How to Know If Your Prices Are Set Right

Ask a business owner how they set their prices and you will almost always hear one of two answers. The first is that they looked at what the competition charges and landed somewhere close. The second is that they added a markup to cost, thirty or forty percent, because that is the norm in their industry. Both sound reasonable, and both can be leaving money on the table or, worse, hiding products that sell at a loss.

Why copying the competition's price does not work

The price next door reflects their cost structure, not yours. Maybe they buy in bulk and you do not. Maybe they own their location and you pay rent. Maybe they have been selling at a loss for three years and have not noticed. When you copy their price, you are copying the result of an operation you know nothing about, and assuming their numbers are healthy with no evidence that they are.

The other problem is that the comparison is almost never fair. The customer is not buying just the product: they are buying delivery time, warranty, guidance, and how easily a problem gets solved. Two businesses can sell the same thing at different prices and both be fine, because they are not actually selling exactly the same thing.

The mistake of applying a flat markup across the board

Applying the same margin to your entire catalog is convenient and misleading. Not every product takes up the same space, sells at the same pace, or requires the same amount of work. An item that sells ten times a month at a low margin can bring in more money than one with a high margin that sells once every two months while tying up capital in the meantime.

On top of that, the markup is usually calculated only on the product’s cost and not on the real cost of selling it. People forget the card-terminal fee, the shipping you absorb, the packaging, the occasional return, and the salesperson’s time. Once those costs are added up, some products end up selling at a much thinner margin than the one shown on the list.

The numbers that actually tell you if the price is right

• Real margin per product, including all the costs of selling it, not just the purchase cost.
• Turnover: how many times a month each item sells, to know what it really brings in per month.
• How much capital is tied up in products that barely move.
• What percentage of your sales comes from your top five products.
• How many discounts were given and on which products, because that is where margin quietly disappears.
• How many customers asked the price and did not buy, versus those who did.

Almost all of that already lives in your point-of-sale system or your spreadsheets, just scattered. A custom-built system that brings sales, costs, and discounts into a single view lets you see the whole picture: not how much you sold, but how much you kept and where it came from.

Selling a lot and earning little is the most common problem among small businesses, and it almost always starts with a price nobody ever revisited.

How often to review them

A full review every six months is enough for most businesses, as long as there is a quick monthly check on the top sellers. Costs creep up quietly: the supplier raises prices five percent, rent goes up, shipping costs more, and the selling price stays the same because nobody had time to touch it.

If you have never done this exercise, start small. Take your ten best-selling products, calculate the real margin for each one including all costs, and rank them from highest to lowest. You will very likely find at least one that you are selling at practically no profit, and that discovery alone pays for the time you spent on it.