials, the time you spend on each piece valued at your hourly rate and a share of your fixed costs. That’s your minimum. Then compare it with similar products and highlight what makes your piece unique so you can charge for its value.
Jose Argudo
CMO at Mailrelay. Writes about email marketing, copywriting and conversion for small businesses and entrepreneurs.