How to Correctly Price a Product or Service

How to Correctly Price a Product or Service

Have you ever found yourself looking at a product you created — or a service you offer — and wondering, “How much should I charge for this?” This question is more common than it seems, and it paralyzes entrepreneurs of all sizes, from the solo freelancer to the owner of a small business with employees. Charging too little might seem like a friendly strategy in the short term, but it’s a direct path to loss. Charging too much without justification can drive away customers before even starting a conversation.

The good news is that pricing is not a mystery reserved for economists or expensive consultants. It’s a logical process that combines basic math, market knowledge, and a healthy dose of self-awareness about the value you deliver. When done right, pricing stops being a minefield and becomes one of the most powerful tools for the financial health of the business.

In this article, we will explore the main methods, concepts, and practical precautions to help you arrive at a price that sustains your business, is competitive, and still reflects the real value of what you offer.

Why So Many People Get Pricing Wrong

The most common mistake is calculating the price “by feeling” — that is, based only on intuition or what the competitor charges, without understanding their own costs. This results in two classic traps:

• Underpricing: charging less than it costs to produce or deliver, leading to accumulated losses over time, even with high sales volume.
• Overpricing without perceived value: charging above the market without clearly communicating the differential, resulting in loss of customers and a stigma of being “expensive without reason.”

Another common mistake is confusing revenue with profit. A company can have good revenue and still be in the red if costs are not properly mapped. Understanding the difference between gross revenue, net revenue, fixed costs, variable costs, and profit margin is the first step to intelligent pricing.

Know Your Costs First and Foremost

Before looking at the market or the customer, look inside your own business. All pricing starts with an honest mapping of costs.

Fixed Costs

These are costs that exist regardless of whether you sell or not. Examples:

• Rent for physical space or server/hosting (for digital businesses)
• Salaries of permanent employees
• Software and tool subscriptions
• Accountant or administrative services
• Internet and phone

Variable Costs

These vary according to the volume of production or service delivery:

• Raw materials and supplies
• Packaging
• Sales commissions
• Payment platform fees (which in 2026 still range from 2% to 5% per transaction, depending on the platform and volume)
• Shipping and logistics

Invisible Costs

These are the most dangerous because they go unnoticed: time spent in meetings, rework, travel, post-sale support, default, and equipment depreciation. Those who sell services, in particular, tend to forget to price their own time adequately.

Main Pricing Methods

There are different approaches, and the choice depends on the type of business, the market, and the objectives of each entrepreneur. The most used are:

1. Markup (or Cost-Based Pricing)

This is the simplest method: you add up all the costs involved in production or delivery and add a desired profit margin.

Basic formula:

> Selling Price = Total Cost ÷ (1 − Desired Profit Margin)

For example: if the total cost of a product is $50 and you want a 40% margin, the selling price would be $83.33.

It’s a safe method to ensure you don’t sell at a loss, but it has an important limitation: it doesn’t take into account what the customer is willing to pay or what the market practices.

2. Market-Based Pricing (or Competition-Based Pricing)

Here, you research how much competitors charge for similar products or services and position your price relative to this reference — it can be cheaper, equivalent, or more expensive, depending on the positioning you want.

Attention: copying the competitor’s price without knowing your own costs is risky. The competitor may be operating at a loss without knowing it, or may have a very different cost structure from yours.

3. Value-Based Pricing

Considered by many management experts as the most sophisticated approach, it starts with the question: how much does the customer gain (or save) by using what you offer?

If a consultant helps a company save $200,000 a year, charging $20,000 for the project is perfectly reasonable — the value generated is ten times greater than the price charged. The secret is to deeply understand the customer’s problem and clearly communicate the impact of the solution.

This method is especially powerful for specialized services, software, and niche products.

4. Dynamic Pricing

Quite common in sectors like aviation, hospitality, and digital retail, dynamic pricing adjusts prices in real-time based on demand, seasonality, consumer behavior, and other factors. In 2026, with the advancement of artificial intelligence tools applied to commerce, small businesses also begin to have access to dynamic pricing resources previously restricted to large players.

How to Calculate the Price of a Service

Pricing services has important particularities because the “product” is largely human time and expertise.

A practical step-by-step:

1. Calculate your hourly cost: add up all your monthly fixed costs and divide by the number of productive hours you actually work in the month (do not confuse with available hours — meetings, prospecting, and bureaucracy also consume time).
2. Add the variable costs specific to the project or service.
3. Define your desired profit margin.
4. Research the market to know if the value is within a practiced range.
5. Evaluate the perceived value by the customer — in some cases, the market pays more than the cost would justify, because the scarcity of specialized professionals increases the perceived value.

Taxes, Fees, and What Many Forget to Include

One of the most recurring mistakes, especially among freelancers and small entrepreneurs, is not including taxes in the price. In Brazil, depending on the tax regime and type of activity, the tax burden can vary significantly. Those in the Simples Nacional, for example, need to know the effective rate that applies to their revenue bracket.

Besides taxes, do not forget to include:

• Platform fees from e-commerce or marketplaces
• Average default (a reserve for customers who do not pay)
• Discounts and promotions that will be practiced throughout the year
• Marketing investment necessary to generate each sale

Ignoring these items means that, in practice, your real profit margin will be smaller than calculated — and often negative.

Positioning and Price Psychology

The price is not just a number: it communicates positioning. A product sold for $29.90 is perceived very differently from the same product sold for $30.00 — even if the difference is negligible. This phenomenon, known as psychological pricing or “charm pricing,” is widely studied in the field of consumer behavior.

Other psychological and positioning strategies include:

• Price anchoring: presenting a more expensive option next to the one you want to sell, making the target price seem more reasonable by comparison.
• Freemium: offering a free or basic version and charging for advanced features — a model widely used in software and apps.
• Intentional premium pricing: in certain markets, a higher price increases the desire for the product, as the consumer associates value with exclusivity.

Reading about human behavior and decision-making can greatly enrich your view on pricing. If you want to deepen your intellectual repertoire on topics like these, it’s worth checking out our selection of books everyone should read at least once.

Price Review: When and How to Do It

Pricing is not a one-time, permanent decision. Costs change, the market evolves, inflation erodes margins, and your expertise grows over time. Therefore, reviewing prices periodically is a healthy and necessary practice.

Signs it’s time to review the price:

• Your costs have risen and the margin has shrunk
• You have demand far above capacity (you can charge more)
• Competitors have significantly changed their prices
• You have acquired new certifications, equipment, or expertise
• The market perceives more value in what you deliver than you yourself charged

When communicating a price increase, be transparent with customers, provide an adaptation period when possible, and highlight what has changed or improved in what you offer.

Conclusion

Correct pricing is, at its core, an act of respect — for your work, your company, and the customer, who deserves a sustainable and honest commercial relationship. There is no single magic formula, but there is a process: knowing your costs in depth, understanding the market, identifying the value you generate, and communicating this clearly.

The combination of methods — especially markup as a safety floor and value-based pricing as an aspirational ceiling — tends to work well for most businesses. The most important thing is to move away from guesswork and adopt a structured, regularly reviewed approach aligned with your business objectives.

The right price is not the cheapest nor the most expensive: it is the one that makes sense for the seller, the buyer, and the long-term continuity of the business.