How to price your products so you actually make a profit

Many small businesses set prices by looking at the shop next door and charging a little less. Customers come, the shop is busy, and yet at the end of the month there is very little left. Often the problem is not sales. It is the price.

Good pricing is not guesswork. It starts with knowing exactly what each item costs you, then adding enough to cover your running costs and leave a real profit. This guide walks through it step by step, with numbers you can check.

Start with your true cost price

Your cost price is not just what you paid the supplier. It is everything you spent to get the item onto your shelf, ready to sell. That usually includes:

• The price you paid the supplier.
• Transport to bring the goods to your shop.
• Loading or carrying fees.
• Packaging, such as bags, boxes or labels.

Take Efua, a fabric seller. She buys 12 pieces of wax print (6 yards each) for GH₵ 1,800. Transport from the wholesaler costs GH₵ 60, and she spends GH₵ 12 on bags. Her total cost is GH₵ 1,872, so her true cost per piece is GH₵ 1,872 divided by 12, which is GH₵ 156, not the GH₵ 150 she might think if she only looked at the supplier's price.

GH₵ 6 per piece sounds small. Over a few hundred pieces a year, it is a lot of money that never shows up in a careless price.

Markup and margin are not the same

These two words cause a lot of confusion, and mixing them up can cost you money.

• Markup is the profit as a percentage of the cost.
• Margin is the profit as a percentage of the selling price.

Here is an item that costs you GH₵ 100, at different markups:

Notice that the margin is always smaller than the markup. A 50% markup is only a 33.3% margin. If someone tells you "keep a 30% margin" and you add 30% to the cost, you will end up with a margin of only 23.1% (GH₵ 30 profit on a GH₵ 130 price).

To hit a target margin, divide the cost by (1 minus the margin). For a 30% margin on a GH₵ 100 item: GH₵ 100 divided by 0.70 is about GH₵ 142.86. Check it: GH₵ 42.86 profit divided by GH₵ 142.86 is 30%.

Cover your overheads

Overheads are the costs you pay whether you sell one item or a hundred: stall rent, an assistant's pay, electricity, phone and data. Your prices have to cover these too, or the business slowly loses money.

Back to Efua. Each month she pays GH₵ 800 for her stall, GH₵ 1,200 for her assistant and about GH₵ 400 for transport and phone. That is GH₵ 2,400 a month. She sells about 120 pieces a month, so each piece needs to carry GH₵ 2,400 divided by 120, which is GH₵ 20 of overheads.

So her break-even price is GH₵ 156 plus GH₵ 20, which is GH₵ 176. Anything below that, and she is working for nothing. If she simply added 10% to her cost (GH₵ 171.60), she would lose money on every piece, even though she "made a profit" on each sale.

At a price of GH₵ 220, each piece gives her GH₵ 64 over cost (a 41% markup and a 29.1% margin). After the GH₵ 20 overhead share, she keeps GH₵ 44 per piece, or GH₵ 5,280 over 120 pieces.

Check the market, then decide

Once you know your cost and break-even price, look at what customers will actually pay. Visit a few competitors. Ask regular customers. Then decide where you stand:

• If the market price is well above your break-even, you have room. You do not have to be the cheapest. Good service, reliable stock and a clean shop are worth something to customers.
• If the market price is close to your break-even, look for savings: a better supplier, sharing transport with another trader, or buying in larger lots.
• If the market price is below your break-even, think hard before stocking that item. Sometimes one item brings people in so they buy others, but know you are doing it on purpose.

Retail and wholesale price levels

Many traders sell to both end customers and smaller sellers who buy in bulk. A lower wholesale price can make sense, because one bulk buyer brings volume that would take many retail customers. But it must stay above your break-even.

Efua sets her retail price at GH₵ 220 and her wholesale price at GH₵ 195 per piece for 6 pieces or more. At GH₵ 195 her profit over cost is GH₵ 39, a 20% margin, and still above her break-even of GH₵ 176. Compare ten pieces sold each way:

Wholesale earns less per piece, so it is worth it only when it brings sales she would not otherwise make, and when the buyer pays promptly. Set a clear minimum quantity, and never let a wholesale price slip below your break-even.

In Snnel, you can give each product both a retail and a wholesale price level, and choose the right one at the point of sale, so staff do not have to remember who pays what.

Review prices regularly

Prices are not set once and forgotten. Look again when:

• Your supplier raises prices or transport fares go up.
• Your rent or staff costs change.
• An item sells much faster or slower than expected.

A small increase of a few cedis, made at the right time, is usually easier for customers to accept than one big jump later. Your profit and loss report will tell you whether your margins are holding. Our guide to reading your profit and loss shows what to look for, and this article on cash flow explains why a good margin still needs good cash habits.